On 4 February 2019, the Government released the final report of the Royal Commission in the Banking, Superannuation and Financial Services Industry (Report). In the Report, Commissioner Kenneth Hayne made 76 recommendations, a number of which will have significant consequences for participants in the automotive industry as new laws and regulations are enacted in the months ahead. In this bulletin, we examine three recommendations in the Report that are of particular relevance to car dealers.
1. Removing the ‘point-of-sale’ exemption of retailer dealers from the operation of the NCCP Act
The Commissioner has recommended abolition of the point of sale (POS) exemption which is relied upon by most car dealers and many retail stores to be a loan intermediary without holding an Australian Credit Licence (ACL) or being appointed as a credit representative of a licensee. The POS exemption in regulation 23 of the National Consumer Credit Protection Regulations 2010 has applied since the commencement of the National Consumer Credit Protection Act (NCCP Act) in the midst of the GFC when there were concerns that the burden of regulation in the retail sector under the NCCP Act would have a further stifling effect on an already slow economy. From the outset, the exemption was devised as an interim measure to be reviewed within 12 months of its implementation. In 2013, Treasury published a discussion paper in relation to the exemption but did not complete its review.
While some dealers may obtain their own ACL to provide credit assistance, the abolition would likely result in most car dealers and other retailers having to be appointed as credit representatives by credit providers and being recorded as such on an ASIC register. As credit representatives, they will need to provide their own credit guides and will also need to be members of the Australian Financial Complaints Authority (AFCA) thereby opening up every aspect of their business to an external complaints process unless AFCA exercises a discretion otherwise.
In the Report, the Commissioner does not acknowledge that these dealers and retailers are already ‘representatives’ of ACL holders and, as a result, the ACL holders are already accountable for them with responsibility to ensure compliance with credit legislation, participation in training and management of conflicts. Instead, the Commissioner has cited observations made in the 2013 Productivity Report into Competition in the Australian Financial System that under the POS exemption:
- Retail dealers are not subject to entry or conduct standards and ASIC has no power to exclude from the market any who engage in conduct that is dishonest or incompetent;
- Retail dealers have no responsible lending obligations; and
- Consumers may be unable to obtain remedies for their conduct.
In relation to the second and third points, it is important to be aware that the relevant lender has responsible lending obligations in relation to each loan originated through the retail dealer and a multitude of remedies may be available to consumers against the financier (by virtue of the retail dealer being its ‘representative’) and directly against the retail dealer under the Australian Consumer Law and laws of general application.
Nevertheless, Commissioner Hayne concluded in the Report that he is strongly in favour of removing the POS exemption.
2. A deferred sales model should be established for the sale of add-on insurance
Commissioner Hayne recommended that a Treasury-led working group should develop and implement as soon as reasonably practicable an industry-wide deferred sales model for the sale of any add-on insurance products (with the exception of policies of comprehensive motor insurance). Under such a model, insurers or their representatives would be required to wait for a specified period of time before attempting to sell add-on insurance products to their customers (such as guaranteed asset protection (GAP) insurance and tyre and rim insurance).
The Commissioner is essentially adopting ASIC’s proposal in ASIC Consultation Paper 294: The Sale of Add-on Insurance and Warranties Through Caryard Intermediaries. The Report states that one likely consequence of a change to a deferred sales model is that the premiums payable for policies subject to the model could not be financed by the loan made to purchase the vehicle without specific adjustment of the loan arrangement. However, in Commissioner Hayne’s view, the potential inconvenience caused by this outcome is justified in light of the benefits to the consumer of moving to a deferred sales model. Of course the inconvenience referred to may include the need for a further unsuitability assessment and physical amendments to contract documents.
Another factor not mentioned in the Report is that some extended warranty products in the market are not regulated as financial products because they are sold by the dealer incidentally to the sale of the vehicle under the ‘incidental product’ exemption in the Corporations Act (s. 763E). These are currently outside ASIC’s jurisdiction and it is unclear how a deferred sales model would apply to them. If they became subject to a deferred sales model, the deferral of their sale would likely prevent them from benefiting from the incidental product exemption.
In addition to this recommendation the Report also recommends that hawking of insurance products should be prohibited and that unfair contract terms provisions now set out in the ASIC Act should apply to insurance contracts regulated by the Insurance Contracts Act.
3. Caps on commissions
Commissioner Hayne also recommended that caps on commissions should be introduced for add-on insurance products sold in connection with the sale of a motor vehicle with the level of the cap being determined from time to time by an ASIC legislative instrument. This recommendation was based on evidence given in the Commission’s sixth round of hearings which showed that the levels of commissions paid to motor vehicle dealers in connection with the sale of add-on insurance products contributed to the miss-selling of those products. ASIC stated in its September 2016 report on the sale of add-on insurance through dealers, that in the 2015 financial year, the commissions paid to dealers for the sale of add-on insurance products were as high as 79% of the premium. ASIC also observed that the amounts paid in commissions on these products exceeded the amounts paid out to customers who made claims.
In 2017, in response to the perceived problems created by the high commissions paid to dealers, the ICA prepared a submission to the Australian Competition and Consumer Commission proposing that insurers cap commissions at 20% of the premium. It is possible that ASIC will follow the lead of the ICA and cap commissions at an amount of 20%.
This article was written by Shaun Cartoon, Partner, Andrew Galvin, Partner and Evan Stents, Partner.