Asset finance brokers raise alarm over BID extension

Asset finance brokers writing consumer loans have told The Adviser that they are concerned the proposed extension would disadvantage their businesses further, as it would create an uneven playing field with car dealers providing finance.

One such broker is WA-based broker Cliff Bernard, from Faraday West Finance, who told The Adviser that his business would be dramatically impacted by the BID, particularly as he had recently shifted focus from mortgages to asset finance, with approximately 80 per cent of business generated now coming from asset finance.

He said: “Earlier this year, with the impending introduction of the BID, the business decided to forego mortgages and solely focus on asset finance. 

“While having a basic understanding of its (the BID) requirements, I did not fully absorb it all as – at the time – it was not policy for the specific field I was operating in. 

“It came as a shock to recently find out that all credit would be encompassed by the BID.”

Mr Bernard added that he believed the extension of the BID to all credit assistance providers providing consumer finance, such as consumer car loans, would create an uneven playing field that would unfairly advantage car dealers offering finance, as they are not covered by the BID extension – despite offering a similar service through their linked credit providers agreement and point of sale (POS) exemptions.

He explained: “Car dealerships operate under the point of sale exemption, which means they are exempt from fulfilling many of the required legislative tasks that brokers must adhere to.

“The dealer usually has access to two to three financiers, effectively operating like a quasi broker. But they would not need to comply under the BID as they operate under the point of sale exemption.”

Indeed, the POS exemption (which the broking industry has long called for review since its “temporary” introduction in 2010), enables introducers such as car dealers to establish arrangements with a lender so that they can offer their credit products for the purchase of the goods sold (e.g. cars) without needing to hold a credit licence.

According to a Treasury discussion paper on POS from 2013, it applies to vendor introducers on the basis of their status rather than according to their function, and allows them to rely on the exemption “even where they may have a significant role in product selection or are otherwise performing a similar function to licensed finance brokers”.

“This has resulted in some regulatory gaps in relation to consumer protection and competitive neutrality,” it noted at the time.

Mr Bernard outlined that – as the car dealers would not need to undertake the same checks and balances to ensure the finance provided is in the customer’s best interests as brokers writing consumer car loans would – they would be able to provide finance much more speedily than a broker.

“A consumer can drive away on the same day they purchase a car [if accessing finance from a car dealer].

“It will not be a level playing field as brokers are providing the same service of providing a car loan; however, one can fulfill the service on the same day whereas the other would require at least 24-48 hours due to the legislation.”

Moreover, he suggested that the convenience of accessing finance through a car dealer could come with “hidden surprises”.

Mr Bernard commented: “Brokers have access to a panel of lenders so, traditionally, would have more options available to consumers. 

“Rates, fees and charges are disclosed upfront to the client by brokers so that there are no hidden surprises, unlike car yards who may play on the fast turnaround – a consumer’s new car is a higher priority than the car loan itself. 

“Often unbeknownst to the consumer, car yards submit applications to a few lenders and by the time the client comes to a broker, their credit score has taken a major hit restricting lender options,” he added.

The Faraday West Finance broker added that, as brokers would need to provide a credit proposal to consumers before gaining permission to submit an application, if the car dealer was privy to these proposals, they could undercut the rates quoted. 

As such, Mr Bernard told The Adviser that he thought the problem had grown out of a lack of understanding of the “nuances of asset finance” from a regulator/legislative level.

“We need to seek clarification on how this fits in with asset finance, particularly with flex commissions (which were regulated only recently) and the POS exemption, which has still been put on ice since COVID-19.”

He concluded: “The March timeline should be postponed until key players (asset brokers, asset-only aggregators and asset financiers) have been consulted and the point of sale exemption has been removed so as to make a level playing field.”

The broker associations have also been flagging the competition issues raised by the extension of the BID to all brokers.

CAFBA reiterates call for POS exemption removal

David Gandolfo, the director of Quantam Business Finance and inaugural chair of the CAFBA Advocacy Committee, told The Adviser that while the BID extension does not apply to commercial finance, CAFBA does have members who also broker consumer finance, “so these issues are important and challenging for those members”.

He commented: “CAFBA has always been concerned at the unlevel playing field caused by the POS exemption for regulated consumer transactions, and our view is that the POS exemption should be removed as it does not provide for best customer outcomes”.

Mr Gandolfo said that a competition issue already extended between brokers and car dealers, as the POS exemption means that “dealers and other retailers introduce finance directly to financiers based on the chosen financier’s criteria… [but] are not obliged to undertake independent responsible lending assessments, as brokers currently are.”

He added that, should the government proposals become law, POS-exempt retailers “will not be impacted in any way by these broker obligations, so the commercial environment will become even more uncompetitive”.

The chair of the CAFBA Advocacy Committee said that while the government “did commit early last year to abolish the exemption”, it has not indicated any change to the POS exemption in the proposed bill “nor has there been any current indication of its repeal by other regulatory means”.

“Regardless of any new regulatory regimen, if the POS exemption remains, then consumer brokers remain at a significant disadvantage, given the POS-exempt retailers are exempt from the obligations licensed brokers need to meet,” he told The Adviser.

“So, given the framework Treasury has currently proposed, in CAFBA’s view it will result in consumer brokers being at a significant commercial disadvantage to POS-exempt retailers, given the compliance burden the brokers are facing.”

Mr Gandolfo concluded: “While CAFBA appreciates there is a range of regulatory developments impacting on POS conduct, the reality remains POS-exempt dealers and other retailers have significant commercial advantages over consumer finance brokers, facilitated by government.” 

[Related: ABA calls for best interests duty clarification]