Flex commission prohibition

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A new law commencing on 1 November 2018 prohibits arrangements where introducers are provided with a delivery rate to which introducers can add a margin to determine the borrower rate – subject to some exceptions. Lenders, brokers, and other introducers need to ensure that their commission arrangements do not breach these rules.

The ASIC Credit (Flexible Credit Cost Arrangements) Instrument 2017/780 inserts new provisions into the National Consumer Credit Protection Act 2009.

The new law prohibits lenders directly or indirectly entering into a flexible cost arrangement defined as an arrangement under which both of the following apply:

  • the benefits paid to an introducer are determined in whole or in part by the interest rate; and
  • the introducer or an associated person can set or influence the rate.

In addition, if there is a flexible cost arrangement, lenders must not pay introducers a fee which exceeds the origination/administration fees agreed prior to the introduction of the customer. Lenders must keep a record of the basis for determining these fees for at least seven years.

Variations to interest rate influenced by introducers are not prohibited:

  • which reduce the interest rate up to 2% per annum from the base rate quoted by lenders (being a rate set prior to the introduction of the borrower); or
  • where benefits paid to introducers are the same as would be paid if the base rate applied; or
  • where benefits are paid to:
    1. directors or employees of the lender / lessor; or
    2. related body corporates; or
    3. directors or employees of related body corporates.

The prohibition does not apply to home loans. However, home loans is defined in the Instrument as meaning:

  • loans 100% used to purchase residential property; or
  • loans to refinance loans wholly or predominantly made to purchase residential property.

As a result all other regulated loans will be subject to the restriction. For example, the prohibition would apply to loans secured by residential property:

  • only partly used to purchase a home (ie there was some money out for personal, domestic, or household purposes);
  • only partly used to refinance loans wholly or predominantly used to purchase residential property (ie there was some money out for personal, domestic, or household purposes).

This is a short summary of reasonably complex provisions. Businesses who may be affected by this prohibition should seek expert advice.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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