ASIC released three reports into the design, distribution and sale of add-on insurance products sold through car dealerships. The report found systematic problems resulting in a market that is failing consumers; products were ‘sold’ rather than being ‘bought’ by consumers; products were high cost (due to excessive commissions); and poor value measured in claims outcomes. ASIC commented that insurers had designed complex and extremely poor value products, and put their reputations at risk.

AADA and insurers were invited to comment on reform proposals in ASIC Consultation Paper 294, August 2017. The reform proposals are a deferred sales model (DSM) for products regulated under by the Corporations Act other than comprehensive or compulsory third party (CTP) insurance products (Proposal 1), and the introduction of more robust and targeted requirements for providers when supervising and monitoring their authorised representatives (Proposal 2). AADA’s supports any reform proposals that would lead to better consumer outcomes but recommends that a short deferral period and a consumer opt-out mechanism be included in the DSM.

The car finance industry has developed a practice of using ‘flex commission’ arrangements to renumerate car dealers and finance brokers in respect of the sale of a car. Dealer remuneration includes upfront commissions for individual loans, volume bonuses, and origination fees as compensation, in part, for the use of dealership staff and facilities. A review of these arrangements by ASIC found there was a significant risk of consumer harm and ASIC decided to prohibit flex commissions from 1 November 2018 through the introduction of a Legislative Instrument (LI). The LI modified provisions of the National Consumer Protection Act 2009.

Dealers can still earn commissions on contracts written at a range of base rates as determined by the lender and agreed with the dealer in advance. Commissions can be earnt on contracts written with ‘negative flex’ discounts of up to 200 basis points (2%) below the lenders nominated rates. The new regulations will allow dealers to receive origination fees and other forms of compensation which do not directly impact the effective agreed percentage rate paid by consumers. The prohibition does not apply to other distribution channels.