Concerned senior industry executives have contacted GoAutoNews Premium predicting that ASIC’s zealous pursuit of the way dealers recover their commissions on finance will result in the closure of hundreds of new-car dealerships across the nation, cause significant job losses in every electorate and potentially cut new-car sales by several hundred thousand units a year.
The concern follows the release of a discussion paper to the industry by ASIC in which it proposes to ban flex sales commissions on car finance and eliminate origination fees for dealers on car loans. ASIC wants the interest rate to be set by the financier and not the dealer. ASIC says that not all commissions will be banned.
ASIC said the elimination of origination fees, typically $700 to $800, was to prevent finance companies and dealers from substituting flex commissions into the origination fees.
The paper gives the industry until the end of January to respond and 18 months to make the transition should the government agree with the proposals.
Industry executives who have seen the paper say that ASIC has taken the view that car finance companies and car dealers have for years been systematically breaching the National Consumer Credit Protection Act of 2009 by charging flex commissions which are based on the interest rate charged on each car loan. The interest rate is set during negotiations for the sale of a car in dealerships. The higher the interest rate, the higher the commission.
ASIC takes the view that this creates consumer harm because it says the interest rates that result from this method of sales are uncompetitive and subject to conflicts of interest on the part of dealer finance and insurance (F&I) sales staff.
The proposed measures, which ASIC views as protecting consumers from paying high interest rates on cars bought from dealers, are said by those who have contacted GoAuto as having serious consequences for the viability of the majority of car dealerships throughout Australia and it is expected the measures will drive car buyers with marginal credit ratings out of the new-car market.
GoAutoNews Premium has been told that 30 per cent of all car finance is sold by car dealers and the industry argues that the majority of people who buy their finance through a car dealer do so because they are credit-challenged and have already failed to get a loan elsewhere.
Dealers argue that by using the various levers of new-car price, tradein value, loan term, residual value and interest rate the F&I sales staff are able to get people with marginal credit records into cars. But this activity can only be performed in the dealership with the customer. Relocating this activity out of the dealerships and into finance company offices would be impractical.
A leading dealer told GoAuto: “That means there will be a whole segment of risk customers who today can get finance under the current system who will not be able to get financed.
“Under the ASIC model, the dealer will not be allowed to price the risk. If the dealer is not allowed to price the risk, if that is stripped out of all of the automotive dealerships across the country, then dealers will tell buyers they don’t qualify for finance. Those customers will have to find somewhere else if they want to buy a car.
“This will force them into used cars and sub-prime loans and this will create a large sub-prime lending market in Australia which will disadvantage those people. People who have to resort to sub-prime loans today, so-called non-conforming customers, are paying between 18 and 32 per cent interest for their cars,” the dealer said.
This compared with loans under flex commissions where interest rates are generally three to five percentage points above the base rate (10 per cent to 11 per cent) and some as high as 14- 15 per cent to cover the risk for some especially marginal buyers.
“The very people that ASIC thinks are being disadvantaged by the flex commission system today are the ones who will no longer be able to get their cars financed as they do today and will wind up paying even higher interest rates than they do today,” he said.
An industry insider said he thought as many as 20 per cent of new car sales would be lost if ASIC gets its way “because finance companies would not be in the same position to pull all the levers that make the sales to marginalcredit customers happen”.
Another insider said car companies were in “double jeopardy”.
“If dealers are not able to play the role they have played in driving newcar sales at well over a million units a year since 2007 then we will see the market drift under the million mark. Taking 100,000 to 200,000 vehicles out of the market will see some of the smaller car brands currently surviving on low volumes become unviable and they will close.
“But even worse for all car importers, is that their dealer networks are going to be decimated. Without the finance sales activity at today’s levels many dealerships will have to shut their doors because for many dealers the revenue generated by the flex commissions spells the difference between remaining operational and going out of business.”
Wayne Pearson, managing director of Pearson Automotive Consulting and former managing director at Deloitte Motor Industry Services who ran a Sydney dealer group for several years, said the outright ban on flex commissions proposed by ASIC was “out of left field” and had taken the industry by surprise.
He said that while F&I sales represented about 25 per cent of the gross profit across dealership operations “the most relevant point is that 90 to 100 per cent of a dealership’s net profit these days comes from finance”.
Mr Pearson said the mathematics of what ASIC is proposing “is very simple”.
“It typically costs a metropolitan dealer $3500 to sell a car including people, commissions, advertising, rent and so on. The gross profit for the average dealer is about $2500. So every time he sells a car he loses $1000. Over a year at 100 cars a month you are looking north of a million-dollar loss,” he said.
“Where they make that up is roughly $1200 to $1300 per car in F&I. “So the offset is that the F&I income is greater than their new-vehicle sales loss. So the F&I income is the reason they can afford to continue to run the business.”
Mr Pearson said he believed the move by ASIC would force buyers who are currently getting the latest in safety, emissions and fuel-economy technology through the ability of dealers to finance them under the current system into older used cars.
“These cars do not have the same value proposition but will cost them similar weekly payments because of the huge interest rates attached to the older used car which does not have the retained value backing the security of the loan,” he said.
“ASIC have looked at this from the customer point of view, which they should do, but they have not appeared to have delved deeply enough into the ramifications of what they are proposing on the car retail business model.”
By John Mellor
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