Westpac May Face Court Action Over Flex Commission Interest Rates on Car Loans

Friday 24 July 2020 @ 11.56 a.m. | Legal Research

According to a number of news reports, Westpac is facing a potential class action on behalf of thousands of Australians who took out car loans under a since-banned scheme that allowed dealers to set exorbitant interest rates.

The flex arrangements were a feature of the car industry for over 25 years before the practice was outlawed by ASIC and condemned by the Final Report of the Financial Services Royal Commission.

Until November 2018, the so-called “flex commission” schemes had allowed car dealers and brokers to set the interest rate on car loans above a base rate set by the bank or lender and take a cut of the difference, which meant the higher the interest rate, the bigger the commission paid to the car dealer.

The Proposed Class Action

In the latest announcements of customer and shareholder lawsuits to arise from the Banking Royal Commission, Shine Lawyers (“Shine”) plans to file a case in the Federal Court, the class action will be open to car buyers who took out personal loans from Westpac (or its subsidiaries St George, Bank of Melbourne and Capital Finance), through a car dealer from July 2014 to November 2018.

Shine’s Class Action Practice Leader Ms Vicky Antzoulatos is quoted as saying:

“If you bought a car from a dealership using ‘in-store’ finance for personal use from July 2014 to November 2018, you may have been the victim of a flex car loan rort.”

Shine’s Class Action Practice Leader Ms Vicky Antzoulatos said Shine is “currently focusing its case on Westpac because it had the largest market share”.

In a similar set of circumstances, Maurice Blackburn is also investigating a class action over flex commissions, which will additionally encompass car buyers who took out loans through Esanda, ANZ and Macquarie Bank.

Borrowers Unaware of the Commission

Shine will allege Westpac and its subsidiaries breached their legal obligations to act fairly and honestly when providing loans. Ms Antzoulatos said:

“Dealerships spruiked cars with finance while failing to disclose the interest rate on the loans was arranged with the lender in exchange for commissions. The bank and its subsidiaries failed to disclose to consumers the true nature of their commission structure with the car dealers, and we will allege this was illegal.”

The Banking Royal Commission

In his Final Report into Misconduct in the Banking, Superannuation and Financial Services Industry, Kenneth Hayne said of flex commissions and their lack of transparency [see pages 84-85]:

“Many borrowers knew nothing of these arrangements. Lenders did not publicise them; dealers did not reveal them. The dealer’s interest in securing the highest rate possible is obvious. It was the consumer who bore the cost … But, because at least one large lender, Westpac, was continuing to offer flex commission arrangements to car dealers when the Commission looked at these matters in March 2018, there will be many car loan contracts on foot where the interest rate being charged will be above whatever rate the lender fixed at the time as its base rate.”

Banking Industry and Flex Commissions

According to ABC News, the industry was given more than a year's notice of the impending ban, which now attracts fines of up to $420,000 per breach. Following the ban, lenders and banks rather than dealers have responsibility for determining the interest rate on a particular car loan, and dealers cannot suggest a different rate to earn more commission, but do have a limited capacity to offer a discount.

During the Banking Royal Commission, Westpac in particular was questioned over its handling of car loans. Despite supporting the removal of flex commissions and introducing a cap on the rate car dealers could charge, Westpac told the inquiry it was “still using the commission structure” as ASIC's ban loomed just months away. Westpac argued it could not unilaterally stop using flex commissions and still compete in the car loans market.

The then Chief Executive of Westpac, Brian Hartzer was questioned in the Banking Royal Commission about whether Westpac's policies could "have incentivised dealers to make unsuitable loans in order to obtain a commission", to which Mr Hartzer responded: “I couldn't say. I'm not a car dealer.”

Ms Antzoulatos commented:

“The evidence that Westpac representatives gave at the Royal Commission demonstrates that Westpac knew that these types of loans would lead to poor outcomes, and we think with that knowledge their conduct was particularly egregious.”

TimeBase is an independent, privately owned Australian legal publisher specialising in the online delivery of accurate, comprehensive and innovative legislation research tools including LawOne and unique Point-in-Time Products. Nothing on this website should be construed as legal advice and does not substitute for the advice of competent legal counsel.


Related Articles: