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ASIC formally bans flex commissions

by Reporter7 minute read

Flex commissions paid to car finance brokers have now been formally banned, in a bid to reduce the likelihood of consumers paying “excessive” interest rates on car loans.

The Australian Securities & Investments Commission (ASIC) announced earlier this year that it would ban flex commissions in car finance, after suggesting that the structure of the commission enabled car dealers to arrange loans at a higher interest rate and earn higher commissions.

ASIC deputy chair Peter Kell explained: “We found that flex commissions resulted in consumers paying very high interest rates on their car loans. We were particularly concerned about the impact on less financially experienced consumers.”

As such, the financial services regulator undertook a consultation on the changes to the National Credit Act that would prohibit the use of flex commissions and ensure that the amount paid in commissions was not linked to the interest rate.

The legislative instrument to ban these commissions registered on the Federal Register of Legislative Instruments on Thursday (7 September), thus formalising the ban.

Lenders now have responsibility for determining the interest rate that applies to a particular loan, but car dealers still have capacity to discount the interest rate and receive lower commissions, leading to lower costs for credit.

Both lenders and dealerships will have until November 2018 to update their business models and implement new commission arrangements that comply with the new law.

[Related: Flex commissions to be banned by ASIC]