ASIC Credit (Flexible Credit Cost Arrangements) Instrument 2017/780, 5 September 2017 modified provisions of the National Consumer Protection Act 2009 (NCCP Act) to impose a prohibition on payments under flex commission arrangements where a dealer or broker is able to determine or influence the annual percentage rate above base rate and earn a larger commission. The Instrument is in force and commences on 1 November 2018.
The prohibition means that lenders will need to develop new pricing models, and lenders and dealers will need to enter into new commercial arrangements with respect to commissions, volume bonuses and origination fees. ASIC will monitor the effectiveness of the prohibition by requiring lenders to provide ASIC with information about the annual percentage rate charged and credit fees on contacts before and after the commencement date. The new remuneration arrangements cannot be determined by reference to any potential loss of revenue as result of the prohibition of flexible benefits with a reverse onus of proof on lenders and dealers. Lenders must keep records of the basis of determining fees and charges for a period of seven years.
ASIC found that flex commission arrangements could result in a higher cost of credit to a consumer as an intermediary (dealer or broker) was given significant discretion to determine the price of a loan and earn a larger commission from the credit provider the higher the interest rate was above the base rate. The prohibition removes any discretion a dealer has in setting an interest rate above base rates.
Dealers can be renumerated for the facilitation of finance to their customers. Commissions will be allowable on contracts written at a range of base rates available to consumers as nominated by the lender and agreed with the dealer in advance. Dealers can legally earn commissions on contracts written with ‘negative flex’ discounts of up to 200 basis points (2%) below the lender’s nominated rates. The amendments will allow dealers to receive origination fees and other forms of compensation which do not directly impact the annual percentage rate paid by consumers.
Under the new rules lenders are required to supervise dealers more closely and to ensure that their product distribution practices are compliant with the Act.
- Dealers and lenders will need to comprehend the implications of the changes and enter into new commercial arrangements before 1 November 2018.
- Dealership staff will also need to understand the new arrangements and be conscious of their obligations in dealing with a consumer.
- Lenders are required to keep records of the basis for determining fees and without any reference to the loss or potential loss of revenue as a result of introduction of the prohibition.
ASIC is considering extending the scope of the prohibition to other distribution channels.