FLEX commissions in the automotive finance market have been banned today by the Australian Securities and Investments Commission (ASIC), formally registering the death of the products with the Federal Register of Legislative Instruments.

Flex commissions are paid by lenders to car finance brokers (typically car dealers), allowing the dealers to set the interest rate on the car loan. The higher the interest rate, the larger the commission earned by the dealer.

The ban comes after ASIC found flex commissions led to consumers potentially paying excessive interest rates on their car loans.

ASIC said the products allowed dealers to set the interest rate on the loan which led to cases where the higher the interest rate, the larger the commission earned by the car dealer.

The move comes after ASIC led a public consultation on banning these commissions.

ASIC deputy chair Peter Kell said: “We found that flex commissions resulted in consumers paying very high interest rates on their car loans”.

“We were particularly concerned about the impact on less financially experienced consumers.”

The CEO of the AADA, David Blackhall told GoAutoNews Premium: “The changes to finance commissions announced by ASIC today are largely in line with the proposals we have been discussing with the regulator over the last year, so no real surprises here. AADA members now have 14 months to work with their finance providers to implement compliant systems and processes”.

“On the positive side, our analysis shows that dealers will be able to continue to rely on finance income as part of their balanced business model. While commissions are likely to fall, the regulator has endorsed other traditional arrangements with finance companies that have no direct impact on what consumers pay for their loans.”

The change will now mean the lender, not the car dealer, has responsibility for determining the interest rate that applies to a particular loan. The car dealer cannot suggest a different rate that earns them more commissions.

ASIC said car dealers will now have a limited capacity to discount the interest rate and receive lower commissions, leading to lower costs for credit.

It said lenders and dealers will have until November 2018 to update their business models, and implement new commission arrangements that comply with the new law.

By Neil Dowling