ASIC has announced that it will prohibit ‘flex commissions’ in the consumer car finance market. The prohibition will still allow lenders to pay other types of commissions to car dealers.
ASIC proposes 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, and therefore giving the lender responsibility for determining the interest rate that applies to a particular loan.
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.
The lender and dealer or finance broker share the flex amount based on a formula agreed to in the commission plan. The percentage of the flex amount retained by the intermediary can vary significantly from lender to lender and plan to plan, and can be up to 80% of the interest charges.
ASIC considers that flex commissions operate unfairly because they:
(a) provide an incentive for intermediaries to increase the price of a credit contract in a way that can depend on the negotiating skills or vulnerability of the consumer; and
(b) create a risk of unfairness in any individual transaction.
ASIC has released a Consultation Paper and a draft legislative instrument to implement the prohibition and is conducting a three-week consultation on technical aspects of the instrument.
Under the draft instrument, intermediaries would be able to reduce the interest rate by up to 200 basis points and receive a lower commission. Further discounting would be permissible, but only at the discretion of the lender (and without a reduction in commission).
The draft instrument sets a commencement date for the prohibition on flex commissions of 1 September 2018. In the interim, ASIC will monitor the interest rates set by lenders and identify which lenders are charging higher interest rates, with a view to considering whether further action is required.
