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17-301MR ASIC bans flex commissions in car finance market
ASIC has formally banned flex commissions in the car finance market, with the legislative instrument to ban these commissions registered on the Federal Register of Legislative Instruments today.
Flex commissions are paid by lenders to car finance brokers (typically car dealers), allowing the dealers to set the interest rate on the car loan. The higher the interest rate, the larger the commission earnt by the dealer.
ASIC is banning these commissions because it has found that they lead to consumers paying excessive interest rates on their car loans. The ban comes after ASIC led a public consultation on banning these commissions (refer: 17-049MR).
'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,' ASIC Deputy Chair Peter Kell said.
Mr Kell thanked those who had provided feedback to ASIC's consultation: 'The feedback we received from stakeholders provided us with helpful insights, and we thank all stakeholders for their cooperation.'
The legislative instrument operates so that:
- The lender not the car dealer has responsibility for determining the interest rate that applies to a particular loan. The car dealer cannot suggest a different rate that earns them more commissions.
- Car dealers will have a limited capacity to discount the interest rate and receive lower commissions, leading to lower costs for credit.
Lenders and dealerships will have until November 2018 to update their business models, and implement new commission arrangements that comply with the new law.
Under flex commissions:
- The lender and the dealer agree that a range of interest rates will be available to any consumer (from a 'base rate' up to a prescribed maximum rate)
- The dealer can set the interest rate for a particular loan within that range and will earn a greater upfront commission from the lender the higher the interest rate
- There is no criteria used to set the interest rate which has been shown to result in opportunistic pricing arrangements
The commission paid on a loan is determined by the 'flex amount' – which is the difference between the base rate and the interest rate of the loan sold to the consumer.
The lender and dealer share the flex amount. The percentage of the flex amount kept by the dealer varies significantly and can be up to 80 per cent of the interest charges.
ASIC's MoneySmart website has information about choosing a car loan to help consumers make informed choices when they're buying a car.
Consumers can also download ASIC's MoneySmart Cars app, which will help them avoid common traps and identify hidden costs when they go into a car dealership.
In October 2018 ASIC amended the legislative instrument to ensure:
- the ban does not apply more broadly than was intended (for example, that it does not inadvertently cover some securitisation arrangements and some remuneration arrangements in relation to home loans).
- the prohibition will not unreasonably affect ‘in-flight offers’. Some consumers may apply for and be offered a car loan before 1 November 2018, but only enter into the contract after that date (for example where the loan is offered but not entered into until the car is delivered). This change will mean the changes to remuneration arrangements as a result of the prohibition will not adversely affect business practices prior to 1 November 2018.