The Australian Securities & Investments Commission has announced that it will ban flex commissions in car finance, which the FBAA has said is a good omen for the remuneration review.
The financial regulator, which has prepared a draft legislative instrument to implement the prohibition and is conducting a three-week consultation on technical aspects of the instrument (submissions for which are due by 27 March), has said that the current pay structure can produce unfair outcomes for consumers and “operate in a way that is unfair under the National Consumer Credit Protection Act 2009 (National Credit Act)”.
It suggested that because 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 therefore earn a much higher commission — consumers can end up “paying thousands of dollars more in interest charges over the life of the car loan”.
Speaking of the decision to prohibit flex commissions, ASIC 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 per cent or one of 14 per cent — 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.
“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.”
ASIC is now proposing 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.
However, car dealers will still be allowed “limited capacity” to discount the interest rate and receive lower commissions. This is thought to “benefit consumers through a lower cost of credit”.
The changes are expected to come into effect in around 18 months.
Change is a good indication of remuneration review outcomes
Speaking to The Adviser after ASIC's announcement, Peter White from the Finance Brokers Association of Australia (FBAA), welcomed the prohibition decision.
Mr White commented: “While this predominantly affects car dealers, it also extends to brokers who have access to flex commission structures (mostly high-end broker structures). However, for the majority of brokers, the end result will bring greater transparency. And, from a competitive point of view, it will actually align things closer to how home loan brokers work today than anything else.
“The commission will be set by the lender and built into the interest rate. In home loans today, you have the published interest rate and the broker commission is already in it. That's how car yards are going to work. So, the upflow of this will be that the transparency of commissions will be a lot more obvious, the competitive platforms will be a lot stronger, and you can have faith that the consumers aren’t being ripped off, as they may have been in the past.”
He suggested that ASIC’s decision could foreshadow the outcome of its current remuneration review (the recommendations for which are expected to be released in the next few weeks).
Mr White commented: “What this change actually reinforces, and what the interesting side of this is, is that paying commissions to brokers is the right thing to do.
“When you look at the home loan commission review you can’t say there is going to be a bad outcome because ASIC has just put regulation into ensuring that commissions are paid, but under the same rule that home loans have.
“It’s a very appropriate way of conducting business in this type of environment. It just needs the right framework around it so people don’t take advantage of things.”
The FBAA executive director added that the association had been pushing ASIC to ensure that reductions weren’t prohibited, as these can provide good customer outcomes.
He elaborated: “The FBAA was the one who pointed out to ASIC that the way they had originally drafted the legislation, car dealers wouldn’t have been able to [reduce commissions and interest rates]. Which means that the consumer would miss out on that benefit. We said that [car dealers] should still be able to do that if it’s in the best consumer outcome.
“If they choose to rip up profit in an area of their business that is their decision, it shouldn’t be regulated. That ability to reduce commission and reduce interest rate should still be allowed, as it’s been for quite a long time, because that’s an appropriate consumer outcome.”
[Related: No place for flex-commissions in broking]
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