MOTOR TRADE ASSOCIATION. Submission To. Commerce Committee. Credit Contracts and Financial Services Law Reform Bill

Transcription

1 MOTOR TRADE ASSOCIATION Submission To Commerce Committee On Credit Contracts and Financial Services Law Reform Bill Motor Trade Association Inc PO Box 9244 Marion Square Wellington 6141 Phone 04) Date 1 November 2013 Page 1 of 6

2 Committee Secretariat Commerce Parliament Buildings Wellington Via Dear Sir / Madam Submission: Credit Contracts and Financial Services Law Reform Bill This submission is from: Motor Trade Association (Inc) PO Box 9244 Marion Square Wellington 6141 Thank you for the opportunity to provide comment on the Credit Contracts and Financial Services Law Reform Bill and its effect on the retail automotive industry. We wish to appear before the Committee to speak to our submission. Our contact person in respect of this submission is: Name: Tony Everett Title: Dealer Services and Mediation Manager Ph: (04) Fax: (04) tony.everett@mta.org.nz Others to support this submission include: Dougal Morrison, MTA Advocacy and Training General Manager Yours sincerely Tony Everett Dealer Services and Mediation Manager Page 2 of 6

3 Credit Contracts and Financial Services Law Reform Bill Introduction 1. The Motor Trade Association (Inc) (MTA) which represents just under 4,000 businesses in the automotive industry takes this opportunity to convey its views on the Credit Contracts and Financial Services Law Reform Bill (the Bill). 2. The Bill has particular relevance and significance to our retail motor vehicle trader members. These businesses include new and used vehicle traders, and motorcycle traders. In those business sectors MTA represents approximately 600 motor vehicle trader members. 3. The provision of finance is a significant element within motor vehicle dealers businesses. In the vast majority of cases dealers have business linkages with one or more established finance companies, the majority of which are likely to be members of the Financial Services Federation (FSF). In the vast majority of cases, the dealer and respective finance companies are distinct and separate business entities with no ownership or management connections. In a very few cases some dealers still operate finance ledgers in their own right and in this context there will be some common ownership. 4. When looking at the operational aspects of motor vehicle financing, the respective finance companies that most dealers use, prescribe the forms and processes to be followed with very little, if any, scope for an individual dealer to deviate from those prescribed requirements. The dealer serves in an intermediary role between the customer and the finance company, in helping the respective parties reach agreement in the establishment of finance support. The credit approval decision rests solely with the respective finance company. Interest rates and fees are set by the respective finance company. The dealer may have some latitude to negotiate interest rates and fees albeit within defined boundaries controlled by the respective finance company involved. 5. Given the relationships outlined above between dealers and their respective finance company partners, MTA supports the submission made by the FSF in respect of the Bill. Notwithstanding that expressed support for the FSF submission, MTA take this opportunity to highlight several aspects contained with the Bill which are of particular importance to our dealer members. Submission 6. MTA supports the submission made by the FSF. 7. MTA highlights three aspects which are of particular concern to our members: 7.1 Clause 9A of Bill Definition of Lender for purposes of Lenders Responsibility Provisions MTA submits that point of sale retailers or dealers be withdrawn from the definition of lenders within Part 1A. Their inclusion is inconsistent with the stance applied under the Financial Advisors Act Page 3 of 6

4 7.2 Clause 9I Publication of Costs of Borrowing MTA submits that the publication of the costs of borrowing should not be proceeded with because it will add unnecessary costs, and it may serve to mislead rather than inform consumers. 7.3 Clause 27 Section 45 amended (fees or charges passed on by creditor) MTA submits that subsection 45(6) is unfair and should be withdrawn. Detailed Comments Clause 9A Definition of Lender for the purposes of Lenders Responsibility Provisions 8. The Bill includes point of sale retailers as lenders. However, the Financial Advisors Act 2008 exempts point of sale retailers from coverage. It seems broadly inconsistent for New Zealand law to exempt point of sale retailers from financial adviser legislation but at the same time to expect them to observe lenders responsibility provisions that in places are similar in nature to advice. 9. When looking at the typical operational aspects of motor vehicle financing, the respective finance companies that dealers use prescribe the contract forms and processes to be followed with no scope for an individual dealer to deviate from those prescribed requirements. The decision to provide credit rests with the respective finance company. In this context and for most practicable situations the finance company on whose behalf dealers or retailers act will need to ensure that Lender Responsibilities are adhered to. 10. MTA supports the FSF submission and submits that the term lender be defined so as not to apply to all point of sale dealers or retailers and in effect exempt them from the Lender Responsibility Principles. Clause 9I Publication of Costs of Borrowing 11. The proposal that all costs of borrowing be publically available may seem beneficial to consumers. However, there are drawbacks that may negate the benefits. Firstly, the process will add costs to finance companies and retailers. Secondly, the advertised rate might be at the lower end of the scale and be conditioned, eg from 12.99%. Published rates may also serve to build false expectation on behalf of consumers and in turn lead to increased incidence of declined credit applications, which in turn may reduce the respective consumer s credit profile. 12. Lending rates are already published via various credit websites, and prudent consumers will have already researched the finance market and have some idea of what is reasonable and perhaps what is accessible. 13. It should be recognised that customers go to dealers to buy cars not to borrow money. Finance is a secondary aspect and is a means to Page 4 of 6

5 an end. Because dealers typically have relationships with several finance companies, to ensure they are able to address a wide range of consumer credit profiles, it is in the dealer s interest to find the best possible supplier to make the finance work. Interest rates and fee structures impact payments and therefore consumer affordability. All of these factors increase the likelihood of credit approval. In the interests of selling the vehicle the dealer needs to do the best for their customer to find the best possible finance offer. 14. Consumers with strong credit profiles will likely to be attractive to those finance companies operating in the premium end of the market, where interest rates are generally lower. Conversely consumers with poorer credit profiles will be unlikely to be accepted by those finance companies. Their applications will need to be directed toward the lower tier finance companies. As a general rule, the higher the credit risk, the higher the interest rates. 15. Finance approval is ultimately at the respective finance company s discretion not the customer or the dealer. Publication of rates and fees may help inform customers, but not all consumers will qualify for all rates. Application to a wide number of finance providers can create unintended consequences. If there are too many finance applications recorded on a consumer s credit profile it may serve to spook other would-be financiers. If other companies have rejected that customer, it could become a reason for others to follow suit. 16. MTA submits that the publication of the costs of borrowing should be withdrawn from the Bill because it will add unnecessary costs, and it may serve to mislead rather than inform consumers. Given the range of factors involved, MTA considers the information is better addressed directly with the prospective customer by either the dealer or finance company. Clause 27 Section 45 amended (fees or charges passed on by creditor) 17. MTA do not support amendment 45(6) and submits that it should be withdrawn from the Bill. In the typical customer/dealer/financier situation the dealer and finance provider are collectively defined under the Credit Contracts and Consumer Finance Act 2003 as creditor, but outside that definition the finance company and dealer are usually independent entities with no common ownership. The definition of creditor when applied to section 45 poses some unrealistic complications and, therefore, expectations. 18. A finance company may require a customer to purchase an insurance or warranty policy as a condition of credit approval to mitigate lending risk. Because the dealer, who is also a creditor under the legislation, will usually have business linkages with only one supplier of warranty and insurance products and, therefore, will only be able to offer one product line to the customer. If the customer purchases a policy from that provider, then the dealer will not be able to earn a commission on the sale of that insurance or warranty policy in accordance with the proposed section 45(6). And yet the requirement to purchase an insurance or warranty policy was set by the finance company not the dealer. Page 5 of 6

6 19. Consider another similar but slightly different scenario, where the dealer sells a car and a warranty policy under finance but in this case the purchase of a warranty policy was not a condition of finance approval and therefore the customer was free to make their own choice in respect of that warranty policy. Again, the dealer has business relationships with only one insurance provider, so again the dealer cannot claim a commission. 20. Now consider a third variation, the same purchase scenario but finance was not involved. In this case the dealer was not deemed to be a creditor, is outside the provisions of the Bill and, therefore, able to claim a commission. The application of subsection 45(6) creates inconsistencies in the wider market place for no valid reason. 21. A hypothetical question, if a dealer arranged supply linkages with several insurance and warranty providers would the dealer then be in compliance with section 45(6) because the customer had a choice of policies, albeit from several providers rather than a particular provider? 22. Despite the finance company and the dealer being jointly recognised as creditors under the Act, section 45(6) fails to recognise the two parties are functionally separate and independent businesses. Section 45(6) is unfair and MTA submits it should be withdrawn. Page 6 of 6