The Australian Securities and Investments Commission (ASIC) has been conducting a review of commission arrangements in the car finance market for a number of years. Its findings will have a significant impact on the way Dealers conduct or continue business operations. AADA was not consulted during the review and made unsuccessful representations to ASIC to be included as part of the review process.
AADA was notified in December last year that during the course of the review ASIC identified a form of remuneration called flex-commissions, which it considers creates a significant risk of, first, consumer harm (through paying uncompetitive interest rates) and, second, of systematic non-compliance with the National Consumer Credit Protection Act 2009 (the NCCP Act), including:
- by lenders – through non-compliance with licence conditions requiring them to engage in credit activities fairly and to take adequate steps to avoid their customers being disadvantaged by a conflict of interest, and
- by intermediaries – through engaging in conduct that may be unfair pursuant to section 180A of the NCCP Act.
ASIC’s view is that the best way to comprehensively and effectively address this conduct is to impose a condition on the Australian credit licences of lenders in the car finance market prohibiting the practice of flex-commissions. It is not, however, proposed to ban other forms of commission arrangements.
ASIC considers flex-commissions “are arrangements in which a party other than a lender (typically either a car Dealer or a finance broker) can effectively set the interest rate payable by the consumer, and earn a higher commission the higher the interest rate above a Base Rate agreed to with the lender (providing that the transactions otherwise are within parameters set by the lender). This means the intermediary can earn a larger commission if, for example, the interest rate is 15% rather than 10%”.
AADA immediately wrote to ASIC seeking an extension to its unreasonable deadline to lodge a submission by 29 January 2016. This was granted and on 11 March AADA lodged a formal comprehensive submission to Michael Saadat, Senior Executive Leader, Deposit Takers, Credit and Insurers. The proposed prohibition and allegations were rebutted on 12 separate grounds:
- Legislative character of ASIC proposal. It should be achieved by an Act of Parliament rather than under ASIC’s administrative powers (a level playing field)
- Mischaracterisation of Dealers as brokers
- Competitive disparity
- Flex-commissions and interest subvention
- Dealers better placed to offer variable pricing
- Positive credit reporting
- Financial impact on Dealers
- Origination fees
- Consumer harm
- Base rate, and
- New car financing rate comparison.
AADA understands ASIC received 19 submissions in response to its December 2015 consultation paper – five from industry bodies; nine from individual lenders and five from car Dealers and other interested parties. We strongly believe in the relevance and validity of each of our responses. In our submission we attached a new car financing rate comparison that demonstrates the competitiveness of rates offered by Dealers.
AADA also commissioned independent financial modelling that forecasts the economic impact on Dealers if ASIC proceeds with the prohibition on flex-commissions. AADA has been in discussions with ASIC and has proposed an open workshop involving AADA, ASIC, financial institutions and brokers.
ASIC has yet to demonstrate or provide evidence of alleged consumer harm and unfair conduct, and AADA’s suggested workshop will assist ASIC executives to gain an understanding of how our industry operates.
AADA will take every possible action to protect Dealers’ interests achieved through ethical and professional practices, and with a focus on enhancing customers’ overall purchase experience with competitive rates of interest.