ASIC bans flex commissions

by AB03 Mar 2017

ASIC announced today that it will prohibit 'flex commissions' in the car finance market. The prohibition will still allow lenders to pay other types of commissions to car dealers.

Flex commissions are common in car finance but not generally found in other markets. 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.

ASIC is implementing the prohibition because of these 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).

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 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 (see the Consultation Paper below).

Mr Kell said, 'We are confident this prohibition will benefit consumers by removing incentives that increase the interest rates they are charged. We consider that average interest rates on car loans will fall as a result of more efficient pricing models and lower losses through defaults. We expect lenders will work with car dealers in moving to fairer and more sustainable models'.

COMMENTS

  • by (0)(0) 3/03/2017 3:00:18 PM

    Stupidity

  • by Not Surprised 3/03/2017 3:29:11 PM

    Idiots, so what I am reading here is the savvy consumer whom shops around and goes to their broker and gets better rates service and product will not have the ability to negotiate terms and instead will have fixed rates that will undoubtedly be higher then they otherwise would have had so again the savvy find them selves paying the for the unsavvy slack consumer who can not be bothered shopping around!

    Also how is it a better outcome for the consumer wanting a 10k car loan when brokers say nah, I can't help you not worth it... again those needing the help are the ones who ultimately will not get it.

    ASIC must work for Labor because only a labor supporter would think increased regulation results in better outcomes for consumers, no one in today.s world with internet access etc can claim to not know it is worth shopping around. Those that do not shop around and take what ever a car yard gives them is one thing.... SLACK and the rest of the world will be paying for that slackness.

  • by there goes the broker proposition 3/03/2017 3:40:34 PM

    The Average commission I charge is 2% leading to about $600 on the average car loan - The reason I do well with car loans is I beat the pants off the rates the car yards give or their own bank gives. I tell the clients what I make and they sign.

    It makes me sick to think my competitive advantage will disappear, now what incentive will a person have to shop around? How will I find my clients, in all seriousness why would a person come see us when they know the rate by law will be the same or similar in the car yard and they can just do it there and then... so there goes competition in the industry.

    FInally the work on a brand new car is simple and deserves less commission, but a private sale I have to go inspect vehicles sometimes a hour away from where I live... it will be simple now I simply will not do private sales, which consumers will that benefit? They will have to simply take what ever their bank offers, what their bank offers is usually a personal loan at 16%, where they may have got 8-11% on a 7 year term with me they will now get a 5 year term at 16% at their bank.

    I think ASIC deserves another pat on the back for looking after the big banks (yes pretty sure the big boys put in their thoughts for sure)