ASIC is banning “flex commissions” from 1 November 2018.
In basic terms, a flex commission is where the amount of commission depends on the interest rate charged to the consumer: the higher the return for the credit provider, the more the introducer is paid in commission.
Details of the ban are set out in a legislative instrument published on 5 September 2017, the ASIC Credit (Flexible Credit Cost Arrangements) Instrument 2017/780 (the “Instrument”). ASIC previously released a draft version of the proposed instrument for comment in March 2017.
The ban on flex commissions follows ongoing concerns by ASIC about commission practices in the motor vehicle finance industry, but the Instrument is not limited to motor vehicle finance. The ban will apply to all regulated credit contracts except home loans and to regulated consumer leases for any type of goods, not just motor vehicles.
The only form of credit which is excluded under the Instrument is home loans, which are defined as credit to purchase residential property or to refinance credit that has been provided wholly or predominantly to purchase residential property.
ASIC’s concerns about consumer harm from flex commissions are set out in a detailed Regulation Impact Statement released at the same time as the Instrument.
The Instrument amends the National Consumer Credit Protection Act 2009 to provide that a “regulated person” must not give the introducer (or an associate) under a “flexible credit cost arrangement” any benefit (monetary or non-monetary) if the amount of the benefit is determined by the annual percentage rate under the contract (or the rental charge payable, in the case of a consumer lease), and where the introducer or an associate has determined, proposed or influenced the amount of the annual percentage rate or rental charge.
The Instrument will also place controls on dealer fees and charges payable to the introducer, which are designed to stop introducers from increasing their dealer fees and charges to compensate for losses from the ban on flex commissions.
What’s more, under the Instrument ASIC has created new civil and criminal penalties for non-compliance with the ASIC ban.
Who is a “regulated person”?
A “regulated person” affected by the ban will be an Australian credit licensee that has entered into a flexible credit cost arrangement in relation to a credit contract or a consumer lease, where the licensee is or will be the credit provider or lessor under the credit contract or consumer lease.
A regulated person would also include an exempt special purpose funding entity which is a party to a flexible credit cost arrangement, directly or through a credit licensee.
What is a “flexible credit cost arrangement”?
A “flexible credit cost arrangement” is defined in the Instrument as a contract, arrangement or understanding (other than a servicing agreement) between a regulated person and an introducer for the introducer or an associate to provide credit services in relation to a credit contract or consumer lease, where the introducer or associate can “determine, propose or influence” the annual percentage rate under a credit contract, or the rental charge for a consumer lease.
Determine, propose or influence
The term “determine, propose or influence” in relation to the annual percentage rate or rental charge does not include:
- proposing or influencing the type of goods to be purchased or leased;
- providing the credit provider or lessor with information about the consumer’s requirements and objectives or financial situation, or factual information about the consumer; or
- where the determining, proposing or influencing of the amount of the annual percentage rate or rental charge occurs before any contact with the consumer, or any information in relation to the consumer being provided to the person or an associate in relation to the credit contract or consumer lease (whichever is earlier).
The ban on flex commissions includes a limited exemption that allows the introducer to reduce the annual percentage rate by a maximum of 200 basis points below the base rate, or by more than 200 basis points if the benefits given are the same as if the contract had been written at 200 basis points below the base rate. A similar exemption applies for consumer leases, where the discount is 4% of the rental charges.
Employees and directors of the regulated person, and related bodies corporate of the regulated person (and their employees and directors) are also exempt from the ban.
Credit contracts and consumer leases entered into before the commencement of the ban on 1 November 2018 will not be affected.
Controls on dealer fees and charges
There was a concern that introducers might seek to recover their losses from the ban on flex commissions by increasing the fees they charge consumers for origination. These fees are commonly known as dealer origination fees or dealer administration fees.
To address this concern, the Instrument prohibits a regulated person from giving the introducer (or an associate) under a flexible credit cost arrangement any form of benefit where fees and charges payable to the introducer (or an associate) exceed the “specified fees and charges”.
This provision applies when the introducer or associate is providing credit services in relation to a credit contract or consumer lease as a representative of the credit provider or lessor, or is a linked supplier of the credit provider or lessor.
The “specified fees and charges” are the greater of $0 and the amount (if any) specified by a regulated person as the maximum amount of fees and charges payable to the introducer (before any determination, proposal or influence by the introducer or an associate).
For example, if the credit provider tells the introducer that it cannot charge a dealer fee of more than $400, and the dealer charges more than $400 for a credit contract, the credit provider is not allowed to give any benefit such as a commission to the dealer in relation to that credit contract.
The specified fees and charges set by the regulated person must not be determined by reference to the loss or potential loss of revenue to the introducer or an associate that results from the ban on flex commissions. The concept is that the allowed dealer fee must not be set in a way that compensates the introducer for the income lost from the ban. The regulated person must also keep written records of the basis for determining specified fees and charges for a period of seven years.
This provision will only apply to fees payable in respect of the credit contract, and not fees and charges payable otherwise. It will not matter whether or not the fees or charges are financed under the credit contract.
To enforce this provision, financiers will have to put in place mechanisms to prevent intermediaries recouping credit fees and charges above the limits set by the financier.
ASIC says that it will monitor the amounts charged for dealer fees to assess the effectiveness of these requirements and to see if further intervention may be necessary in the future.
Flexing the power of the administrative state, ASIC has created civil and criminal penalties that will apply for breaching its new order: a civil penalty of 2,000 penalty units (10,000 penalty units in the case of a corporation) and a criminal penalty of 100 penalty units, 2 years prison, or both. A penalty unit is currently worth $210.
Kathleen Harris and Patrick Dwyer
Click here to subscribe to our email list for news, comment and analysis