In recent years there has been significant focus by government regulators on the sales processes widely used by Australian Motor Dealers for Finance and Insurance products. This focus has led to numerous reports and findings which have shaken up the industry and challenged the established processes.
On September 7, 2017 the Australian Securities and Investments Commission (ASIC) announced they were banning the payment of Flex Commissions on finance contracts as of November 1, 2018. ASIC took the view that the long-standing way of selling finance involving so-called “flex commissions” left many car buyers open to potential financial disadvantage compared with other car buyers with similar creditworthiness paying the same amount for the same car.
ASIC’s announcement was aimed at addressing what it saw as potentially unfair practices in car dealerships on the sale of car finance to car buyers and has taken the setting of interest rates for car loans out of the hands of the dealer’s business managers.
"We found that flex commissions resulted in consumers paying very high interest rates on their car loans," ASIC deputy chair Peter Kell said. "We were particularly concerned about the impact on less financially experienced consumers."
In addition to their work on Flex commissions, in September 2016 ASIC released Report 492 (A market that is failing consumers: The sale of add-on insurance through car dealers)
this report undertook a review of seven insurers who issue add-on general insurance products (add-on insurance) through car dealers. These insurers, were estimated to make up over 90% of the market. Report 492 followed on from the previously released ASIC reports: Report 470 Buying add-on insurance in car yards: Why it can be hard to say no
(REP 470); and Report 471 The sale of life insurance through car dealers: Taking consumers for a ride
Each of these reports discussed ASIC’s view that the existing products and processes negatively impacted the consumer with high costs and provided high commissions to the selling agents whilst offering poor value and poor claims outcomes and offered, in a number of cases, no real customer benefit.
After the release of these reports, ASIC called for insurers to review and substantially improve the design and distribution of these products. In particular, they were asked to address the high costs and high commissions, poor value and poor claims outcomes, and the level of supervision of authorised representatives. This has led to a number of changes already implemented across the industry with significant product changes, capping of commissions and a stronger focus by the insurers to update the sales processes and ensure Regulatory compliance by their Authorised Representatives.
ASIC’s work in this area is ongoing having released Consultation Paper 294 (The sale of add-on insurance and warranties through caryard intermediaries)
in August 2017. This paper requested feedback from insurers, credit providers, car dealers, insurance and finance brokers, consumers, consumer representatives and other interested parties on options for reform to the sale of add-on insurance and warranties through caryard intermediaries. This discusses the possible option to enforce a deferred selling model for add on insurances going forward, possible refunds, and other regulations around how these products can be sold and financed going forward. The Consultation period closed in October 2017 and we are awaiting the findings of this paper.
All of this change has dramatically affected the Auto F&I marketplace in Australia and clearly shows that there is a need to embrace alternative distribution mechanisms.
Consumer’s prefer choice at a time when they are prepared to make a purchase decision. In the case of motor insurance, this can often be at the time when the renewal is due. This is the optimal time to engage the consumer and highlight product features.
The consumer is also better served when given choice as the resultant product comparison eliminates one of the practices targeted by ASIC, that of reverse competition. This occurs when insurers that specialise in the auto dealer distribution channel compete for the Dealer’s business by paying large commissions and upfront payments, to secure exclusivity, which must ultimately be funded from product pricing.
The move to eliminate this practice therefore questions the entire dealer distribution model as it relates to insurance. Brand owners and manufacturers are beginning to recognise that they need more control of the distribution process to ensure their customer base receives a consistent brand message and a competitive product offering at a time when they are ready and willing to purchase.
Maiden Australia, in conjunction with Willis Towers Watson, is at the forefront of insurance innovation, with a new distribution model now available that is compliant with the new legislation and provides automotive brands with control of their insurance programme. Introducing the GenAsys platform, which allows the customer to select an insurance solution that best suits their needs at a time when they are in the market for the product.
For more details on the services provided by Maiden Australia please contact us