Title : Car buyers still at risk of excessive interest rates, ahead of 'flex commission' ban
link : Car buyers still at risk of excessive interest rates, ahead of 'flex commission' ban
Car buyers still at risk of excessive interest rates, ahead of 'flex commission' ban
Would-be car buyers remain vulnerable to being hit with high interest rates on loans, despite new regulations designed to limit gouging by banks and dealers.
Corporate regulator ASIC has found a widespread structure known as "flex commissions" leads to customers being hit with very high interest rates.
It announced a ban on these commissions last September but has allowed dealers and lenders more than a year to prepare, leaving consumers exposed in the meantime.
The impact of flex commissions was laid bare at the banking royal commission.
Westpac faced a grilling over the structure and agreed it was not transparent to customers, but admitted it will keep offering flex commissions until the ban to avoid car dealers taking their business to other lenders.
What are flex commissions?
Flex commissions are an arrangement between lenders and car dealers, which allows the dealer to set the customer's interest rate on a loan-by-loan basis.
Lenders set a base rate, but it's the dealer that can decide what the customer is charged above that base.
The difference between the base rate and the interest rate is the margin and dealers take a percentage of that margin as their commission — the higher the interest rate, the higher the commission for the dealer.
"The comparison in the base rate commission can be sometimes four times greater," said auto and finance industry researcher Steve Nuttall from ACA Research.
"So you could be looking at commission on the base rate of, say, $300, getting [increased to] $1,200 [with a flex commission].
"That's a big deal."
It is not just a big deal for the dealer, it is also a big difference for the customer and that caught the attention of ASIC.
The corporate and financial regulator found customers were paying excessive interest rates due to flex commission arrangements.
An ASIC analysis of loans from major lenders found, in one month, around 15 per cent of customers were charged an interest rate 7 per cent higher than the lender's base rate.
The discretion lies with the dealer not the bank, raising concerns among consumer advocates that the rates are based on a customer's ability to negotiate a better deal rather than their credit rating.
"It clearly creates conflicts of interest and an opportunity for car dealers to charge more for credit, often to the people who are most vulnerable," said Gerard Brody from the Consumer Action Law Centre.
"We were particularly concerned about the impact on less financially experienced consumers," ASIC deputy chair Peter Kell said in September last year.
Mr Nuttall said some dealers may discount the price of the car and sell it for little or no profit but then make up the money on the car loan.
"You might not be aware of the difference in rate, you will not notice the difference in payments that you're making as a consumer between the base rate and the flex rate, you're focussing on 'I've got a great deal on the purchase of this car'," he said.
"For me, that's just not a sustainable business model moving forward."
Ban still months away as lenders seek to protect business
After consulting with the auto and finance industries, in September last year ASIC announced it would ban flex commissions, but not until November this year.
Under the new regulations, dealers cannot charge customers more than the base interest rate set by the lenders. There is some scope for the dealer to discount the interest rate, but that will reduce their commission.
The Australian Automotive Dealer Association (AADA), which represents new car dealers, is working with lenders to reach new arrangements.
AADA chief executive David Blackhall said there was some initial confusion over ASIC's proposal but he thinks it is good compromise.
"The way it's worked out … setting of the interest rates [devolves] onto the financiers and then dealers [are] allowed to discount from those set rates and still earn a commission," he said.
"We think the net outcome, the compromise, is reasonable."
But consumer advocate Gerard Brody does not expect dealers to discount rates at a cost to their commission very often.
Mr Blackhall welcomed the transition period and said it allowed industry to work through the logistics including reprogramming systems and training staff.
Lenders also pushed for the transition period. Following its consultation, ASIC said there was a broad agreement that: "It was desirable to have a collective and competitively neutral response to address the 'first mover' problem".
It was an issue brought out into the open at the banking royal commission.
Westpac, which also provides car loans through its St George and Bank of Melbourne brands, was the lender in the spotlight over flex commissions.
After identifying issues with flex commissions in a 2015 audit report, Westpac introduced a cap on the commissions dealers could charge — but it continues to use the flex commission structure, meaning the discretion to set the rate above the base rate and up to the cap still lies with the dealer.
Under questioning by Commissioner Kenneth Hayne, Westpac executive Phillip Godkin admitted commercial reasons were behind Westpac's decision to continue to use flex commissions until November.
"The issue in this market is, in terms of the way that we compete, is that it would be, in our view, impossible to stop it unilaterally without stepping away from the market altogether," explained Mr Godkin.
Westpac echoed that sentiment in its submission to the royal commission's first round of hearings, saying: "The issue cannot be addressed by individual lenders abandoning the practice".
"That would simply leave the market to others who did not abandon the practice. The outcome for customers will be the same," the submission said.
Two days after that submission was made, Westpac chief executive Brian Hartzer was lauding the bank's stance on flex commissions.
"We've consistently supported the view that payments and commission arrangements for dealers in car financing need to change," he said in a speech.
"We have advocated for the removal of flex commissions and introduced our own cap before this occurs."
Consumer advocate Gerard Brody does not think the decision to continue flex commissions until ASIC's ban takes effect is good enough.
"When the bank itself agrees this is an improper practice, it's really unethical for them to continue those arrangements with car dealers," he told the ABC.
"The industry claims they're caught in a Catch 22, they claim there's a first-mover problem whereby, if they did change the commission structures, they would lose out to other lenders and car dealers.
"That tells me that those lenders and dealers are putting their profits before customers' needs. If they want to be offering an ethical business model, they would be changing that straight away."
'No customer knows' about unexplained commission structures
A lack of transparency has been one of the major concerns for consumer advocates and the regulator.
"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 7 per cent or one of 14 per cent — regardless of your credit history," said ASIC's Peter Kell in March last year.
At the royal commission, Westpac executive Phillip Godkin agreed with Commissioner Hayne that "no information of any sort" was provided to customers about the commission structure.
Sydney father Peter Gillam had not heard of flex commissions. When he went to a dealer to buy a car, he said the interest rate on his loan was not explained.
Mr Gillam and his wife Jenny wanted a second car for their daughter to learn to drive. They were concerned they would not be able to get a bank loan but found it easy to get one through a dealer.
"We just sort of turned up off the street into the car yard, met the salesman, went inside, answered a few questions and that was pretty much it," said Mr Gillam.
The Gillams signed on the spot as the repayments sounded affordable but said they were not informed of the interest rate.
"Over the space of the six years, it's ended up costing 50 per cent more than the actual price of the car," Mr Gillam told the ABC.
Mr Gillam said he felt pressure to agree to the loan to secure the car.
"It's a case of if you need the finances, you sign the piece of paper, if you don't sign the paper, you won't get the finance," he said.
Consumer Action Law Centre's Gerard Brody advises would-be buyers to avoid dealerships to reduce the pressure to sign on the dotted line.
"Go to another bank or a lender separately from the car yard, you're more likely to get a better deal, and an opportunity to think through that purchase before being put under pressure to sign a particular finance deal in the car yard," he said.
Peter Gillam said he did not know what questions to ask at the time and cautioned other would-be buyers to press for more information.
"Half the problem, you never know what question to ask, and the salesman's not forthcoming for information unless you ask, " he said.
Consumer advocates have welcomed the ban, despite calling for further changes.
"I think once the ban comes into place in November this year, the pricing of car loans through car dealers should be much more transparent," Mr Brody said.
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