Lenders will now set the interest rate, but discounts may be offered for the customer's benefit
ASIC’s ban on flex commissions in the car finance space, which begins tomorrow (1 November), will level the playing field between brokers and car dealers and make the purchasing process fairer for consumers.
While in the past lenders allowed car dealers and brokers to decide on the interest rate themselves based on a pricing scale from a ‘base rate’ up to a prescribed maximum rate, now the lender will be responsible for determining the rate applied to the loan.
The old flex model created the impetus for dealers and brokers to set the highest interest rate possible within that range in order to generate a higher upfront commission. The onus was on the consumer to negotiate or shop around for a better rate.
“There was no criteria used to set the interest rate, which was shown to result in opportunistic pricing arrangements,” ASIC said. “The commission paid on a loan was determined by the 'flex amount' – which was the difference between the base rate and the interest rate of the loan sold to the consumer.”
As a result, consumers were paying very high interest rates on their car loans.
The new model should improve lending practices and make the pricing process more transparent. Consumers should be offered an interest rate that is based on their financial position and credit score, rather than their ability to negotiate, according to ASIC. Lenders who do not comply will face penalties of up to $420,000 per contravention.
While the dealer or broker can’t suggest a different rate to earn them more commission, there will be some play to discount the interest rate if it benefits the consumer. So while that will reduce the commission they earn, it will give clients a better deal and may help brokers win business over the car yard. Brokers also have access to more lenders, while car yards are generally limited to one or two, so that’s definitely an advantage that brokers can emphasise.
