The Australian Securities and Investments Commission says 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 says it is implementing the prohibition because of “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 says, “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.”
ASIC has proposed 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.
Therefore the lender has the responsibility for determining the interest rate that applies to a particular loan.
The watchdog has prepared a draft legislative instrument to implement the prohibition and is conducting a three-week consultation on technical aspects of the instrument.
ASIC 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 flex commissions issue.
Moving forward, ASIC has prepared a draft legislative instrument to implement the prohibition and is conducting a three-week consultation on technical aspects of the instrument.
“We are confident this prohibition will benefit consumers by removing incentives that increase the interest rates they are charged,” Kell adds.
“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 welcomes feedback from stakeholders.
Submissions are due by March 27, 2017 and can be sent to: FlexCommissions@asic.gov.au
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