Regulations , , ,

CAR retailers will become more professional and gain new levels of customer trust after the Australian Securities and Investments Commission (ASIC) finalises its proposal to control dealer commissions on loans, the Finance Brokers Association of Australia (FBAA) has said in a statement.

But the FBAA believes some dealers who rely on commissions to prop up their business will experience pain.

FBAA head of government media and strategy Peter White spoke to GoAutoNews Premium after a meeting with ASIC in Canberra and said it was likely the commission would complete its report within a matter of months and take it to parliament.

“There are still a couple of months to go before the proposal comes up for further discussion by ASIC,” he said.

“It still has to go through parliament to get an okay so when it could be enacted is a hard question because it depends on what is on the parliamentary agenda.

“My gut feeling is that something will happen this year – early to late November – and then if it goes through parliament there would be a 12-month lead in to allow everyone to get used to the idea.”

Asked if the move would be beneficial to the association, Mr White said the introduction of the ASIC proposal “would not reduce our members’ businesses because demand will always be there”.

“People won’t not buy a car and they will still go to a dealer (for finance) because it’s convenient,” he said.

“I don’t see any of those worlds changing. I just see a more transparent and rational business scenario.Finance_lower3

“It’s about professional, transparent standards and encouraging people to do business with you because you are best of breed.

“I can’t see how this transparency can be a negative – in fact I see it as a positive for the car yards.

“I think, when it comes to regulatory bodies, it’s only going to get tougher. But that’s a good thing.

 

“It cleans up the bad habits and what dealers need to do is get in front of this and be proactive with it and embrace it and to go out and tell people – ‘you should buy a car from me because I am best of breed and there is no question of our morality’.

“They should be able to tell buyers: ‘We have the best finance deal, the best price we can offer and the best service that comes after market’.

“I can tell you it will change how dealer principals run their business.

“They will not go around and cut the guts out of a car because they won’t be able to prop it up from other areas. Commercially, that style of business won’t make sense. It will be suicide.

“We are looking at a new level of professionalism.”

Mr White said the finance broking industry had been through the same process.Finance_Lower2

 

“I’ve been in the industry for 38 years and 20 to 30 years ago it was rough and ready,” he said.

“Now we sell off the back of our professional career, our educational status, our transparency, things that people embrace.

“People hate being ripped off. It doesn’t matter who you are.”

Asked if the proposal by ASIC would hurt dealers, Mr White said: “The reality is that dealers will lose money on this.

“They won’t be able to earn 10 per cent commission on a car deal just because they can. You have to look at the consumer outcomes for that and it’s not fair on the borrower.”

“The regulator looks at that and says: ‘well that’s not a very positive outcome for the consumer’.”

ASIC’s investigation into flex commissions charged by car dealerships started as a result of the 2009 National Consumer Credit Protection Act. Its review was open to submissions from relevant parties in December 2015.

GoAutoNews Premium in December reported a car dealer who said: “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”.

The report also quoted an industry insider who 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 marginal credit customers happen”.Finance_lower

The Australian Automotive Dealers Association (AADA), which responded to the first submission and is preparing a report in answer to ASIC’s second submission, is undertaking financial modelling that forecasts the flex commission prohibition’s economic impact on dealers.

The AADA – which has stated that ASIC has yet to demonstrate or provide evidence of alleged consumer harm and unfair conduct in the current commission environment – has also discussed with ASIC the possibility of holding an open workshop involving the AADA, ASIC, financial institutions and brokers.

Mr White said he believed ASIC’s aim was to remove the potential for unfair conduct on “vulnerable consumers”.

“If you have someone with a high credit risk it won’t be the same as one with a normal risk rating,” he said.

“But you can’t just turn around and charge the higher interest rate if the risk isn’t there. If the client has no impairments – a bad credit history, for example – then it’s going to be whatever the standard rate is for that style of product.

“If there are defaults or impairments, then that’s risk-based pricing.”

Mr White said that under the national consumer credit protection act, dealers were given certain exemptions.

“But not everything was exempt. Many dealers thumbed their noses at it and many dealers have complied with the act.

“The reality today, and as we go forward, is that car yards won’t be ripping up money on trade-ins or the retail price of the car.

“The retail price will be what makes sense from a commercial business point of view and a trade-in will be appraised for what it is properly worth, and finance will be in a fair consumer outcome.”

Mr White, who has previously worked in finance and insurance for a car dealership, said it was important that dealerships needed to have the flexibility to change the interest rate, for example when they are having a sale and for high-risk situations.

“We have not had an answer from ASIC on any interest rate or commission rate limits,” he said.

“My understanding is that there will be the ability to risk price product, so there may be more commission on higher interest rates on something that is more risky but on a standard loan the lenders will determine what the commission is based on margins within whatever the interest rate is.

“They are not going to be able to increase the rate to get bigger commissions but the lenders will be able to reduce the rate for lesser commissions.”

Mr White said ASIC did consider capping the commissions at 150 basis points (effectively 1.5 per cent) “but it looks like that will be thrown out the window”.

“There will also be no interim period, it will just be in place in 12 months or 18 months time, whatever they choose, and then it will start,” he said.

“I think what ASIC proposes will be a far better outcome for everyone.

“It will create a much more transparent and commercially sensible structure for both the dealer and the customer.

“I’m not saying ASIC’s decision is the be-all and end-all and is 100 per cent perfect, but when you look at it with transparent eyes you can see it is fair and reasonable.”

By Neil Dowling

Finance_lower4

Manheim
Manheim
Manheim
Gumtree
PitcherPartners
AdTorque Edge
Gumtree
MotorOne
DealerCell
Schmick