3.1 Flex commissions

I discussed the use of flex commissions in the Interim Report.[1] As I recorded there, under that kind of arrangement, the lender fixed a base rate of interest that would be charged under the loan agreement. If the dealer could persuade the borrower to agree to pay a higher rate, the dealer received a large part of the interest payable over and above the base rate. In more recent times, lenders provided that the agreed rate must not exceed a rate fixed by the lender but, below that cap, the dealer was free to offer a loan on behalf of the lender at a rate greater than the base rate fixed by the lender.

Many borrowers knew nothing of these arrangements. Lenders did not publicise them; dealers did not reveal them. The dealer’s interest in securing the highest rate possible is obvious. It was the consumer who bore the cost. To the borrower, the dealer might have appeared to be acting for the borrower by submitting a loan proposal on behalf of the borrower. The borrower was given no indication that in fact the dealer was looking after its own interests rather than acting as a mere conduit between lender and borrower. For all the borrower knew, the interest rate the dealer quoted had been fixed by the lender. But, whenever the dealer quoted a rate larger than the base rate, the dealer was acting in its own interests.

Since 1 November 2018, flex commissions have been banned.[2] But, because at least one large lender, Westpac, was continuing to offer flex commission arrangements to car dealers when the Commission looked at these matters in March 2018, there will be many car loan contracts on foot where the interest rate being charged will be above whatever rate the lender fixed at the time as its base rate.

Until 1 November 2018, the conduct was not unlawful. It was conduct that Westpac accepted could create unfairness in individual transactions.[3] But despite recognising this to be so, Westpac considered that it could not stop the practice because doing that ‘would simply leave the market to others who did not’.[4]

Flex commissions stand as one of the starker examples of changes to practices in the financial services industry even changes seen by important industry participants as desired and desirable foundering on the rock of firstmover disadvantage. There are times, and this was one, where regulatory intervention was necessary to achieve change.

[1]FSRC, Interim Report, vol 1, 63–4.

[2]ASIC Credit (Flexible Credit Cost Arrangements) Instrument 2017/780 (Cth).

[3]FSRC, Interim Report, vol 2, 89; Westpac, Module 1 Case Study Submission, 9 [41].

[4] Westpac, Module 1 Case Study Submission, 10 [45]; FSRC, Interim Report, vol 2, 90.