Westpac still paying flex commissions

Westpac has made no move to stop paying car dealers huge commissions they set for themselves.

Phillip Godkin from Westpac leaves the royal commission in Melbourne yesterday. Picture: Stuart McEvoy.

Westpac has made no move to stop paying car dealers huge commissions they set for themselves, despite last year telling the corporate regulator they should be prohibited, the financial services royal commission has heard.

The bank’s lack of action follows an internal audit that found so-called “flex commissions” “significantly increase the risk of unfair consumer outcomes”.

Westpac is instead awaiting an industry-wide ban slapped on flex commissions by the Australian Securities & Investments Commission to take effect in November.

Flex commissions, which allow dealers to earn higher commissions by charging customers up to seven percentage points more than a base rate set by the financier, were among misconduct issues in the $35.7 billion a year car finance industry pinned by the royal commission’s spotlight yesterday.

In the past, up to half the gap between the base rate and the actual rate charged has flowed into the pockets of car dealers, the commission heard.

The commission also heard about Westpac’s failure to independently verify information supplied by car dealers on behalf of loan applicants.

Flex commissions have become a lucrative source of income for car dealers, who according to a 2016 memo from a senior Westpac banker to chief executive Brian Hartzer have become dependent on commissions from selling car loans and add-on insurance, much of which is worthless to customers.

“Consumers receive much less in claims than dealers receive in commissions,” the head of Westpac’s business bank, David Lindberg, said in the memo, read to the royal commission.

“Finance and insurance income is consistently reporting 80 to 120 per cent of dealer profits.”

He said cuts to commissions “could see insurance income halve”.

“Likewise, if they take a similar approach on finance commissions, the knock-on effect could be ­severe.”

Westpac’s general manager of specialist finance, Phillip Godkin, told the royal commission the bank supported ASIC’s “complete prohibition of flex commissions”.

He said that over the past few years Westpac had strengthened its accreditation and training of dealers.

However, he admitted the bank had not itself ditched the payments, and said he was not aware of any other finance industry players doing so.

The commission also heard from Nalini Thiruvangadam, who said that in mid-2012 she wanted to buy a reliable new car for her job after her old Mitsubishi Magna caught fire while she was driving it.

However, the only bank or dealer who would give her finance instead sold her an unreliable Ford Focus demonstrator with high mileage and a habit of stalling.

She fell behind on the payments of $259.19 a fortnight almost immediately, the commission heard.

Westpac now admits the loan should never have been made.

“We never should have made this loan, that’s correct,” Mr Godkin told the commission.

He admitted the bank did nothing to verify the information given to it by the car dealer but said it had strengthened its policies since then — including as recently as last August.

However, he said he was not qualified to comment on whether the bank was breaking credit laws by relying on material from car yard dealers.

“In the vast majority of cases, expenditure is not verified,” he said.

Ms Thiruvangadam said she tried to get loans from banks including Westpac, which knocked her back because “I had a Citibank credit card that was not paid”.

At the time, she was earning about $350 a fortnight as a personal care assistant and receiving Centrelink benefits, she told the commission.

Eventually, Ms Thiruvangadam found a dealer some 50km from her home who was willing to finance her.

“He said, don’t worry, come to my car dealer and you are definitely going back with a car tonight,” she said. She said she signed paperwork that she did not get a chance to read.

Eventually, after she got help from the Consumer Action Law Centre last year, Westpac forgave the loan and agreed to pay her $20,000.

She kept the car.