ASIC bans car dealer flex commissions
A new Australian law to more tightly regulate unscrupulous car dealers and lenders is now in effect.
Several months ago, ASIC pointedly said that "flex commissions do not operate in a fair and transparent way". Today, 7 September, ASIC formally brought the hammer down and banned flex commissions from the car market.
Flex commissions are paid by lenders to car dealers, allowing the car dealers to set their own interest rates on car loans and earn a lot more money by charging higher rates.
"We found that flex commissions resulted in consumers paying very high interest rates on their car loans," ASIC deputy chair Peter Kell said. "We were particularly concerned about the impact on less financially experienced consumers."
Under this ban, car dealers and lenders have until November 2018 to update their business models and prepare new commission arrangements that comply with the new law.
This ban takes the form of new regulations around car loans. Under these regulations:
- Lenders are now more responsible for determining the interest rates of a particular loan, instead of the car dealers.
- Car dealers still have some freedom to set their own rates, but it needs to be within a set range, between the "base rate" and the "maximum rate".
- The "flex amount", which is the difference between the base rate and the amount actually paid by a car buyer, will be split between the dealer and the lender. The dealer can still keep up to 80% of the flex amount.
- The base rates and maximum rates must be determined ahead of time and agreed upon by the lender and the car dealer. This generally means that all customers who go to a car dealer will have the same range of rates.
The pre-defined base and maximum rates will make it harder for unscrupulous dealers to take advantage of financially inexperienced buyers by jacking up rates for individual customers.
The new arrangements also move the profits and responsibilities involved in lending back towards the more strictly-regulated financing companies and away from the car dealerships. This is likely to push car dealers back to selling cars with loans, rather than selling loans with cars.
Lenders and dealerships have until November 2018 to update their business models in compliance with the new law, so you might not see immediate results. It's possible that some unscrupulous car dealers might decide to make the most of the old arrangements and may try charging even higher interest rates before November 2018.
It's still a good idea to go to directly to the lender for a car loan instead of paying the car dealer extra just to be a middleman. These changes should reign in some of the worst of the unscrupulous loans, but car dealers will still generally have a strong desire to charge higher rates.