Update on Flex Commission
5 October 2017
Executive Summary:
On 5th September 2017, ASIC released a draft of a proposed legislation with regards to flexible credit cost arrangements. The motor dealerships in Australia need to prepare their businesses to adapt to the changes as currently approximately 80% of their profitability is dependent on finance income
To successfully navigate these changes the dealerships may need to consider the following:
1. Increase Finance department productivity & penetration by re-engineering all sales processes
2. Protect where possible, the retail gross on new and used vehicles
3. Manage the variable and semi fixed expenses in the new and used department, set targets and commissions using scientific principles
This update and a detailed paper published on eprofitfocus.com.au, helps the reader understand how the Auto retail industry in Australia may be affected and how it can successfully adapt to these changes.
Background:
On 5th September 2017, ASIC has released a draft of changes to the National Consumer Credit Protection Act 2009, which will be effective 1st Nov 2018.
What does this legislation do?
- It prohibits the payment of flex-commissions
- Provides for a limited exception to the prohibition that allows lower commissions to be paid where the price of credit reduces.
- Addresses the risk of avoidance by casting the prohibition in broad terms
Following is a quick summary of some of the issues this change brings to the Auto retail industry and some high level remedies that you can look at:
Issue 1. Finance Income may reduce.
Today approximately 80% of dealer profitability is dependent on finance income. With the recent proposed legislation on flex commissions, dealers' ability to generate income from finance operations will be constrained.
Areas to consider:
To potentially decrease this impact on profitability the dealerships need to increase Finance department productivity and finance penetration. Along with looking at these core areas, the dealerships also need to protect the per unit grosses on new and used vehicle, wherever possible. Figure 1: below shows how the top dealers are already adapting to this change by increasing their penetration levels as opposed to the average dealers.
Figure 1: Finance income per contract and new vehicle finance penetration Top 30% (new vehicle dept) ve Average dealer
Issue 2. Some of the current sales processes in the average dealership are not very efficient and rely on multiple handovers from sales person to finance personnel etc. as a result the current penetration levels are around 34% to 35%.
The current sales processes were built with focus on department specialists. This introduces an element of detachment where the customer may not be the focus throughout, and lasting customer relationships may not form.
Areas to consider:
The dealerships can leverage the current changes to design a better sales process where the handovers are less, and the process is more customer focused. The specialised role of a business manager can be simplified for an early introduction of the finance element in the sales process. The dealerships may need to train and qualify the sales person to also sell finance.
Issue 3. Recent actions by ASIC and the ACCC raises the perception that dealerships are not customer friendly and are perceived as solely profit driven organisations.
The recent scrutiny by the regulating authorities on Flex commissions and add on insurance, along with falling service retention levels, point towards an atmosphere of trust erosion where the dealerships are not perceived as the champions of customers. This image crisis, if not tackled right away, has a potential to affect business in the long run.
Areas to consider:
The dealerships need to assess if their systems and processes are customer focused or are solely profit driven. The dealerships may have to consider the way they engage customers and also assess the products they sell. For example, with reduced insurance commissions, is it still financially viable to offer these products or should you offer these products purely as customer convenience?
These are some of the issues that the industry needs to address, but with less than 12 months to the regulation change, we recommend that at a minimum you should
- Understand the new regulation
- Analyze and quantify the impact of this change on your dealership or network
- Identify areas of opportunity in your sales process
If you wish to access the F&I regulatory impact for your brand / state segment grouping and understand how you can gain more from our benchmarking and analytical capabilities we would be pleased to discuss the results of our analysis with you.
Contacts:
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