As you may or may not already be aware, ASIC is looking to introduce a cap on broker and F&I Flex commissions. The proposal is for the brokers / F&Is to be restricted to around 2% flexi per deal. This seems like its possibly a good idea to “protect” the unaware consumer from getting hit with a higher interest rate. If you read more into the proposed changes, this is not the case. ASIC is allowing finance companies to determine the rate for risk of a client, and then taking the flex option away from the broker. This means that the lender’s money still costs them the same.
Lets consider this scenario...
Lender ABC has a break-even cost of funds of 4% and lends money out to a client for a car loan at 15%. NB: This can still happen after these changes are brought into play. We will still possibly see rates as HIGH as 18%!!!
In the current model, the broker may have access to these funds at around 8% and be able to sell them to their client at 14%, making a commission from the difference between the base rate and writing rate (14% less 8%). The lender will currently pay the writer of the business a commission, which then reduces the lenders profit on the deal.
The new proposal allows the lender to set the rate (on a rate for risk plan). However, the flex will be capped at 2%, thereby reducing the amount the lender pays the writer of the loan and increasing the lender's bottom-line. So what is the end result?
- The proposed client will still possibly be getting charged a high interest rate,
- the writer of the business will have a reduced commission, and
- the lender will WIN with a larger % gross income per deal.
Finance is currently the most profitable, or one of the most profitable, departments in a car yard. ASIC’s new structural change to commissions will have a negative impact on this department. One would hypothesize that if the department is going to be capped on its income, the yards will need to find alternative avenues to try make that income back. We may then see an increase in car prices to cover the loss of income and this would not only affect the finance buyers but the cash buyers too.
The other possible knock on effect is that the taxable income will be reduced in this industry. If a broker is earning on average $120,000 per year, the tax component is ~$30,000 (including Super). Now if this new structure reduces that income to $90,000 per year, the taxable component will be ~$19,900 (including super) - this is a reduction of tax taken by ~$10,000! The Government will therefore be losing out on this taxable income! In a time when we are running a large budget deficit, not sure if the commonwealth could afford that...
Hope the policy makers in the government have closely reviewed these new changes and consider the overall impact. Like an iceberg, what is hidden underwater is far bigger than what's visible above.
- Daniel Meilech (Finance Specialist at Ausloans Finance Group)
In response to the incoming ASIC legislation on commission-capping, Ausloans and Genius have been proactive in continuing to develop the best information and technology available that will best allow us to keep the Asset Brokerage Industry alive and healthy. Put simply, we have lowered the time needed to complete a loan from interview to settlement, which will keep quality brokers on board, and allow for new blood to enter the industry with less barriers and bureaucratic hurdles.
Consequently, now, more than ever, cost savings in setting up and running your brokerage are paramount. Our brokerage-in-a-box solutions can save you up to $280k in Business Start-Up support.
