ASIC’s ban on Flex Commissions levels the playing field

October 30th, 2017

If you are a broker with experience in the car and vehicle finance market, you’ll be aware that right now you have a powerful advantage when competing with car dealers and other car and vehicle loan providers when it comes to offering a loan or finance to your clients. But this is will change in 2018.

Car and vehicle loans obtained from competitors like car dealers can have an interest rate as high as 14% p.a. or more, as a result of Flex Commissions. As ASIC is now moving to ban Flex Commission arrangements, you can potentially take advantage of the situation to build credibility with your clients and win new business.

What is a Flex Commission?

With Flex Commission arrangements, it’s the car dealer or their finance broker who decides what interest rate the consumer will pay rather than the lender. The lender will set a minimum interest rate (or base rate), and the dealership will earn more commission for charging an interest rate above this minimum. ASIC believes that these arrangements may result in consumers paying excessive interest, particularly consumers who lack financial experience or knowledge.

Why are ASIC banning Flex Commission?

In forming this view, ASIC examined 25,500 vehicle finance contracts written in May 2013 (a typical month) across a group of seven lenders. It found that 15% of consumers were paying 7% above the base rate, or even more. Following further consultation with the industry, ASIC announced last month that they would be banning Flex Commission arrangements from November 2018.

So what does this mean for brokers operating in this space?

Between now and November 2018, lenders will be required to develop alternative commission models where they will set the interest rate. This may mean that car and vehicle finance will be priced for risk and driven by factors like the type of product, or the borrower’s credit history. ASIC has, however, left room for rates to be discounted by the broker to help them win business, but the result will be that you would receive a lower commission, rather than the consumer receiving a higher interest rate as with a Flex Commission arrangement.

As our industry adapts to these changes, there is an opportunity to ‘get on the front foot’ with your clients:

• You can continue to be a trusted source of information for your clients and educate them about these upcoming changes. Use your newsletters, blogs and social media to keep them informed.

• It is likely that some operators will try to take advantage of Flex Commissions while they remain in place. If you provide asset finance you should be able to provide competitive pricing for your clients.

• Keep an eye on announcements from the Compliance Team and the Connective Asset Finance Team about new commission models over the course of the next 12 months.

• If you are yet to implement car and vehicle finance into your business, now is an ideal time to consider taking up the Connective Asset Finance offer. You are well placed to help your clients understand the changes being implemented by ASIC, secure their business and help them to get the right finance for their car and vehicle purchasing needs.

Any questions?

Contact your Connective Asset Finance BDMs with any questions, or for more information on incorporating asset finance into your business model, or to help you maximise the resources available to you through Connective Asset Finance if you are already writing loans in this space.

Phillip Meehan, CAF BDM NSW & QLD

phillip.meehan@connective.com.au

0488 788 839

Stephen Light, CAF BDM VIC, TAS, SA & WA

stephen.light@connective.com.au

0499 399 433

If you have any questions about asset finance compliance requirements, the Compliance Team will be happy to help. Get in touch by clicking your help icon in Mercury or simply email us directly at compliance@connective.com.au

Sources: http://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-301mr-asic-bans-flex-commissions-in-car-finance-market/