The Australian Securities and Investments Commission (“ASIC”) makes ASIC Credit (Flexible Credit Cost Arrangements) Instrument 2017/780 (“Instrument”) to amend the National Consumer Credit Protection Act 2009 (Cth) to prohibit flexible credit cost arrangements, commonly known as ‘flex commissions’.
What are ‘flex commissions’?
Flex commissions refer to an arrangement between an intermediary and a credit provider, where the intermediary who arranges a loan to a consumer, earns a commission based on how high the annual interest rate of the credit contract is. These arrangements are commonly used in the car finance market.
Why are they bad?
ASIC found that flex commissions harm consumers because:
the interest rate charged to the consumer is not related to their credit rating or risk of default, but rather depends on the consumers ability to negotiate to protect their interests;
they provide an incentive for intermediaries to increase the price of a credit contract; and
they are not transparent for consumers and after often misunderstood at the point of sale.
What type of credit does the ban apply to?
While flex commissions are generally associated with credit contracts, the Instrument was deliberately extended to include consumer leases. This was intended to deter intermediaries encouraging consumers to finance cars through consumer leases rather than credit contracts.
What does this means for credit providers?
ASIC will be monitoring the effectiveness of the ban by requiring holders of an Australian Credit License (ACL) to provide ASIC information about the interest rate, fees and charges under their credit contracts both before and after the commencement of the Instrument.
ASIC has warned that if an ACL holder is found to have provided a significant number of credit contracts with excessive interest rates to financially vulnerable consumers, it may raise questions as to whether the ACL holder is engaging in credit activities efficiently, honestly and fairly.
Cowell Clarke‘s financial services team have extensive expertise in consumer credit law. We advise credit providers and entities that provide credit assistance to ensure that they are meeting their ongoing compliance obligations under the National Consumer Credit Protection Act 2009 (Cth).
If you have any questions or require assistance with your responsible lending obligations, please contact Richard Beissel or Hillary Ray.