It's what Australia's banking industry has been fearing, with the government finally releasing its report on the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, with car dealers put on notice.
The near-500-page report includes 76 recommendations made by Commissioner Kenneth Hayne QC, which the government is expected to accept in their entirety.
Speaking to media from Parliament House, Treasurer Josh Frydenberg said the actions of banking institutions were "driven by greed and behaviour that was in breach of existing law and fell well below community expectations”.
“The price paid by our community for this misconduct is immense, and goes beyond just the financial,” he said.
While most of the recommendations centred around the conduct of banks and the industry, car dealers will be directly targeted by at least three of the recommendations tabled by the Royal Commission.
- Recommendation 1.7: Removal of point-of-sale exemption
- Recommendation 4.3: Deferred sales model for add-on insurance, and
- Recommendation 4.4: Cap on commissions
The first recommendation (1.7) relates to the car dealers being exempt from a requirement of holding an ASIC Credit Licence (ACL) when offering consumers a method of loaning money to pay for their new car.
Normally to engage in credit activities you must be a credit licence holder with strict penalties in place if you engage in offering credit without a valid ACL. But, until now, car dealers were exempt from this requirement and could act as agents for lenders.
According to the report, "Consumers making large purchases, such as motor vehicles, white goods or furniture may borrow money in order to pay the price. Often the application for credit is made at the point of sale, not at the lender's premises. The person with whom the consumer deals at the point of sale is not subject to the NCCP Act."
The issue with this practice, according to the report, was that some dealers would take advantage of customers by using 'flex commissions', by capitalising on add-on insurance products, or by misrepresenting portions of the consumer's credit application because the sale of the car relied on the finance being approved.
Flex commissions allowed car dealers to sell finance at a higher interest rate than the one applicable to that particular loan. This was a practice offered and encouraged by lenders because it allowed the car dealer to not only secure a loan for the customer, but also pocket a commission for locking in a higher interest rate than what was actually required to service the loan.
The report suggests that "many borrowers know nothing of these arrangements" and that "lenders did not publicise them and dealers did not reveal them." Finally, it was in the "dealer's interest in securing the highest rate possible".
Thankfully this arrangement was banned on November 1, 2018, but Westpac continued to offer loans with flex commissions when the Royal Commission first looked into these matters in March 2018. Westpac suggested that despite "recognising it could create unfairness in individual contracts, it could not stop the practice because doing that would simply leave the market to others who do it".
Also part of Recommendation 1.7 was a further review of a Productivity Commission review in 2013 that analysed retailer exemptions from the NCCP Act (National Consumer Credit Protection) of 2009. It was this act that originally recognised car dealers as being exempt from holding a credit license to process applications for finance.
The 2013 Productivity Commission review recommended three options – maintaining the status quo, requiring retail dealers to comply with the NCCP Act or modifying the application requirements of the NCCP Act to better suit retail dealers.
Treasury never completed that review, which is why the Royal Commission now recommends taking the second option, which requires retail dealers to be subject to the NCCP Act.
The second recommendation (4.3) calls for a deferred sales model for add-on insurance (covering funeral insurance, accidental death and injury insurance, along with add-on insurances sold in relation to motor vehicle purchases).
ASIC identified that "In the current sales environment, combining the sale of the car, finance and add-on products into once process restricts the capacity for consumers to consider these matters and make rational, informed purchase decisions. The deferred sales model aims to address this by inserting a pause into the sales process."
"We consider that a well-designed model would give consumers additional time to navigate the complexities of add-on products and facilitate improved decision making."
To put this into context, the Royal Commission report noted that in some cases, car dealers were pocketing 79 per cent of the premium for some add-on insurance products, which led to them being pushed even when they weren't in the consumers best interests.
The main reason commission was so high was because insurance companies competed to gain market share, considering dealers as their customers as opposed to consumers, which led to "many dealers being dependent on revenue from commissions and volume-based payments", which led to them being "likely to create incentives to engage in poor sales practices".
The report says that comprehensive car insurance would be excluded from this particular recommendation.
The final recommendation (4.4) calls for a cap to be put on commissions paid to dealers, saying "ASIC should impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products."
Not everybody is on board with these changes though, with the peak Australian automotive body, the Australian Automotive Dealer Association, surprised with the report finding.
“I am surprised given the point of sale exemption was only briefly mentioned in the Royal Commission’s interim report and suddenly, its abolition is now Government policy,” said AADA CEO David Blackhall.
“It is unclear what this policy will mean for the provision of finance at dealerships. It is not certain how many new car Dealers already have credit licences, but we do know that many mid-to-small and regional dealerships do not,” he said.
“It is unclear why the exemption needs to go. Obtaining finance from a dealership is a cost effective, convenient solution for many consumers and the Royal Commission by its own admission repeatedly said that delinquencies in the car finance market are very low,” he said.
The AADA also offered their opinion on the commission cap, suggesting it was already in place by some insurance companies.
“The concept of a deferred sales model is already under consideration by ASIC. We will be urging Treasury to adopt a model which defers the sale for around three to four days and allows informed consumers a waiver,” Blackhall said.
“Allowing ASIC to impose a cap on add-on insurance commissions will only formalise a practice already being employed by the main insurance companies,” he said.
With the government expected to take on all recommendations in the report, we could see a serious hit coming to the car industry and dealers, which all rely on these secondary products to keep profits healthy.
What do you think about the changes? Are they too harsh, do they go far enough? Let us know in the comments below.
While all dealers are affected by these changes, the images used here are generic representations of dealers and not dealers specifically called out in the Royal Commission report.