ASIC Bans Flex Commissions to Improve Car Finance Practices
You would have heard the news that ASIC is clamping down on the banking and finance industry, and a lot of large banks are coming under scrutiny for irresponsible practices.
The car finance industry was one of the first to be addressed, and on 7 September 2017, it was announced that the system by which the car dealers and car finance brokers set customer rates would be changed by November 2018.
What is a 'flex commission'?
A flex commission is a difference between the base rate that the lender offers on a particular financial product and the final rate that the customer pays.
At the moment, a car dealer or car finance broker can arrange car loans at a higher interest rate than the lowest rate offered by the lender, up to 700 basis points or 7%.
The difference between the base rate and the customer rate is how the dealer or broker makes a commission.
What are the new regulations?
The new regulations around car loans mean that:
- Lenders are now more responsible for determining interest rates of particular loans, not the car dealer or car loan broker.
- The 'base rate' and the 'maximum rate' for every car loan product must be determined ahead of time and agreed on by the lender and car dealer. This increases fairness as all customers who go to a dealer or car loan broker will be offered the same range of rates.
- The 'flex amount' will still be split between the dealer or car loan broker and the lender, with up to 80% of the flex amount being kept by the dealer or loan broker.
What does this mean for customers?
Enforcing pre-defined base and maximum commissions make it harder for unethical providers of car finance to take advantage of inexperienced customers.
ASIC analysed 25,500 car loan contracts written by seven lenders in May 2013 and found that 15 per cent of consumers, 3,800 people each month, were charged the maximum interest of 7 per cent above the base rate.
The new regulations mean that customers looking for finance will receive a rate set by the lender, much closer to the available base rate. The rate a consumer is offered will be more closely related to their credit score, and will be consistent across different finance providers.
This might mean that fewer car dealerships offer finance as part of the car purchase process.
Why is ASIC enforcing the changes?
An investigation by ASIC found that 'flex commissions do not operate in a fair and transparent way'.
Deputy chair of ASIC, Peter Kell, observed: "We found that flex commissions resulted in consumers paying very high-interest rates on their car loans. We were particularly concerned about the effect on less financially experienced consumers".
The investigation found that consumers were paying up to 7% more than they needed to for their car loans. This applied across the board, regardless of a customer's credit history.
After extensive consultation with industry bodies, lenders, dealers and consumer groups, ASIC decides to implement the new regulations outlined above.
The purpose of the new legislation is to create a fair and sustainable model for providing finance in the future.
Change has already started
Many lenders and car finance brokers, including Positive Lending Solutions, have already begun to implement changes ahead of the enforcement date of the new commission structure November 2018.
ANZ is another lender that has already updated its policies to allow lending within the new guidelines.
Average rates on car loans will fall
It's anticipated that the new rules will reduce the cost of obtaining credit. Dealerships and car finance brokers will still have the ability to discount the interest rate set by lenders, but there won't be as much variation in the rates available for car loans.
This means that car loan brokers and lenders will have to find new ways to offer genuine value to their clients, over and above the discounted rate they could offer.
Getting a car loan
When arranging your next car loan, you will probably find that the car loan rate you'll get is pretty consistent everywhere.
Instead of looking for the lowest rate, you will look for the car loan broker who can give you the most convenient application process, best customer service, and fastest approval.
Positive Lending Solutions has been preparing for the change in flex commissions since the initial announcement. When you apply for a loan with a car loan broker, you'll get:
- A completely online application process, with document upload using your phone and camera.
- An experienced adviser will guide you through the application process for a faster settlement.
- Regular updates on the progress of your loan application
- The opportunity to ask any questions you have
- Advice on loan products and options you might not be aware of.