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18-329MR ASIC ban to improve car finance practices begins
ASIC’s ban on flex commissions in the car finance market commences on 1 November 2018, resulting in fairer and more transparent pricing on car loans.
Flex commissions were paid by lenders to car dealers and finance brokers to encourage them to arrange car loans at the highest possible interest rate. The higher the interest rate, the larger the commission earnt by the dealer or broker.
ASIC Commissioner Danielle Press said, '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 vulnerable consumers less able to protect their interests.'
ASIC expects the ban to improve lending practices as:
- Consumers should be offered an interest rate that is based on their financial position and credit score, rather than their ability to negotiate.
- Consumers are more likely to be offered interest rates by car dealers that are competitive compared to what other lenders are providing.
- Vulnerable consumers will not be charged high interest rates simply because they are not able to negotiate lower rates.
Ms Press said 'The ban on flex commissions will deliver better outcomes for consumers across the entire car finance industry.’
‘Lenders have had ample time to prepare for this ban and we expect to see full compliance from 1 November.’
Lenders who do not comply face penalties of up to $420,000 per contravention. ASIC will be monitoring lenders, to ensure they are complying and the prohibition is operating as intended.
Under flex commissions:
- The lender and the dealer agreed that a range of interest rates would be available to any consumer (from a 'base rate' up to a prescribed maximum rate).
- The dealer could set the interest rate for a particular loan within that range and would earn a greater upfront commission from the lender the higher the interest rate.
- There was no criteria used to set the interest rate, which was shown to result in opportunistic pricing arrangements.
The commission paid on a loan was determined by the 'flex amount' – which is the difference between the base rate and the interest rate of the loan sold to the consumer.
ASIC introduced a ban on flex-commissions which 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. They will have a limited capacity to discount the interest rate, but only to reduce the price so that it operates to benefit the consumer.
The ban is expected to deliver significant savings to consumers. Take for example, a consumer who borrows $25,000 over five years:
- Before 1 November 2018 – they were at risk of being charged uncompetitive interest rates. If they were sold finance at 16% then they would accrue interest charges of $11,477 on the loan of $25,000.
- After 1 November 2018 – they are charged an interest rate based on their credit rating. If they are offered finance at 10% then they would pay interest charges of $5,415. As a result, they will save $6,062 and also pay $101 less per month.
ASIC implemented the ban by making a legislative instrument in September 2017 by using its powers under the National Consumer Credit Protection Act 2009.
A transition period allowed:
- Lenders to develop new pricing models for their car loans (such as rating for risk models).
- Lenders and car dealers negotiate new remuneration arrangements that comply with the new law.
ASIC's MoneySmart website has information to help consumers make good decisions when choosing a car loan.
ASIC's MoneySmart Cars app helps consumers avoid common traps and identify hidden costs when they go into a car dealership.