Compliance vs. Ethics: The Lines are Getting Blurry in the Car Business

Ethics and compliance are different from each other, but both are vitally important to the long-term success of dealerships and automotive professionals. Often the terms “unethical” and “illegal” are used interchangeably. Ethics is personal - it means the process of discerning what the correct action is. Law is impersonal and requires no discernment, just compliance. Ethics refers to moral principles and values that guide a person or an organization, and ethical conduct refers to knowing the difference between right and wrong and choosing to do what is right. A company or person can be unethical without breaking laws.

For instance, it’s not illegal per se to charge different prices for the same F&I products – and many finance practitioners do so on a regular basis. They’ll charge one customer $795 for GAP and another $1500 for the same coverage because “X Bank allows that much”. Another example I recently read about is that some dealers charge a “certified pre-owned” fee to customers on CPO vehicles they sell. Although that practice may be against OEM guidelines, it’s not necessarily unlawful from a strict legal standpoint.

One more illustration of dubious ethics in my opinion is vehicles that are marketed as a “CarFax One Owner”, even when the “one owner” was a rental car company. Even though the “one owner” statement may be technically true, the descriptions I’ve seen for some of these vehicles are questionable at best: “With just one previous owner, who treated this vehicle like a member of the family, you'll really hit the jackpot when you drive home with this terrific car”; “This 2010 Elantra is for Hyundai fans that are searching for that babied, one-owner creampuff” and “From the looks of it, I'd say this car has been garage kept and babied regularly. If only my wife treated me as nice!!!”

Now some will argue that these statements are just harmless puffery that is intended to make the vehicles stand out, but isn’t it safe to assume that most consumers place more value in a true one-owner car than a prior rental? Even if the dealership discloses the vehicles’ previous histories at some point, is it OK for the first contact with a consumer to be secured by misleading claims? Even if it’s legal, is it truly ethical?

The reality of the car business is that pay plans and sales quotas can sometimes make acting ethically a challenge. Dealership personnel may be under continuous pressure to abandon their personal standards to achieve sales goals. The actions of salespeople mirror the behavior and expectations of their managers. The words and actions of sales and F&I managers often reflects the moral and ethical considerations of top management’s philosophy.

Ethics can be a very personal decision and different people will have different opinions about the above scenarios, but here’s where the lines have gotten blurry: While I agree that “profit is not a dirty word”, it appears that regulators and consumer attorneys have been redefining what is “legal” by applying their own interpretations of “ethical” standards.

In the last few years we’re seeing more and more enforcement actions and lawsuits against dealers for a number of seemingly “legal” activities. Recent cases have charged dealerships with assessing dealer fees that were deemed excessive even though they aren’t regulated by state laws. Another target for regulators is pricing of add-on products. For instance, NY Attorney General Schneiderman said in a statement announcing a $14 million settlement “New York consumers must beware: Car dealerships sometimes pad their pockets by charging for worthless after-sale items, which inflate the price of their car. These items are often ones that consumers don’t need, did not ask for and often are not even told about. Businesses need to make a profit to survive, but it’s illegal to do so by duping consumers.” Whether or not these products are “worthless” is a matter of opinion, but these consumer watchdogs seem to think so.

Another notable case is where a dealer group agreed to pay $1.6 million to settle a class-action lawsuit that claimed the dealerships sold car buyers an over-priced window etch package (and they were only charging $295!)

Former CFPB official Rick Hackett had this to say at an industry event: “If I found out that Walmart set the price of their products at different levels, and they were all the same product, and they were just hoping I would buy one for $20.95 because I was a particularly gullible consumer, I’d be grumpy. That’s the bureau’s perspective of variable pricing of ancillary products.”

We can complain all we want that it’s not fair for the government to limit our profits but it’s clear that they’ve drawn a line in the sand and there’s no relief in sight.

But here’s the good news. Taking an ethical approach has several benefits beyond just avoiding legal issues:

Increased Closing Ratios and Higher Product Penetrations - Higher levels of satisfaction with the selling process result in higher closing rates and higher sales. The more people trust you, the more likely they will buy from you.

Lower Cancellations and Chargebacks – How many times do your customers read the contract after the sale and realize they paid much more than they thought? How many times are credit unions, insurance companies, friends or family members telling your customers they paid too much? Even if you hold their feet to the fire for non-cancellable products, what are the chances you’ll ever see that customer again?

Improved Reputation (your REAL reputation, not necessarily the one you “manage” online) - A dealership’s reputation is difficult, if not impossible, to maintain when staff members depend on “old school” practices. Customers often make decisions during a vehicle sale transaction that they come to regret after the “ether has worn off”. You can be sure they’re telling somebody about the transaction. Or perhaps they’re telling thousands of people online?

Increased Customer Satisfaction - Lack of ethical behavior and old school tactics invariably diminish the customer experience. Nobody likes surprises. Sure, you made the deal but are your customers truly satisfied with your processes or do you just wear them down? At the end of the day higher customer satisfaction translates into more repeat and referral business.

Increased Customer Loyalty - Customers only have loyalty if you earn it from them. Ethical processes help build customer loyalty and retention. You’ll find that customers will be willing to spend more when they feel they’re buying from a business they can trust.

You’ll Exceed Customer Expectations - Your potential customers have unprecedented access to information in real time. The increase in the amount of data available to consumers has brought them a quick and easy way to analyze not only different prices but also to identify who they want to do business with. Car shoppers simply have too many choices and will quickly discard dealers they feel are hiding something. Holding back information or playing fast and loose with the truth will only make them trust you less.

You’ll Stand Out From Your Competition – Progressive dealers can easily differentiate themselves by marketing their ethical processes and demonstrating their honesty. Consumers will respond - after all, how many consumers prefer old-school tactics?

Good ethics can be the pot of gold at the end of the rainbow. An ethical business model can greatly enhance your sales, reputation, customer retention, and bottom line. The most successful dealerships have not only a standard of “don’t break the law” but a standard of “always do the right things”.

Here’s something to think about: If you treat each customer as you would like your mother to be treated, you’re most likely practicing good ethics. After all, it was probably your mom who first said “just because you can, doesn’t mean you should.”

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Comment by Jim Radogna on February 28, 2016 at 5:23pm

You're so right Kathryn. Although I only addressed ethics as it relates to vehicle sales and financing in this post, there are so many ethical considerations in other departments as well. Service advisors come to mind - they're under constant pressure to increase their level of sales at every customer visit (heaven forbid an advisor allows the dreaded single-line RO!). I've always believed that this is the number one reason why dealers struggle with service retention. It would make far more sense to build a long-term relationship of trust with customers by sometimes letting them just get their oil changed without being pressured with add-ons. The smartest advisors resist the temptation to offer customers services they really don't need because chances are he customer will be back absent the high-pressure tactics. It's the ethical thing to do and it just makes good business sense.

As you mentioned, situations like these create conflicts for employees. Most employees want to establish roots and build a career within an organization but but that's difficult to do when they aren't given the tools to establish a solid base of repeat and referral business.

Thanks for your input!

Comment by Kathryn Carlson on February 28, 2016 at 3:24pm

Love the explanation of the difference between ethics and compliance.  How to establish and maintain a workplace culture of high ethical values is the ongoing challenge for HR senior management and executives everywhere not just in dealerships.  Corporate  Compliance is relatively easy- follow the rules and regulations- even when there is significantly complexity in the regulations the guideline is established. Corporate Ethics is hard- how to follow the rules in a manner that is consistent with both an individual moral code and the corporate moral code- when in conflict a primary reason the individuals leave the organization.

Comment by Jim Radogna on February 27, 2016 at 10:02pm

Thanks for the feedback Brian. I love your attitude and references to "old school" as a good thing. I couldn't agree more. The old school values as espoused by legends like Jackie Cooper is a lost art. I don't believe people are more honest today than they were back in the day, I just think that the business lost it's way at some point. I remember back in the 60's and 70's going with my parents to buy family cars. The salesman were the coolest guys in town and my folks were loyal to a fault because they treated us like family. When I bought my first car from a dealership in 1979, I went to the same dealership and salesman that my family had been dealing with for decades. I bought every car from him afterwards until he retired and referred countless friends. I never ever saw a "four square" or felt any kind of pressure...

Fast forward to the 90's when I got into the car business on a whim (like most people) and was horrified by the culture of the dealership I was hired by. I had been in the sales game (very successfully) my entire adult life and was flabbergasted by how the staff treated and viewed customers. The only reason why I didn't quit was the GSM, who was a quality person, talked me out of it and allowed me to treat my customers as I saw fit (Of course I was the top producer month after month because I treated customers the way they deserved to be treated - duh!). I was regularly berated as a "consumer advocate" but somehow I sold more cars and made more gross than everybody else... just lucky I guess?

I quickly moved up to management and ended up staying in retail for 15 years but constantly struggled with the lack of ethics by many of my peers. That's the "old school" I'm referring to.

Thanks again for your input. It's the success of people like you that's exactly my point!

Comment by Brian Bennington on February 27, 2016 at 9:14pm

Hey Jim,  It's a hell of a note when a post here is necessary to compare compliance to ethics, but as compliance is your business, I saw where you we heading.  Couldn't help but notice the reference to Paragon's problems, but as competent as their management is, they should have smelled a problem with those products before they got involved.  And who knows, if they wouldn't have gotten so greedy, they might have stayed under the NY Attorney General's radar and be selling them to this day.

My only complaint is your use of "old school" in a negative connotation.  Are you saying people are more honest today than they use to be?  I don't think so.  The problem now is that the people involved in unethical practices aren't bright enough to execute them without making waves by yapping too much. "Everybody's way too inclined to tell everybody what they're doing."  And unfortunately, operating in an unethical way is often recognized by business peers as being "smart'" or "shrewd," like outwitting customers is the game to win.. 

All of your suggestions to avoid problems go hand-in-hand with the legitimate, dare I say, best way to sell.  I began high-line retail sales over 45 years ago in the midwest and I couldn't agree more with your pointers on why to stay "ethical."  I'm definitely "old school," but I learned early on that being ethical is a lot more profitable and rewarding than not.  Surprisingly, I maintained my "ethics" even selling cars in SoCal, and my customers appreciated it with repeats and referrals.  Compliance has changed but customers haven't.  They still value concern and honesty.  And, if you're good at delivering it, you'll still get lots of opportunities to make good gross.       

   

Comment by DealerELITE on February 27, 2016 at 5:52pm

Jim Thank you sharing

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