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On Friday 3 March 2017 ASIC announced that it will prohibit flex-commission in the car finance market but will still allow lenders to pay other types of commissions to car dealers. ASIC has decided on a prohibition as a comprehensive, industry-wide solution that will deliver broad changes for the benefit of consumers. It will apply to car dealers and finance brokers.

ASIC will, however, allow dealer financial benefits for arranging finance including upfront commissions for individual loans, volume bonuses, soft dollar benefits and origination fees. A dealer can offer a lower interest rate up to a maximum of 200 basis points below the nominated minimum interest rate.

A summary of ASIC’s proposals includes:

• flex-commissions will be banned but other financial benefits will be allowable e.g. reverse flex.
• the lender will set the rate which the dealer can discount by a maximum of 200 basis points.
• origination fees are set by the lender subject to certain conditions.
• there will be transition period with the prohibition commencing on 1 September 2018.
• a legislative instrument will be introduced into the Parliament and subject to review.
• the prohibition does not apply to novated leasing and salary packaging companies as ASIC does not have statutory powers to regulate them.

ASIC proposes to use its statutory powers to modify provisions of the National Consumer Credit Protection Act 2009 (National Credit Act) so that the amount paid in commissions is not linked to the interest rate, and that the lender has responsibility for determining the interest rate that applies to a particular loan. ASIC acknowledges that it is desirable to allow car dealers some flexibility to reduce interest rates to secure a loan.

ASIC has prepared a draft legislative instrument with a transition period of around 18 months to implement the prohibition and feedback from stakeholders is due by 27 March and can be sent to FlexCommissions@asic.gov.au. Relevant documents can be accessed here. The draft legislative instrument modifies the National Credit Act using ASIC’s statutory power in s109(3)(d) of the Act.

Legislative instrument (LI) – ASIC Credit (Remuneration Arrangements) Instrument 2017

As currently drafted the LI would apply to all credit contracts and consumer leases regulated by the National Credit Act. Car dealers would be able to reduce the interest rate by up to 200 basis points and receive a lower commission.

Dealer fees charged to a customer for providing services in relation to arranging finance is to be controlled by lenders to ensure the amount of fees charged cannot be varied up or down.

Transition period

ASIC recognises the need to allow a reasonable period of time for lenders to develop different pricing models, with the interest rate linked to the risk of the individual transaction. The draft LI sets a commencement date for the prohibition of flex-commissions of 1 September 2018. In the interim ASIC will monitor lenders’ interest rates.

Remuneration arrangements in car finance industry

ASIC considers that dealers have two main sources of finance-related income from a sale:

• financial benefits including upfront commissions for individual loans, volume bonuses according to the level of business arranged and soft dollar benefits.
• a dealer origination fee (dealer fee) for assisting in the provision of finance.

Dealer origination fees

Lenders must set a maximum price for origination fees (which is likely to be based on reasonable reimbursement of the costs associated with arranging a loan, and intermediaries are prohibited from influencing or proposing the amount of the fee, where any benefit to that person increases or decreases by reference to an increase or decrease in the amount of the fee.

Point-of-sale exemption (POS) in Reg 23 of National Credit Regulations

ASIC does not consider the need to remove the POS exemption that applies to dealers.

ASIC understands that the majority of car dealers engage in credit activities by relying on the POS exemption, rather than as credit licensees or as credit representatives. This does not make the dealer an agent of the lender.

Under the National Credit Act lenders are under an obligation to ensure that car dealers exercise their discretion to determine or propose interest rates in a way that is efficient, honest and fair.

Section 180A of the National Credit Act provides for remedies against brokers and other intermediaries for engaging in conduct that is unfair or dishonest, where that conduct has the result of a consumer entering into a contract they would not otherwise have entered into, or that the terms that are different from a contract the consumer would otherwise have entered into.

This remedy also extends to dealers operating under the POS exemption.

ASIC noted the views of some stakeholders that the continuation of the POS exemption means that the market is not competitively neutral. They argued that it means there is greater regulatory burden on licensees and credit representatives when arranging finance, compared to car dealers.

ASIC considers there would be merit in considering this issue further if the financial disadvantage from flex-commissions was the result of car dealers who operated in reliance on the exemption. However, the practice is not limited in this way, and is engaged in intermediaries who hold credit licences or have been appointed as credit representatives by a licensee.

Novated leases

Novated leases are not regulated by the National Credit Act and ASIC does not have the powers to regulate them in the same way in respect of flex-commissions. Dealers affiliated with novated lease providers would therefore be entitled to receive flex-commissions. ASIC indicated it could monitor conduct in this market to see if further reforms are needed in the future.

Dealer can offer a lower interest rate than the nominated interest rate

A dealer can offer a lower interest rate than the nominated interest rate in the following circumstances:

If the negotiated contract interest rate is lower by 200 basis points or less than the interest rate nominated by the lender, the amount of the commission can vary (so that the car dealer compensates the lender for lower interest charges through a lower commission.

If the negotiated contract interest rate is lower by more than 200 basis points than the interest rate initially nominated by the lender, than the amount of commission cannot vary. This would mean the lender needs to decide whether or not to provide a discount, given that they would bear the entire amount of the reduction in revenue (whereas currently, under flex-commission arrangements, the cost of this reduction is shared between the lender and the car dealer).

Other

ASIC’s analysis considers that lenders are likely to design rating for risk pricing within parameters which means they receive a similar a similar level of income in interest. There would be a smaller percentage of contracts written at very high interest rates. ASIC expects that the main impact on intermediaries would be costs arising from the need to renegotiate existing agreements (as with lenders).

The above information is of a general nature only and is not a substitute for legal or other professional advice. Please discuss the proposed changes with your professional advisors.

For more information, contact:

David Blackhall
Chief Executive Officer
E: dblackhall@aada.asn.au
M: +61 413 007 833

Terry Keating
Chairman
E: terry.keating@jtfossey.com.au
M: +61 418 668 277

This afternoon ASIC released its proposals on flex-commissions paid to Dealers by financiers. The ASIC documents can be viewed here.

AADA is examining the documents and will issue a detailed report on the implications for members early next week. A broad summary of the proposals include:

• A total prohibition on the payment of flex-commissions above base rates set by financiers based on customer risk profiles. The National Credit Act will be modified through a legislative instrument to prohibit flex-commission arrangements so the amount paid in commissions is not linked to the interest rate and the lender has responsibility for determining the interest rate.
• The prohibition will apply to all credit contracts and consumer leases regulated by the National Credit Act.
• The base rate can be discounted down by a maximum of 200 basis points and the commission paid may be correspondingly reduced.
• Volume bonuses will continue to be allowable.
• Origination fees will be allowable provided they are “realistic”.
• It appears the proposals will also apply to finance brokers.
• ASIC acknowledges that lenders and dealers would need to negotiate new commission models and the legislative instrument allows a transition period of 18 months and sets a commencement date for the prohibition of 1 September 2018.
• ASIC estimates the benefits to consumers will be significant.
• Lenders will be required to report data to ASIC to identify any avoidance practices.

AADA has been working very closely with ASIC on a range of issues including flex-commissions and add-on insurance products. We will continue to do so on your behalf through to the transition period.

There are a lot of unanswered questions and over the weekend AADA will closely examine the ASIC documents to get a better understanding of its effect on your businesses and whether there are any unintended consequences.

I am sure you have many questions but I ask that you read the documents and give us time to provide a detailed summary.

AADA has come a long way in working with and developing a relationship with ASIC and will continue to do so particularly in addressing the “outliers”.

Yours faithfully

David Blackhall
Chief Executive Officer
Australian Automotive Dealer Association Ltd

For more information, contact:

David Blackhall
Chief Executive Officer
E: dblackhall@aada.asn.au
M: +61 413 007 833

Terry Keating
Chairman
E: terry.keating@jtfossey.com.au
M: +61 418 668 277

Our persistence and advocacy is paying off.

The ACCC today brought down its draft determination to deny authorisation of cartel behaviour sought by 16 insurance companies seeking to impose a 20% cap on commissions paid to new car dealers for the sale of five categories of so-called add- on insurance products.

ASIC argued in Report 492 that consumers are being sold expensive products that often provide little or no benefit to them and that consumers are unable to make optimal, well-informed choices when buying add-on insurance products from dealers.

However, ACCC Chairman Rod Sims said a cap on commissions does not address these issues and will not remove the opportunity and incentive for insurers and dealerships to sell consumers expensive, poor value products.

He said ASIC’s proposal did not help to create an environment where consumers are in control and can benefit from effective competition and was unlikely to address these market failures or improve the industry for consumers.

The ACCC considers the proposed cap is unlikely to result in any significant public benefit and will likely be reflected in a wealth transfer from motor vehicle dealerships to insurers rather than a reduction in prices for consumers.

“While insurers would benefit from a cap at the expense of car dealers, this conduct is likely to lessen competition between insurers, creating greater opportunities for explicit or tacit collusion and greater shared knowledge between insurers of competitors’ costs.”

“The ACCC is also concerned that these arrangements, if implemented, could significantly delay the development of more effective solutions to the problems that ASIC has identified,” Mr. Sims said.

The ACCC will accept submissions by 3 March 2017 in relation to this draft determination before making its final decision.

“We are delighted with the outcome of this determination. It accords strongly with the direction of our own submissions on this subject and represents the accomplishment of many hours of hard work and the strong representations we have put before ACCC on this vital issue.” AADA CEO David Blackhall said.

AADA looks forward to continuing to work with ACCC and ASIC to ensure that any re-design of these products delivers real consumer benefits and that any changes contemplated are not exclusively to the detriment of our members.

For more information, contact:

David Blackhall CEO
E: dblackhall@aada.asn.au
M: +61 413 007 833

The AML/CTF Act provides the means to help detect and deter money laundering and terrorism financing. It also provides financial intelligence to revenue and law enforcement agencies. Businesses must meet minimum obligations and assess the risks of potential money laundering or terrorism financing when providing a designated service to a customer.

The Attorney’s General’s Department and the Australian Transaction Reports and Analysis Centre (AUSTRAC), in consultation with industry, has been given the task of developing options for regulating lawyers, conveyancers, accountants, high-value dealers (HVDs), real estate agents and trust and company service providers. A consultation paper which can be accessed here has been released to obtain feedback about options.

HVDs are businesses involved in the buying and the selling of high-value goods commonly considered to include jewellery, antiques, collectibles, fine art, yachts and luxury motor vehicles which are subject to the luxury car tax (LCT) requiring identification of purchaser, reporting and remittance to the Australian Taxation Office. Other high-value goods are not subject to a luxury tax.

Money laundering (ML) enables criminals to disguise and enjoy the benefits of their illegal profits. Terrorist financing (TF) provides the resources to provide terrorist attacks on Australian soil or support overseas activities. The most significant ML/TF risks arise when high-value goods are purchased using large sums of cash.

Many motor vehicle dealers are already enrolled with AUSTRAC whose financial intelligence is an integral element in the detection and investigation of serious and organised crime, ML/TF and tax evasion. Australian franchised dealers already comply with a wide range of federal, state and local regulations all of which takes time and adds to the costs of doing business. Most franchised dealers prefer not to deal with cash.

Dealers would bear the initial costs associated with establishing and implementing AML/TF systems and controls, and the ongoing costs to maintain those systems and controls including:

• enrol with AUSTRAC

• register with AUSTRAC if the reporting entity provides a remittance service

• conduct customer due diligence (CDD)

• implement ongoing customer due diligence procedures (OCDD)

• implement and maintain an AML/CTF compliance program

• lodge transaction and suspicious matter reports

• comply with various AML/CTF related record-keeping obligations.

Record keeping obligations generally include records about:

• transactions

• electronic funds transfers

• customer identification procedures

• AML/CTF programs

• due diligence assessments of correspondent banking relationships.

There are a number of measures that could be adopted to mitigate the regulatory impact of any AML/TF framework including:

• non-acceptance of cash

• risk based approach

• staggered implementation.

The costs of regulatory compliance with the AML/CTF Act could add significant costs to dealership operations and AADA on your behalf will be lodging a submission to the Financial Crime Section of the Attorney General’s Department on the due date of 31 January 2017.

For more information, contact:

David Blackhall CEO
M: +61 413 007 833
E: dblackhall@aada.asn.au

Terry Keating Chairman
M: +61 418 668 277
E: terry.keating@jtfossey.com.au

Michael Deed Policy Director
M: +61 417 742 956
E: mdeed@aada.asn.au

ACCC likely to implement 20% cap and other actions in 2017

Last month ASIC reviewed the insurance industry’s application to institute a voluntary code to regulate commissions and other matters on five categories of so-called ‘add-on’ insurance sold by our members

ASIC has now published its recommendations to the ACCC which are summarised below:

1. Insurers must deliver better value products with significantly improved claims ratios
2. Insurers must:
   1. reduce the commissions and financial benefits payable to car dealers
   2. pass on the entirety of the savings from lower commissions to consumers through lower premiums
3. Insurers must abandon pricing arrangements where the consumer can pay more for the same cover for reasons unrelated to the underlying risk (e.g. because the car dealer can earn higher commissions by arranging for the consumer to pay a higher premium)
4. Insurers must redesign their policies to ensure they provide cover in circumstances that can be reasonably expected to meet the needs of their customers. Insurers must:
   1. take immediate steps to stop the continued sale of policies where  cover is unnecessary or overlaps with other cover
   2. act to prevent situations arising where their products should not be sold (e.g. gap insurance where there is no gap)
   3. act to prevent car dealers from selling products in those  circumstances
5. Insurers should not sell single premium policies because they lead to reduced claims and increase the risk of consumers not getting a premium refund for paying out a car loan early
6. Insurers must redesign their sales practices to:
   1. prevent failure to provide adequate information about the price of products and the options within each product before the consumer makes a purchasing decision
   2. proactively audit and identify unfair sales practices
   3. penalise misconduct including claw back of commissions and termination of agency for repeated or serious failures.

AADA understands that the ASIC decision on flex-commissions is currently being reviewed by the Office for Best Practice Regulation (OBPR), an office within the Department of Prime Minister & Cabinet, to undertake an assessment on the burden of the legislation to inform the process whether changes to legislation should proceed or not.

The timeline for the ACCC’s decision is:

• December/January 2016/7 Public consultation on draft determination including any conference if called
• February 2017 Final determination

We will participate in the public consultation phase via submission and face-to-face meetings. While this final phase of the process is underway we strongly recommend that you proactively engage with your insurance partners to seek an understanding of their plans.

The franchised new car dealer channel remains a significant competitive distribution advantage for insurers that partner with us. Given the role the insurance industry has played in the creation of the likely regulatory framework it is appropriate for franchised dealers to seek a full explanation as to how we will be compensated for our investments in facilities, staff recruitment and training and sales expertise once the existing plans are discontinued.

We believe this is an urgent matter that requires the attention of every owner and dealer principal and we urge you to participate fully in the resolution of future plans.

For more information, contact:

David Blackhall CEO
M: +61 413 007 833
E: dblackhall@aada.asn.au

We are writing to advise you about an important change to the competitive landscape in the internet lead management space and across related dealer support services.

The existing Carsguide.com.au joint venture between around thirty of our members and News Limited is being replaced under a Scheme of Arrangement. The Scheme has received ASIC and Court approval and is moving into the final shareholder approval stage which is expected to be completed in December.

The net effect of the Scheme will see an injection of $20 million in new equity (including an expansion of the number of participating dealer investors to about sixty), the exit of News Limited from the joint venture and a majority position in the newly reconstituted joint venture by Cox Communications.

Aside from bringing their considerable global expertise into the joint venture, Cox Communications will also merge its existing Australian businesses Manheim Auto Auctions, Dealer Solutions and other intellectual property into the new entity in the form of Cox Automotive Australia.

The AADA Board of Directors has authorised the following statement as part of the overall announcements being made by Cox Automotive Australia and Carsguide.com.au in connection with the new venture.

David Blackhall, the Chief Executive Officer of the Australian Automotive Dealer Association said…

“By investing in this new company dealers have demonstrated their commitment to the benefits that flow from increased competition. The combined resources, infrastructure and technology of Cox Automotive Australia and its parent company offer dealers a new world class choice of service providers across all aspects of their automotive retailing, wholesaling, advertising and servicing needs – and of course, consumers will be the ultimate beneficiaries.”

Please contact either me or AADA Chairman of Directors Terry Keating if you require further information.

David Blackhall CEO
M: +61 413 007 833
E: dblackhall@aada.asn.au

Terry Keating Chairman
M: +61 418 668 277
E: terry.keating@jtfossey.com.au

On 14 October 2016, Consumer Affairs Australia and New Zealand (CAANZ) presented the Interim Report on the Australian Consumer Law (ACL) Review. The Interim Report follows the ACL Review Issues Paper, released in March 2016, which attracted more than 160 submissions from a range of industry associations, consumer groups, not for profits and legal/academic professionals. AADA made a submission to the Issues Paper which can be viewed here.

The ACL is jointly administered and enforced by Federal, State and Territory regulators, and is being reviewed by officials from these regulators through CAANZ. AADA Policy Director, Michael Deed and Policy Officer, Daniel Brown attended a briefing session in Brisbane on 21 April 2016 with officials from the Australian Government Treasury and the Office of Fair Trading Queensland. The ACL review covers four major areas:

• consumer policy in Australia
• the legal framework of the ACL
• administering and enforcing the ACL
• emerging consumer policy issues

Readers of the May 2016 Issue of Automotive Dealer Magazine will recall an article written by AADA Company Secretary and Legal Counsel, Vinesh George, which examined the issues and implications of the ACL Review for Dealers. The three aspects of the review were identified as;

• the review will assess the effectiveness of the provisions of the ACL, whether these provisions are operating as intended, and address the risk of consumer and business detriment at an appropriate level of regulatory burden
• the review will also consider the extent to which the national consumer policy framework has met the objectives articulated by the Council of Australian Governments (COAG)
• the review will assess the flexibility of the ACL to respond to new and emerging issues to ensure it remains relevant into the future as the overarching consumer policy framework in Australia

Reading this article is recommended for Dealers seeking further information on the overall review of the ACL. This article can be viewed in full here.

‘Lemon Laws’

Of most interest to Dealers from the Interim Report was the stakeholder concern for laws regarding the sale of new motor vehicles, specifically the calls for the introduction of ‘lemon laws. AADA has advocated strongly against the introduction of ‘lemon laws’ however this view made up the minority as numerous submissions were received calling for the introduction of ‘lemon laws’ under the ACL. One such submission from Legal Aid NSW supported the motor industry-specific laws together with the reversal of the onus of proof, thereby requiring the dealer to prove the alleged fault did not exist at the time of the vehicles supply or delivery.

The Report did note AADA’s concerns that industry specific regulation is unwarranted as it is not possible to draft a definition that provides sufficient certainty for consumers, businesses and Tribunals as to the problem that is intended to be addressed. AADA along with the state MTA’s also noted that the ACL already provides substantial remedies, and the proposed ‘lemon laws’ present a significant threat to the industries already small profit margins.

CAANZ’s response stated;

CAANZ notes the wide range of stakeholder views on this issue, as well as the many benefits provided by having a nationally consistent, generic consumer law.

Generally, industry-specific regulation would only be preferable to a generic approach where it can be demonstrated that there are issues particular to that industry, and that generic approaches would not adequately address the problem.

CAANZ observes that while whitegoods and motor vehicles were the focus of many submissions, issues with defective goods do not appear to be limited to those industries. Also, it is not clear that an industry-specific law would address the issues raised any more effectively than through generic enhancements to the consumer guarantees.

CAANZ notes that even if the case cannot be made for an industry-specific approach to legislative changes at this time, CAANZ will continue to monitor this issue, as well as the need for industry-specific compliance, enforcement and education activities. This may include regulators working with the specific industries to improve compliance levels, for example, through best practice or codes of conduct with regard to providing refunds.

Responding to the ACL Interim Report

The Interim Report is available to read here. Dealers interested in providing a submission, or making a comment on the Interim Report can do so by visiting the Australian Consumer Law website. Feedback on the Interim Report must be received by Friday 9 December 2016. Feedback from the Interim Report will influence the Final Report that will be presented to the Legislative and Governance Forum on Consumer Affairs in March 2017. AADA will continue to inform, and advocate on behalf of Dealers throughout the ACL Review.

For more information, contact:

David Blackhall CEO
M: +61 413 007 833
E: dblackhall@aada.asn.au

Terry Keating Chairman
M: +61 418 668 277
E: terry.keating@jtfossey.com.au

Michael Deed Policy Director
M: +61 417 742 956
E: mdeed@aada.asn.au