ASIC鈥檚 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听rate that is based on their financial position and credit score, rather听than their ability to negotiate.
- Consumers are more likely to be offered听interest rates by car dealers that are competitive compared to what other听lenders are providing.
- Vulnerable consumers will not be charged听high interest rates simply because they are not able to negotiate lower听rates.
Ms Press said 'The ban on flex commissions will deliver better outcomes for consumers across the entire car finance industry.鈥�
鈥楲enders have had ample time to prepare for this ban and we expect to see full compliance from 1 November.鈥�
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.听听听
Background
Under flex commissions:
- The lender and the dealer agreed that a听range of interest rates would be available to any consumer (from a 'base听rate' up to a prescribed maximum rate).
- The dealer could set the interest rate for听a particular loan within that range and would earn a greater upfront听commission from the lender the higher the interest rate.
- There was no criteria used to set the听interest rate, which was shown to听result in opportunistic pricing听arrangements.
The commission paid on a loan was determined by the 'flex amount' 鈥� 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 鈥� not the car dealer 鈥� has听responsibility for determining the interest rate that applies to a听particular loan.
- The car dealer cannot suggest a different听rate that earns them more commissions. They will have a limited capacity听to discount the interest rate, but only to reduce the price so that it听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 鈥撎齮hey were at risk of being charged 听听听听 uncompetitive interest rates. If they were sold finance at 16% then they听would accrue interest charges of $11,477 on the loan of $25,000.
- After 1 November 2018 鈥撎齮hey are charged an interest rate听based on their credit rating. If they are offered finance at 10% then they 听听听听 would pay interest charges of $5,415. As a result, they will save $6,062听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听their car loans (such as rating for risk models).
- Lenders and car dealers negotiate new听remuneration arrangements that comply with the new law.
ASIC's MoneySmart website has information to help consumers make good decisions when .
ASIC's helps consumers avoid common traps and identify hidden costs when they go into a car dealership.
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