A formal ban on car finance flex commissions has been introduced by the Australian Securities & Investments Commission (ASIC), to help protect financially inexperienced consumers from excessive interest charges on their car loans.
Flex commissions are paid by lenders to car finance brokers (typically car dealers), and are based on the car loan interest rates set by these brokers. The higher the rate, the larger the flex commission the broker receives. In some cases up to 80% of the flex amount (the difference between the lender’s base rate and the dealer’s interest rate) can go to the dealer.
Two previous rounds of ASIC consultations with industry bodies, lenders, car deals and consumer groups found that flex commissions create poor consumer outcomes, with borrowers potentially paying thousands of dollars more for their car loans than necessary. Based on approximately 25,500 contracts written by seven lenders in May 2013, ASIC found that about 15% of consumers (approximately 3800 people a month) were charged an interest rate of 700 basis points (7%) or more above the base rate.
ASIC deputy chair, Peter Kell, said that the industry-wide ban was necessary to create a more level playing field for both lenders and consumers, as while many lenders recognised the issues with flex commissions, ceasing to pay them would have put these lenders at a competitive disadvantage.
“Most consumers would be surprised to learn that when you are buying a car on finance, the car dealer can, for example, decide whether you will be charged an interest rate of 7% or one of 14% – regardless of your credit history. Flex commissions do not operate in a fair and transparent way, and ASIC’s action will ensure that consumers are not charged excessive interest rates.”
The new ASIC legislation still provides car dealers with some flexibility in setting the interest rates for dealer finance, allowing them to discount the interest rates they offer and receive lower commissions so that their customers can enjoy lower credit costs.
Lenders and dealerships will have until November 2018 to update their arrangements to comply with the new law.