Flex commissions banned: New vehicle financing rules coming into force
'We found that flex commissions resulted in consumers paying very high interest rates on their car loans.'
The Australian Securities and Investments Commission (ASIC) has introduced new ban on 'flex commissions' in automotive lending.
When they come into force on November 1, the new rules will apply to all automotive finance lenders, including banks and car dealers. The regulation changes come on the back of an investigation into flex commissions.
Under the new rules, lenders take responsibility for working out the interest rate that applies to a particular loan, and dealers can't suggest a different rate that would offer them a greater commission. They will, however, be able to reduce the rate by 2.0 per cent to benefit the consumer.
Interest rates are calculated based on the buyer's credit score, in what's meant to be a fairer process.
Dealers and lenders have been granted a transition period to adjust their practices ahead of the November 1, 2018, introduction date.
According to ASIC, the old rules encouraged dealers or finance brokers to arrange loans at the highest possible interest rate by offering bigger commissions for bigger rates.
Lenders and dealers would agree on a range on interest rates that would be offered to consumers, after which dealers could piggyback hefty margins above the finance company's rates.
No specific criteria was, according to ASIC, used to set the final rate for a particular consumer, which led to "opportunistic pricing arrangements". Commission was paid on the difference between the base interest rate and that sold to the customer.
"We found that flex commissions resulted in consumers paying very high interest rates on their car loans," said Danielle Press, ASIC Commissioner.
"We were particularly concerned about the impact on vulnerable consumers less able to protect their interests."
In its official media release, ASIC offers the following example of how the new rules would work in some circumstances:
"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 – they were at risk of being charged uncompetitive interest rates. If they were sold finance at 16 per cent they would accrue interest charges of $11,477 on the loan of $25,000.
- After 1 November 2018 – they are charged an interest rate based on their credit rating. If they are offered finance at 10 per cent they would pay interest charges of $5,415. As a result, they will save $6,062 and also pay $101 less per month."
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