AADA continues to work with the Australian Securities and Investments Commission (ASIC) relative to ASIC’s review of Finance and Insurance arrangements in the retail automotive industry.
AADA is working closely with ASIC in an attempt to address the regulator’s concerns about consumer harm and unfair conduct in the provision of motor vehicle finance by Dealers as agents for the financiers.
Following the release of ASIC’s first consultation paper in late 2015, AADA formed a sub-committee of specialists in F&I, including AP Eagers, AHG, Dealers, BDO and HWLE Lawyers.
The sub-committee prepared a confidential submission and lodged it with ASIC on 11 March 2016, including reference to modelling by BDO on the financial impact on the Dealer network.
ASIC released its second consultation paper on 3 June 2016. The ASIC Regional Commissioner asked for a copy of the financial model. A meeting, led by Deputy Chairman Anthony Altomonte, took place in Sydney with ASIC on 8 June 2016 and a range of issues, including the financial model, were discussed.
ASIC subsequently asked AADA to address three questions:
- Provide a model with no prohibitions up to 300 basis points;
- Noting that car sales rose about 3.6 per cent from May 2015 to May 2016, will profitability also go up by 3.6 per cent, and
- Noting that the average loan term is 32 months, would the majority of consumers trade-up to new cars (so that longer terms could be expected to result in slightly fewer car sales).
AADA’s response to these questions was submitted on 22 July 2016, and included detailed modelling by BDO with the assistance of Andrew Bunce of AP Eagers. The modelling included impacted’ commissions based on volume-based incentive (VBI) based on net amount financed (NAF). This indicated that any decline in NAF will result in a decline in VBI.
AADA’s response also included an independent paper by Dr Rhonda Smith, Senior Lecturer in Economics at the University of Melbourne. In her opinion, “so long as information about the terms on which credit is available is accessible and transparent and consumers undertake some research, competition between credit suppliers will constrain the interest rate that car dealers can charge.
This means that flex-commissions influence the relative return to dealers versus finance companies but has little, if any, impact on consumers”.
AADA had a second meeting with ASIC in Canberra on 17 August 2016, with CEO, David Blackhall; Deputy Chairman, Anthony Altomonte; Andrew Bunce, AP Eagers; Mark Ward, BDO, and Policy Director, Michael Deed, in attendance.
AADA indicated a willingness to work with ASIC to address ‘outliers’ assist in the implementation of a positive credit reporting system, outlined an alternate arrangement using a ‘base rate’ reference model and drew their attention to dealership agreement incentives based on achieving customer satisfaction ratings and ‘penalties’ for not utilising OEM finance facilities.
ASIC indicated it had arrived at a position on origination fees paid by financiers and that a position paper would be prepared in due course.
ASIC’s position can be summarised as:
- ASIC maintains its view that flex-commissions create an inherent risk of unfair conduct with a disproportional impact on vulnerable (but not credit impaired) consumers.
- ASIC considers that even a small gap between the base rate and the maximum interest rate causes financial harm.
- ASIC considers that a prohibition on flex-commissions could commence on 1 February 2018, allowing a transition period of 18 months.
- In the transition period, ASIC considers the interest rate should be set at no more than 150 basis points above the base rate commencing 1 November 2016.
- On origination fees, ASIC considers that the risk of origination fees being unfairly increased is real and substantial. ASIC does not accept that disclosure would address its concerns about unfair conduct.
- ASIC is preparing to address its concerns through a ‘legislative instrument’. It should be noted that a ‘legislative instrument’ is subject to Parliamentary oversight.
- ASIC has acknowledged that its proposed changes will not affect novated leases and other commercial lending arrangements.
AADA has been actively addressing these issues on Dealers’ behalf. This is without doubt the single most significant regulatory challenge we face, but Dealers should rest assured that this matter remains the highest priority on the AADA team policy agenda.