ASIC has put the spotlight on the commissions that car dealers and finance brokers earn from arranging finance for car buyers saying that it will prohibit "flex commissions" in the car finance market.
The corporate watchdog is moving to ban "unfair" commissions which allow dealers to charge higher interest rates on car finance for a greater share of the interest earned.
Deputy Chair of ASIC, Peter Kell, highlighted that "flex commissions do not operate in a fair and transparent way, and ASIC's action will ensure that consumers are not charged excessive interest rates."
ASIC acts to address unfair outcomes from flex commissions in car finance market
"Whilst today's announcement will prohibit 'flex commissions' in the car finance market, the prohibition will still allow lenders to pay other types of commissions to car dealers, but the devil is in the detail and dealers shouldn't get read too much into this statement", says Brad Dale, Executive Director of AFS.
ASIC is implementing the prohibition because of poor outcomes for consumers and because flex commissions operate in a way that is unfair under the National Consumer Credit Protection Act 2009 (National Credit Act).
"Flex commissions are common in car finance, and also throughout the lesiure goods market, that includes the financing of boats, bikes, caravans, jet-skis and the like, but you don't tend to find flex being readily applied in other markets", says Dale.
Flex commissions allow car dealers to arrange car loans at a higher interest rate than the lowest available rate (700 basis points higher – or more), and thereby earn a much higher commission. As a result, some consumers can end up paying thousands of dollars more in interest charges over the life of the car loan.
AFS says, "The complexity starts where you have vendor introducers or finance brokers controlling the relationship between price and risk. Ideally the interest rate should be set by the bank or financial institution, using an objective basis such as the consumer's credit score."
ASIC's Deputy Chair Peter Kell said, 'Most consumers would be surprised to learn that when you are buying a car on finance, the car dealer can, for example, decide whether you will be charged an interest rate of 7% or one of 14% - regardless of your credit history. Flex commissions do not operate in a fair and transparent way, and ASIC's action will ensure that consumers are not charged excessive interest rates.'
Mr Kell said ASIC has conducted two rounds of written consultations with targeted stakeholders, including industry bodies, lenders, car dealers and their associations and consumer groups on various options to respond to the harm caused by flex commissions. Based on this consultation, ASIC has decided on a prohibition as a comprehensive, industry-wide solution that will deliver broad changes for the benefit of consumers.
'There was a broad recognition that flex commissions create poor consumer outcomes. However, lenders who cease paying flex commissions unilaterally risk putting themselves at a competitive disadvantage. It is therefore necessary to implement the change through an industry wide approach that would ensure a level playing field for all lenders,' Mr Kell said.
ASIC proposes to use its statutory power to modify provisions of the National Credit Act to prohibit the use of flex commissions so that the amount paid in commissions is not linked to the interest rate, and therefore that the lender has responsibility for determining the interest rate that applies to a particular loan.
ASIC acknowledges that it is desirable to allow car dealers some flexibility to reduce interest rates in order to secure a deal. It is therefore proposing to allow a limited capacity for car dealers to discount the interest rate set by the lender by up to 2 per cent and receive lower commissions, as this will benefit consumers through a lower cost of credit.
ASIC has prepared a draft legislative instrument to implement the prohibition and is conducting a three-week consultation on technical aspects of the instrument
AFS will monitor developments in the 'flex commission' matter and provide commentary on how it will impact car loans within the car finance market.
"As a responsible lender, AFS believes the banning of flex commissions is a positive development in the car finance market and it will provide consumers a more transparent outcome that equates to their credit risk profile. Consumer's should take comfort that it is not the dealer or finance broker setting the rate but the financial institution", says Brad Dale.