In response to the Australian Securities and Investments Commission’s (ASIC) draft ruling on flex-commissions paid to dealers by finance companies, AADA CEO David Blackhall said “there are no surprises” and that “dealers running an ethical business playing by the rules will not be disadvantaged”.
He said that, importantly, the onus to set the interest rate – and therefore the commission – will be on the financier and not the dealer.
“That removes any perceived conflict of interest where a dealer could raise an interest rate to achieve an increase in commission.”
The AADA’s summation comes a day after Australia’s two largest listed dealer groups, AP Eagers Ltd and Automotive Holdings Group Ltd (AHG) both said the ruling will not affect future earnings.
Mr Blackhall said the dealer groups assessed the ruling correctly and presented a positive note to an issue that was previously thought to be a more significant impediment to dealer profitability.
In a dealer bulletin today, the AADA said ASIC would continue to allow dealers to receive financial benefits for arranging finance.
These include upfront commissions for loans, origination fees and other forms of remuneration reflecting dealers’ overall relationships with their finance partners.
“A dealer can offer a lower interest rate up to a maximum of 200 basis points below the interest rate nominated by the lender,” Mr Blackhall said from the ASIC report.
“ASIC acknowledges that it is desirable to allow car dealers some flexibility to reduce interest rates to secure a loan.
“This allows the dealer to make the decision whether to proceed with providing finance for a customer or refuse the business.”
The AADA said that based on ASIC’s report, a dealer can offer a lower interest rate than the nominated interest rate in the following circumstances:
- If the negotiated contract interest rate is lower by 200 basis points or less than the interest rate nominated by the lender. The amount of the commission can vary so that the car dealer compensates the lender for lower interest charges through a lower commission.
- If the negotiated contract interest rate is lower by more than 200 basis points than the interest rate initially nominated by the lender, then the amount of commission cannot vary. This would mean the lender needs to decide whether or not to provide a discount, given that they would bear the entire amount of the reduction in revenue (whereas currently, under flex-commission arrangements, the cost of this reduction is shared between the lender and the car dealer).
Asked by GoAutoNews Premium if the ASIC ruling affects origination fees or similar charges, Mr Blackhall said they were seen by ASIC as being acceptable.
“Origination fees are an arrangement between the financier and the dealer and ASIC’s draft ruling enshrines that principle going forward,” he said.
“ASIC is placing the onus on the financier to set realistic fees and the onus on the dealer not to vary those fees.
“Dealer fees charged to a customer for providing services in relation to arranging finance are to be controlled by lenders to ensure the fees charged cannot be varied up or down.”
ASIC has also waved through volume bonuses.
Mr Blackhall said “volume bonuses are designed to reward businesses that place a lot of finance through a financier’s books”.
“We see it as a ‘facility access fee’ – not a commission – and we believe ASIC see it as not directly affecting the consumer.
The AADA said the ruling by ASIC will be a modification to the provisions of the National Consumer Credit Protection Act 2009 (National Credit Act) so that “the amount paid in commissions is not linked to the interest rate, and that the lender has responsibility for determining the interest rate that applies to a particular loan”.
“ASIC acknowledges that it is desirable to allow car dealers some flexibility to reduce interest rates to secure a loan,” the AADA stated.
There will be a transition period to allow the industry time to digest the changes.
The AADA said that ASIC recognised the need to allow a reasonable period for lenders to develop different pricing models, with the interest rate linked to the risk of the individual transaction.
“The draft report sets a commencement date for the prohibition of flex-commissions of September 1, 2018. In the interim ASIC will monitor lenders’ interest rates,” the AADA said.
THE AADA’s FINDINGS:
- Flex-commissions are banned but other financial benefits are allowable.
- The lender will set the rate which the dealer can discount by a maximum of 200 basis points.
- Origination fees are set by the lender subject to certain conditions.
- There will be a transition period with the prohibition commencing on September 1, 2018.
- The legislative instrument will be introduced into the Parliament and subject to review.
- The prohibition does not apply to novated leasing and salary packaging companies as they are not regulated under the National Credit Act.
Regulator spotlight on car retailing “not over”
Asked if dealers could breathe easy now that ASIC – and ACCC – have brought the automotive industry into the spotlight, Mr Blackhall said “not by a long shot”.
“We still have the add-on insurance investigation to be aired by both ASIC and the ACCC,” he said.
“That’s an important one. Most dealers get a reasonable income from the add-on insurance products but, in saying that, not every dealer sells it and not every insurance company offers it.
“The review has now been pushed back to the insurers and it’s now up to them to look at changing the design of their products.”
Mr Blackhall said that the “other big one” is the ACCC inquiry into the car retailing sector that was initiated by the issuing last year to the public and industry a list of 55 questions.
“It should rear its head by mid-year,” he said.
“One of the key elements of it is the sharing of digitised data from the manufacturer to the franchise dealers and then to the independent repairers.”
In the ASIC report, there is also reference to novated leases. The AADA said these leases were not regulated by the National Credit Act.
“ASIC does not have the powers to regulate them in the same way in respect of flex-commissions,” the AADA stated.
“ASIC indicated it could monitor conduct in this market to see if further reforms are needed in the future.”
By Neil Dowling
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