Brokers ‘not recording the outcomes’ of IO discussions: ASIC

From The Adviser.

Brokers may be having the appropriate conversation with borrowers on interest-only home loans, the financial services regulator has said, but there has been some “pretty poor record keeping”.

The financial services regulator announced last week that it would “shortly” begin reviewing the loan files of brokers with a “high proportion of interest-only loans” as part of its work “to ensure that consumers are not paying for more expensive products that are unsuitable”.

The review was triggered by the fact that interest-only (IO) loans are now often more expensive than principal & interest loans, and it is therefore becoming “ever important now for lenders and brokers to explain and justify why they are putting people into more expensive loans”.

Speaking to The Adviser, Michael Saadat, ASIC’s senior executive leader for deposit takers, insurers & credit services, elaborated that while the regulator believes that brokers are having the appropriate discussions with consumers about the reasons for taking out IO loans, the record keeping on loan files has not been of a high standard.

He revealed: “In the past, I’d say we have seen pretty poor record keeping on that front, where there has been very little on the loan file which tells you why the consumer got that product. In general, when we have looked at loan files in the past, we have seen [responses to the question]: ‘What were the consumers’ requirements and objectives?’ In many cases, we see things like: ‘To buy a house’. That is pretty implicit, but it really doesn’t tell you too many things about what type of product, what type of loan, what type of rate, etc.

“So, our view is that although these discussions are happening… brokers are having these discussions, but they’re not recording the outcomes of those discussions. And it’s hard to prove that you’re meeting your obligations if you don’t have something on a file that shows why you have recommended a particular loan.”

What ASIC wants to see on IO loan files

Mr Saadat added that the next stage of the review into interest-only loans will be “getting these individual files and looking to see how consumers’ requirements and objectives have been documented on those files”.

He said: “If [borrowers] have been provided with an interest-only loan and they are an owner-occupier, we will be looking for a summary or an explanation on the loan file that describes why the consumer was provided with an interest-only loan. So, that’s really the key thing.”

Adding that ASIC “won’t be that prescriptive in terms of our expectations”, Mr Saadat revealed that what the regulator wants to see is “information on the file which is sufficient to explain why the consumer’s decision (or suggestion from the lender or broker) to go into an interest-only for an owner-occupier loan was the right one”.

The lending industry has already begun responding to some of these concerns, with Commonwealth Bank launching a new IO simulator to help brokers show customers the differences between these type of repayments as well as principal & interest repayments.

Mr Saadat told The Adviser that these types of tools, which delve deeper into why consumers need an IO product, help “make the consumer aware of some of the risks involved with going down a particular path”; for example, “the fact that at the end of that period, you do need to make higher principal and interest payments and, over the life of the loan, you may end up paying more interest as a result”.

Mr Saadat concluded: “Investors may have other reasons for getting an interest-only loan — they may be tax reasons, for example, whereas those reasons don’t necessarily apply to owner-occupiers. And that doesn’t mean that owner-occupiers should never have been given an interest-only loan. Of course, there will be cases where that still is appropriate. We just want to make sure that it is appropriate and that you’re documenting the reasons for that.”

The regulator’s crackdown on IO loans has begun to bite, according to some industry data. New data from Mortgage Choice has revealed that there was a 60 per cent decline in interest-only mortgages over a period of just six months.

According to Mortgage Choice’s latest home loan approval data, the proportion of interest-only loans written by the brokerage dropped from 35.95 per cent in April 2017 to 14.64 per cent in September 2017.

CEO of Mortgage Choice John Flavell said that the “significant decline” was a result of lenders hiking rates for these loans.

New ASIC chair announced

From The Adviser.

James Shipton, executive director of the Program on International Financial Systems at Harvard Law School, has been announced as government’s recommended nominee for the role of chair at ASIC.

According to an announcement by the Minister for Revenue and Financial Services, Kelly O’Dwyer, Mr Shipton will be recommended as the government’s choice for the role of chair of the Australian Securities & Investments Commission to the Governor-General in Council.

Mr Shipton would then replace Greg Medcraft for the five-year period starting 1 February 2018.

Mr Peter Kell, the current deputy chair, will be the acting chair from the time Mr Medcraft’s term ends on 12 November 2017 to when Mr Shipton commences in February.

Ms O’Dwyer commented: “Mr Shipton brings wide regulatory and financial market knowledge to the position, as well as international experience.

“He is currently the executive director of the Program on International Financial Systems at Harvard Law School. From 2013 to 2016 he was the executive director, Intermediaries Supervision and Licensing Division at the Hong Kong Securities and Futures Commission. Prior to that he had extensive experience in various roles in investment banking in Asia and Europe and commenced his professional career as a solicitor in Australia.

“I look forward to Mr Shipton making a significant contribution to the important work of ASIC in promoting confidence in Australia’s financial system and protecting consumer interests as the incoming chair.”

Ms O’Dwyer also went on to “express [her] appreciation to Mr Greg Medcraft for his commitment over the past years to ASIC both as the chair and as a member”.

She said: “Mr Medcraft has overseen significant changes in ASIC’s role during his tenure, including reforms to improve the quality of financial advice and financial literacy, and the establishment of a national business names register.”

ASIC committed to improving the financial capabilities of Australians

ASIC has released the National Financial Literacy Strategy for consultation.

The National Financial Literacy Strategy is a framework to guide policies, program and activities that aim to strengthen Australians’ financial literacy and capability.

The five priorities in the National Strategy are:

  • Educate the next generation, particularly through the formal education system;
  • Increase the use of free, impartial information, tools and resources;
  • Provide quality targeted guidance and support;
  • Strengthen co-ordination and effective partnerships;
  • Improve research, measurement and evaluation.

A key feature of the National Strategy is collaboration across different sectors, including government agencies, community organisations, the education sector and financial services firms.  ASIC is leading a public consultation process to shape the National Strategy from 2018 and is seeking feedback on a number of issues including:

  • updating the language of the National Strategy from ‘financial literacy’ to ‘financial capability’ to reflect a growing focus on behaviours that support better financial outcomes;
  • expanding the priority audiences identified under the National Strategy, for example to include people with disability (and their families or carers) who are navigating choices and options under the National Disability Insurance Scheme, or people in newly arrived communities who are attempting to understand and access financial services;
  • broadening stakeholder reach and engagement with the National Strategy, including through the use of new technologies and;
  • improving research, measurement and evaluation.

‘Building financial capabilities requires a long-term commitment to lay the foundations for behavioural change over time.  We all confront significant financial decisions at key points in our lives, such as leaving school, having children, or reaching retirement.  To help people develop healthy financial habits and make better decisions about money we’re seeking feedback on the National Strategy’, said ASIC Deputy Chair Peter Kell.

‘I encourage people to share their views with us through this process.  Your input will help us shape a National Strategy that supports positive outcomes for individuals and communities now and into the future’, Mr Kell said.

ASIC invites feedback on the consultation paper from all interested stakeholders. Submissions are due by Friday 17 November 2017.

 

ASIC Stops More Pay Day Lenders

ASIC annouced today enforcable undertaking with Payday lenders Web Moneyline and Good to Go Loans, to cease using a loan product, called OACC2, following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

Both lenders are required to

  • write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
  • notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
  • not enter into the OACC2 loan product with any new consumers.

Here are the ASIC releases:

Payday lender Web Moneyline has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Web Moneyline may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.

Under the Enforceable Undertaking , Web Moneyline is required to:

  • write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
  • notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
  • not enter into the OACC2 loan product with any new consumers.

ASIC Deputy Chairman Peter Kell said, ‘Financially vulnerable consumers can be at particular risk from this sort of activity, and in many cases will have little real understanding of the greater risks of default they are being exposed to. ASIC will take action to protect those consumers from falling victim to unsuitable payday loans.’

All consumers with outstanding debts from OACC2 loans taken out between 21 August 2014 and 26 May 2015 are not required to make any more payments and will shortly receive communication from Web Moneyline confirming that their loan is now finalised.

Consumers who believe they may have entered into a loan contract with Web Moneyline (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au.  If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options.

 

Payday lender Good to Go Loans has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).

ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Good to Go Loans may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.

Under the Enforceable Undertaking, Good to Go Loans is required to:

  • write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
  • notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
  • not enter into the OACC2 loan product with any new consumers.

ASIC Deputy Chairman Peter Kell said, ‘ASIC will continue to take action to protect financially vulnerable consumers, many of whom are recipients of welfare payments, from falling victim to unsuitable payday loans.’

All consumers with outstanding debts from OACC2 loans taken out between 18 May 2014 and 20 May 2015 are not required to make any more payments and will shortly receive communication from Good to Go Loans confirming that their loan is now finalised.

Consumers who believe they may have entered into a loan contract with Good to Go Loans (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au.  If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on 1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options

ASIC update on interest-only home loans

ASIC today provided an update on its targeted review of interest only home loans. They say that borrowers who used brokers were more likely to obtain an interest-only loan compared to those who went directly to a lender and borrowers approaching retirement age continue to be provided with a  significant number of  interest-only owner-occupier loans.

ASIC will now look at individual loan files, especially from lenders with high IO portfolios, in the light of the responsible lending provisions.

Announced in April 2017, the review was a targeted industry surveillance examining whether lenders and mortgage brokers are inappropriately recommending more expensive interest-only loans.

With many lenders, including major lenders, charging higher interest rates for interest-only loans compared with principal-and-interest loans, lenders and brokers must ensure that consumers are not provided with unsuitable interest-only home loans.

ASIC has concluded the first stage of its targeted review, which involved data collection from 16 home loan providers (including large banks, mid-tier and smaller banks, and non-bank lenders).

ASIC found that Australia’s major banks have cut back their interest-only lending by $4.5 billion over the past year. However, other lenders have partially offset this decline by increasing their share of interest-only lending.

The 16 lenders reviewed by ASIC provided $14.3 billion in interest-only loans to owner-occupiers in the June 2017 quarter, down from $19 billion in the September 2015 quarter.

ASIC’s interest-only lending review has also found:

  • Borrowers who used brokers were more likely to obtain an interest-only loan compared to those who went directly to a lender
  • Borrowers approaching retirement age continue to be provided with a  significant number of  interest-only owner-occupier loans

ASIC has now moved into the second stage of its review, and will be reviewing individual loan files from both lenders and mortgage brokers. These lenders and mortgage brokers have been selected based on a number of criteria, including their relative share of interest-only home lending.

ASIC will examine individual loan files to ensure that lenders are providing interest-only home loans in appropriate circumstances. ASIC will carefully review cases where owner-occupiers have been provided with more expensive interest-only home loans, to ensure that consumers are not paying for more expensive products that are unsuitable.

Under the responsible lending obligations, lenders and brokers are required to make sure that a loan meets the requirements and objectives of a consumer, in addition to making sure that the loan is affordable. Lenders and brokers must have a reasonable basis for suggesting that a consumer apply for a particular loan product, and no consumer should be surprised by the type of home loan product that they have obtained.

In providing the update, ASIC Deputy Chair Peter Kell said he expected lenders offering these types of loans to be making thorough enquiries into the financial status and the needs of their clients:

“The spotlight has been firmly on interest-only lending for some time, and there are no excuses for lenders and brokers not meeting their legal obligations,” he said.

“While interest-only loans may be a reasonable option for some borrowers, lenders must make appropriate enquiries into the needs and financial circumstances of their customers, and they must be able to demonstrate that they have done so.”

ASIC will consider appropriate enforcement action if breaches of the law are identified.

Background

ASIC collected data from the following lenders covering their interest-only lending activities over the last two years:

  • Australia and New Zealand Banking Group Limited
  • Australian Central Credit Union Ltd (trading as People’s Choice Credit Union)
  • Bank of Queensland Limited
  • Bendigo and Adelaide Bank Limited
  • Citigroup Pty Limited
  • Commonwealth Bank of Australia
  • ING Bank (Australia) Limited
  • La Trobe Financial Services Pty Limited
  • Liberty Financial Pty Ltd
  • Macquarie Bank Limited
  • Members Equity Bank Limited
  • National Australia Bank Limited
  • Pepper Group Limited
  • Suncorp-Metway Limited
  • Teachers Mutual Bank Limited
  • Westpac Banking Corporation

ASIC has provided guidance to industry in Regulatory Guide 209 Credit licensing: Responsible lending conduct (refer: RG 209).

In 2015, ASIC reviewed interest-only loans provided by 11 lenders and issued REP 445 Review of interest-only home loans (refer: REP 445), which made a number of recommendations for lenders to comply with their responsible lending obligations (refer: 15-297MR).

In 2016, ASIC reviewed the practices of 11 large mortgage brokers and released REP 493 Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives (refer: REP 493). REP 493 identified good practices as well as opportunities to improve brokers’ practices.

Responsible lending is a key priority for ASIC in its regulation of the consumer credit industry. ASIC’s targeted surveillance of interest-only lending follows considerable regulatory activity focused on responsible lending compliance:

  • Treasury releases ASIC’s Review of Mortgage Broker Remuneration.
  • ASIC announces further measures to promote responsible lending in the home loan sector (refer: 17-095MR).
  • ASIC filed civil penalty proceedings against Westpac in the Federal Court on 1 March 2017 for alleged breaches of the National Consumer Credit Protection Act 2009 (refer: 17-048MR).

Borrowers with concerns about their ability to make home loan repayments should contact their lender in the first instance. ASIC’s MoneySmart website has guidance for consumers who are having problems paying their mortgage, including how to approach their lender. They can also access free external dispute resolution, through either the Financial Ombudsman Service or Credit and Investments Ombudsman.

The Hundred-million Dollar Home Loan Fraud Conspiracy

ASIC says false documents were used for more than 500 loan applications valued at approximately $170 million submitted between about March 2008 and August 2010 to numerous banks and financial institutions.

These included the Commonwealth Bank of Australia, Westpac Banking Corporation, St George Bank, Bankwest, Adelaide Bank, Bank of Queensland, Choice Home Loans, Citibank, National Australia Bank, Pepper Homeloans and Suncorp Bank.

The false documents included bank statements, payslips, citizenship certificates and statutory declarations. These were predominantly used in support of applications for home loans for house and land packages as well as for the purchase or refinance of existing homes.

The sentencing follows an ASIC investigation into Footscray-based finance broking company Myra Home Loans Pty Ltd, which traded as Myra Financial Services (Myra).

Mr Najam Shah, 58, of Victoria, has been sentenced to 5 years jail after pleading guilty to one charge of conspiring to defraud financial institutions. Mr Shah must serve 3 years and 3 months before being eligible for parole.

The charge relates to Mr Shah’s role at Myra and the creation and use of false documents to support loan applications valued at a total of approximately $170 million.

On 13 February 2017, Mr Shah entered the guilty plea during an appearance at the County Court of Victoria. Mr Shah’s plea followed his arrest and charge in January 2015. By pleading guilty, Mr Shah admitted to conspiring to defraud financial institutions.

In sentencing Mr Shah, Judge Gucciardo noted that mortgage fraud of this nature damages the integrity of the lending system and that Mr Shah’s well organised deception enabled such corruption. He further noted that Mr Shah was motivated by greed.

ASIC Deputy Chair Peter Kell said, “ASIC will continue to ensure that mortgage brokers who provide false documentation are held to account. Today’s sentencing reflects both the severity of Mr Shah’s actions and the consequences facing those who do not abide by the law.”

The matter was prosecuted by the Commonwealth Director of Public Prosecutions.

ASIC’s investigation is continuing.

ASIC bans director of unlicensed payday lender

ASIC says it has banned Mr Robert Legat from engaging in credit activities for a period of three years following the penalty decision of the Federal Court on 10 March 2017.

The Court had previously found that payday lenders Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (Burleigh Heads) Pty Ltd (the FAF Companies) breached consumer credit laws by engaging in credit activities without holding an Australian credit licence.

The FAF Companies used a business model which used the sale and purchase of diamonds to provide loans to consumers (the diamond model). The Federal Court found that the diamond model was designed to conceal the true nature of the transaction, which was the provision of credit. As such the FAF companies should have held an Australian credit licence under the National Credit Act.

ASIC found that Mr Legat created and caused the FAF companies to implement the diamond model, which was designed to circumvent the 48% legislative interest rate cap that would have been applicable to the loans. This conduct demonstrated a lack of judgement, integrity and professionalism on Mr Legat’s part and a disregard for the law. ASIC determined that Mr Legat is not a fit and proper person to engage in credit activities.

ASIC Deputy Chair Peter Kell said, ‘The National Credit Legislation contains important protections for consumers. ASIC will take action against people who seek to deprive consumers of these protections.’

ASIC questions legality of bank rate hikes

From The Adviser.

The corporate watchdog told a parliamentary hearing this week that the big banks could be in breach of the ASIC Act over the reasons given for hiking interest rates.

ASIC appeared before the House of Representatives Standing Committee on Economics yesterday (14 September) where chairman Greg Medcraft provided no opening remarks and instead launched straight into the inquiry.

Chairing the committee was David Coleman MP, who kicked off the questioning by raising the issue of recent rate hikes by the banks. He noted that some banks, in their public justifications for the out-of-cycle rate hikes, have named the regulatory impact but did not name any other factors.

Mr Coleman questioned if the interest rate increases were larger than could sensibly be justified by the regulatory impact.

He then asked ASIC chairman Greg Medcraft: “Would that concern you?”

“Yes, it would. I think what you are really saying is, are they profiteering on the announcement?” Mr Medcraft replied, before passing to ASIC deputy chair Peter Kell to elaborate.

“Yes, it certainly would concern us,” Mr Kell said. “It would go in effect to, I suppose, whether the public justification or explanation for the interest rate rise was actually inaccurate and perhaps false and misleading, and therefore perhaps in breach of the ASIC Act.”

The deputy chairman explained that ASIC is currently “looking at this issue” and will be working with the ACCC, which has been given a specific brief by Treasury to investigate the factors that have contributed to the recent interest rate setting.

“It is an issue we are concerned about,” Mr Kell said. “We will have to look at any particular statement carefully. I would also ask if the committee has any particular statements they have concerns about?”

CBA blames regulator for rate hikes

David Coleman MP took the opportunity to read from a 27 June press release issued by the Commonwealth Bank of Australia (CBA) which informed the market of home loan pricing changes. It stated: “To meet our regulatory requirements, variable interest-only home rates for owner-occupiers and investors will increase by 30 basis points.”

Mr Coleman said that there was “no wiggle room” in CBA’s statement, which made clear that regulatory requirements were the sole reason for the rate hike.

“CBA has very clearly put on the record that it is to meet the regulatory requirement,” he said.

“It is notable in this context that analysts who have looked at these rate rises have concluded that the rate rises will increase the profitability of the banks. Presumably, this is not the role of a regulatory change.”

Mr Coleman said that it is important that the industry is aware and that bank executives are aware that “the ACCC has powers to interrogate these matters very carefully”.

Back book repricing under scrutiny

APRA was grilled by the parliamentary inquiry earlier in the week, where Mr Coleman questioned whether CBA’s and other lenders’ back book IO repricing practices were “actually opportunistic changes” that had effectively used the APRA speed limits as excuses to garner profit.

He called on APRA chairman Wayne Byres to clarify whether lenders had put out “misleading” statements by using the APRA crackdown as reasoning for back book repricing.

Deflecting the question, Mr Byres said that APRA would wait to see what came out of inquiries by the ACCC and ASIC. He noted that ASIC would have “great interest” in the matter.

Applications for crowd-funding licences open 29 September 2017 – ASIC

ASIC says that from 29 September 2017, the new crowd-sourced funding (CSF) regime will come into effect and ASIC will begin accepting licence applications from CSF intermediaries.

Under the CSF regime, eligible public companies will be able to make offers of fully paid ordinary shares to a large number of investors via the online platform of a licensed intermediary. Generally, the CSF regime reduces the regulatory requirements for public fundraising and the intermediaries will play an important oversight role in this process.

ASIC Commissioner John Price said that the new system balances the need for regulatory oversight with supporting innovation.

‘ASIC welcomes the start of the new crowd-sourced funding laws. Crowd-sourced funding helps both start-ups and small to medium sized businesses and investors access the opportunities that are available from an innovative economy. It is also important for investors to understand the benefits and risks of crowd-sourced funding and we encourage them to refer to the materials on crowd-sourced funding on our MoneySmart website‘. he said.

For companies to access the benefits of the new CSF regime, ASIC must first license suitable intermediaries to provide crowd-funding services. Providers of CSF services must hold an Australian financial services (AFS) licence. From 29 September 2017 ASIC will begin accepting applications from potential CSF intermediaries for AFS licence authorisations to provide a crowd-funding service.

To facilitate implementation of this regime as soon as possible, ASIC’s Licensing team will consider applications from CSF intermediaries as a matter of priority.

ASIC has today released further details of its approach to the assessment of CSF intermediaries, and the information required for both new licence and variation applications seeking CSF service authorisation.

Applicants should read the information provided on this page before making an application.

ASIC has also released an update to ASIC Form 206 which can be used to convert an existing company so that it is eligible to use the new CSF regime. ASIC will now accept lodgement of ASIC Form 206.

ASIC bans flex commissions in car finance market

ASIC has formally banned flex commissions in the car finance market, with the legislative instrument to ban these commissions registered on the Federal Register of Legislative Instruments today.

Flex commissions are paid by lenders to car finance brokers (typically car dealers), allowing the dealers to set the interest rate on the car loan. The higher the interest rate, the larger the commission earnt by the dealer.

ASIC is banning these commissions because it has found that they lead to consumers paying excessive interest rates on their car loans. The ban comes after ASIC led a public consultation on banning these commissions.

“We found that flex commissions resulted in consumers paying very high interest rates on their car loans. We were particularly concerned about the impact on less financially experienced consumers,” ASIC Deputy Chair Peter Kell said.

Mr Kell thanked those who had provided feedback to ASIC’s consultation: “The feedback we received from stakeholders provided us with helpful insights, and we thank all stakeholders for their cooperation.”

Background

The legislative instrument operates so that:

  • The lender not the car dealer has responsibility for determining the interest rate that applies to a particular loan. The car dealer cannot suggest a different rate that earns them more commissions.
  • Car dealers will have a limited capacity to discount the interest rate and receive lower commissions, leading to lower costs for credit.

The legislative instrument and the Explanatory Statement can be found here.

Lenders and dealerships will have until November 2018 to update their business models, and implement new commission arrangements that comply with the new law.

Under flex commissions:

  • The lender and the dealer agree that a range of interest rates will be available to any consumer (from a ‘base rate’ up to a prescribed maximum rate)
  • The dealer can set the interest rate for a particular loan within that range and will earn a greater upfront commission from the lender the higher the interest rate
  • There is no criteria used to set the interest rate which has been shown to  result in opportunistic pricing arrangements

The commission paid on a loan is determined by the ‘flex amount’ – which is the difference between the base rate and the interest rate of the loan sold to the consumer.

The lender and dealer share the flex amount. The percentage of the flex amount kept by the dealer varies significantly and can be up to 80 per cent of the interest charges.