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David Blackhall

NEW-CAR dealers have been under sustained pressure from regulators such as the Australian Competition and Consumer Commission (ACCC) and the Australian Security and Investments Commission (ASIC) for some time now.

So much has been going on for so long that you would be forgiven for being bored and disinterested in the whole saga – if elements of it weren’t crucial to the profitable future of the new-car business.

In search of clarity, GoAutoNews Premium spoke to Australian Automotive Dealer Association (AADA) CEO David Blackhall. Here is a plain language summary of what has been going on, what is likely to happen and when.

First to flex commissions on finance. There is no surprise here, Mr Blackhall is certain that flex commissions will be banned and that a form of ‘negative flex’ will be instituted instead.

The finance providers will set a risk-adjusted base rate for a contract, and the finance reseller will be able to earn commission by discounting that rate up to 200 basis points (two per cent). This represents an attempt by ASIC to prevent financiers setting artificially high base rates and then allowing massive discounts.

“The new negative flex commission is currently planned to be limited to 200 negative basis points and beyond that, nothing,” Mr Blackhall said.

Having consulted extensively with the various finance companies, the AADA’s position is that 300 basis points would be a fairer limit. They maintain that there are circumstances under which discounts of more than 200 basis points will be appropriate – such as the loan contract for a valued, long-term fleet customer, for example.

“An important in-principle point is that they are regulating a channel, not a product,” Mr Blackhall said. “Why are they regulating only the car dealer channel when, under the proposed new regime, finance can be obtained from other places without any restrictions on the commissions paid.

Rod Sims

“As far as we are aware, there has been limited or perhaps no consultation by ASIC beyond the car finance market and there has been limited or no assessment of the impact on commission arrangements for the financing of other types of goods.”

Amongst a range of other detailed matters under discussion, the AADA has asked ASIC to be realistic about the delay occasioned in their ongoing review and to understand the car industry’s need for an 18-month phase-in period after any new legislation. The AADA is asking for March 1, 2019 implementation date.

The AADA has had further consultations with ASIC on the matter and is expecting a final draft in about two weeks.

The next major issue is the sale of so called ‘add-on insurance’ by dealers to new-car buyers, including products such as consumer credit insurance (CCI) and Gap policies.

The ACCC has already overruled an ASIC plan to limit the commissions paid to car dealers who sell such insurance to 20 per cent.

According to Mr Blackhall a deferred sales process with a hiatus period between the time of selling the vehicle to the time of sale for any add-on insurance is currently ASIC’s preferred model. During that hiatus period the customer cannot be sold any add-on insurance. The extent of this hiatus is currently expected to be four days.

“But it could be three days, or it could be five – we don’t know,” said Mr Blackhall. “We don’t think that is terribly practical because on day one, when the customer commits to the car, that is when you want to sign up the finance contract.

“It is difficult to write up that contract for a customer borrowing money to buy the car if you don’t know what they are going to do about Gap or CCI.”

To help alleviate this situation the AADA has discussed with ASIC officers the idea of a consumer waiver as is used under a similar system in the United Kingdom. Such a waiver would clearly outline to the customer their rights in terms of being able to take four days to consider insurance, but also allow them to make the choice if they just want to get on with the deal.

“We can’t see why a consumer waiver isn’t fair,” Mr Blackhall said. “The initial ASIC answer was ‘we don’t like it’. My response has been ‘why?’ because surely it is freedom of choice. The consumer is informed ‘there is a four-day hiatus here that you are entitled to but there is also a waiver that allows you to complete everything today’.

“We think lack of a waiver suggests that ASIC has an unrealistically negative view of consumers’ ability to know what they are doing when they sign contracts.”

Either way, ASIC has used its market influence with the insurance industry to a point where it represents a vastly reduced revenue stream for dealers.

According to Mr Blackhall insurance companies have reduced commissions payable to new-car dealers across the board to a maximum of 20 or 21 per cent. This was announced in a way that seems to suggest a lot of conversations have gone on across the insurance industry.

“They have done the very thing that the ACCC said they didn’t want them to do. In terms of a revenue stream for dealers it has already been mitigated heavily, and we think that this is just a further complication that makes insurance very hard to sell in the showroom.”

A final draft of ASIC’s preferred path in regard to add-on insurance is also expected in about two weeks.

The third main regulatory issue is the ACCC’s wide-ranging enquiry into new-car retailing, and this now focusses on a few main points. The first of these is access to vehicle repair data.

“The issue that is exercising our minds the most is the push to expand the availability of data,” Mr Blackhall said. “Our opponents on this have declared victory, saying effectively there will be ‘open slather’. There won’t be open slather. There is a big difference between a discussion draft and a final piece of legislation.

“We will work with the ACCC to help shape a regulation that delivers their consumer-focused objectives, but we are not interested in having our business smashed apart to help the independents grow their profitability.

“It would not be a good outcome for the ACCC to drive one sector out of business, or reduce that business significantly, at the expense of another sector. Surely their obligation is to create a level playing field, not an unbalanced one.”

The AADA’s position is that any new framework will need to embrace two main elements. The first is training.

“It is one thing to get the data but another thing entirely to know how to use it,” Mr Blackhall said. “One of our members, a multi-franchise Melbourne dealer recently took the trouble to aggregate his annual training bill and it came to many hundreds of thousands of dollars – how many of the small-scale independents will be willing to do that?

“Secondly, we can’t see how it would be fair or even legal for an independent repairer to hold out a capability to service a particular brand, or ‘all makes’ as some do, if they don’t have the certified special tools and equipment to do so.

“The consumer risks are significant – think Takata airbags for example, or other safety recalls. How many smaller-scale independents will afford a $20 thousand and upwards cost for a diagnostic set up – which is common today for many modern cars?”

The ACCC’s second main concern focus area in the Market Study is ensuring that car dealers respect consumers’ rights under Australian Consumer Law (ACL).

The AADA has put an informal proposition to the ACCC that is effectively, “If you will write the words we will sing the song. If you will give us a one-page consumer advisory we will have every franchised new-car dealer in Australia hand that to their customers, have them initial it, and put it in the deal jacket so that they know what their rights are.”

The ACCC is apparently considering the matter.

AADA will make a detailed submission in reply to the ACCC’s draft by September 17.

By Daniel Cotterill

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