The corporate watchdog has sought to use a legislative instrument to act against commissions in the car financing industry.
The Australian Securities and Investments Commissions (ASIC) has now prohibited “flex commissions” in the car finance market but will still allow lenders to pay other types of commissions to car dealers.
ASIC said it had implemented the prohibitions because of poor outcomes for consumers and because flex commissions operated in a way that was unfair under the National Consumer Credit Protection Act 2009 (National Credit Act).
ASIC has proposed to use its statutory power to modify provisions of the National Credit Act to prohibit the use of flex commissions so that the amount paid in commissions is not linked to the interest rate, and therefore the lender has the responsibility for determining the interest rate that applies to a particular loan.
The watchdog has prepared a draft legislative instrument to implement the prohibition and is conducting a three-week consultation on technical aspects of the instrument.
ASIC deputy chair, Peter Kell said: “Most consumers would be surprised to learn that when you are buying a car on finance, the car dealer can, for example, decide whether you will be charged an interest rate of seven per cent or one of 14 per cent – regardless of your credit history”.
“Flex commissions do not operate in a fair and transparent way, and ASIC’s action will ensure that consumers are not charged excessive interest rates,” he said.
“There was a broad recognition that flex commissions create poor consumer outcomes. However, lenders who cease paying flex commissions unilaterally risk putting themselves at a competitive disadvantage. It is therefore necessary to implement the change through an industry wide approach that would ensure a level playing field for all lenders.”
Kell said ASIC was confident that the prohibition would benefit consumers by removing incentives that increased the interest rates they were charged.
“We consider that average interest rates on car loans will fall as a result of more efficient pricing models and lower losses through defaults. We expect lenders will work with car dealers in moving to fairer and more sustainable models,” he said.
