THE Australian Securities and Investments Commission (ASIC) has told leading dealers and lenders that it is holding firm to its view that flex commissions on car loans are unfair to vulnerable consumers and, in ASIC’s view, are against the law.

GoAutoNews Premium has been told that a closed-door meeting with leading dealers last week revealed that, in spite of comprehensive submissions from the car industry, ASIC has not moved from its hard-line stance on flex commissions.

Insiders say that ASIC officers are taking such a restrictive view on dealer’s finance commissions that it would, if applied to other forms of commercial finance and funding other than car loans, “bring down the entire banking system”.

An industry insider familiar with the issue said ASIC appeared to be taking a view that in the case of car finance “no lenders should be allowed to make a profit on the provision of finance” to car buyers.

Insiders said that any move by ASIC to ban flex commissions under ASIC regulations, rather than by an Act of Parliament, would most likely prompt a response from the banks and finance companies to have the matter tested in court.

The insiders said that banks and other lenders now fear that any ban on car dealers and car finance companies charging interest rates that reflect risk could be broadened at the stroke of a pen to the entire Australian banking and lending industry.

Insiders said that ASIC is making “an ideological attack on a commercial business model – the concept of making a profit from the provision of funding – that has been in place for centuries”.

One insider said that ASIC asked the industry a number of questions that all revolve around disadvantaging people at the lower end of the socioeconomic scale by “gouging” high interest rates from them. He said the industry was “all in violent agreement” that gouging should not take place.

Another said: “What we are struggling with at the moment is whether we can we get a little more structure around what ASIC would like to achieve (other than an outright ban on flex commissions and origination fees).

“We are a bit concerned they want to use a sledgehammer to crack an acorn.”

The basic theme flowing from ASIC is that the incentives for selling flex commissions are canted in the wrong direction and have a harmful consequence for people who are not equipped or able to manage themselves to a better outcome. ASIC says this means the lower educated, lower income and lower socioeconomic groups are constantly disadvantaged.

One of the big issues that the industry is trying to get through to ASIC is the relationship between higher interest rates and higher risk of default that specifically relates to the groups ASIC is referring to. In terms of default, this is a high-risk group.

The industry is asking ASIC what it is expected to do with risk-adjusted interest rates because there has to be a premium for risk.

One insider said: “We think they are having trouble internally understanding what it is ASIC wants to achieve. If we asked them what success would look like they would not really know. They just want to attack.

“What they have not seemed to have realised is that they will not be able to quarantine this to just car dealers selling car loans.

“There are all sorts of areas like personal loans that would be affected as well. How about banks? How about finance companies? What about all the institutions across the entire range of businesses active in the finance market?”

The industry has also pointed out how important finance income is to the provision of the premises and services that car dealers provide to the public to buy, fund, service and sell their motor vehicles.

The industry is saying that if that source of revenue, which is so fundamental to the ongoing existence of car retailers, was to be denied to the retailers, then the only option for dealers would be to raise car prices to stay in business. This would mean all car buyers would be forced to pay more to cover the high-risk car buyers ASIC is seeking to protect.

Alternatively, the car buyers who would be denied a loan under a flex commission ban would simply be denied the right to purchase a car on terms of last resort that at least get them the transport they seek.

The industry believes that in these circumstances those car buyers would be forced into the hands of fringe financial institutes under which those buyers would pay far higher interest rates than presently available from car dealers under flex commission arrangements.

The Australian Automotive Dealer Association (ASDA) has told members that it has asked for an extension on the deadline for responses to the latest discussions, that ASIC set for June 27, in order to prove additional expert modelling and cover the additions issues raised in last week’s meeting.

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What ASIC is telling car dealers ….

• ASIC maintains its view that flex commissions create an inherent risk of unfair conduct with a disproportional impact on vulnerable (but not credit impaired) consumers.

• ASIC considers that even a small gap between the base rate and the maximum interest rate causes financial harm.

• ASIC considers a prohibition on flex commissions could commence on February 1, 2018, allowing a transition period of 18 months.

• In the transition period, ASIC considers the interest rate being set no more than 150 basis points above the base rate commencing 1 November 2016.

• On origination fees, ASIC considers that the risk of origination fees being unfairly increased is real and substantial. ASIC does not accept that disclosure would address its concerns about unfair conduct.

• ASIC is preparing to address its concerns through a “legislative instrument” under the National Consumer Credit Protection Act 2009 (NCCP Act). It should be noted that these changes are subject to Parliamentary oversight.

• ASIC has acknowledged that its proposed changes will not affect novated leases and other commercial lending arrangements.

 

By John Mellor