It's been more than five years since the banking royal commission, but its findings continue to have an impact on the financial services sector.
Author
Jeannie Marie Paterson
Professor of Law, The University of Melbourne
Law firm Maurice Blackburn recently announced it had settled with ANZ in a class action over allegedly unlawful "flex commissions" built into car loans made by Esanda between 2011 and 2016.
ANZ agreed to settle the proceedings for $85 million on a "no admission of liability" basis. However, two further flex commission class actions - against Westpac & St George and Macquarie Leasing - remain on foot and will be heard this month.
Class actions are a growing trend in the ways consumers seek to access justice. Many cases are simply too small to be pursued individually.
On top of this, a recent High Court ruling could see organisations come under greater scrutiny over the systems they put in place. Could all of this mean consumers are getting a stronger voice?
What are flex commissions?
Many car dealers offer to provide financing for prospective car buyers as an alternative to getting a loan directly from a bank. But dealers typically don't have their own huge reserves of funds to lend out.
This financing usually comes from a finance company or bank lender through what is sometimes called a "white label" product.
Dealers will usually be paid a commission on the loans they arrange by the lender. Prior to 2018, some lenders offered these car dealers arranging loans what is called a "flex commission".
Flex commissions allowed car dealers to set the interest rate on car loans above an agreed base rate.
Higher interest rates meant a greater commission for the car dealer, but were not always in the interests of the borrower.
Banned and heavily criticised
Flex commissions were formally banned by Australia's corporate watchdog, the Australian Securities and Investments Commission (ASIC), in November 2018.
ASIC had been concerned that borrowers were paying excessively high interest rates on dealer-arranged car loans, and that the commissions were not fair or transparent.
The watchdog's own research found about 15% of customers were being charged an interest rate that was 7% or more above the base rate.
Their main concern was that many car dealers weren't increasing rates in line with actual credit risk, but rather opportunistically to target inexperienced or vulnerable consumers.
Shortly after the ban, the final report of the banking royal commission didn't mince words. Commissioner Kenneth Hayne noted a lack of transparency and a misplaced trust:
Many borrowers knew nothing of these arrangements. Lenders did not publicise them; dealers did not reveal them. […] To the borrower, the dealer might have appeared to be acting for the borrower by submitting a loan proposal on behalf of the borrower. The borrower was given no indication that in fact the dealer was looking after its own interests.
Why were class actions needed?
Neither ASIC's ban nor the criticisms of the banking royal commission guaranteed any redress for borrowers subject to loans with flex commissions.
ASIC suggested flex commissions may have contravened the National Consumer Credit Protection Act by being unfair, or the ASIC Act by being misleading. But it is difficult and expensive for individuals to pursue such claims themselves in court.
ASIC itself can seek compensation on behalf of borrowers, or require redress to be paid as part of other enforcement action. The watchdog has already gone down this road in some of the especially egregious instances of misconduct identified by the royal commission, such as fees for no service.
Where individual action is too hard or regulator action lacking, consumers' best option for redress may lie in a class action - taken on a no-win, no-fee basis. The likelihood of a good result may be increased in instances where the class action "piggybacks" on an adverse report from the regulator.
Corporations may face increasing scrutiny
It's reasonable to ask why upstream lenders are being targeted in "flex commission" class actions when it is the car dealers who allegedly wronged borrowers.
The ongoing class actions do not allege the lenders themselves misled borrowers or treated them unfairly. However, in this context that may not matter.
In each of the class actions, Maurice Blackburn has argued the car dealers were acting as the representatives of the lenders, which they say makes the lenders responsible for the car dealers' alleged misconduct.
Moreover, in these and similar cases, a recent High Court ruling that centred on "systemic unconscionable conduct" could make it harder for such upstream entities to argue their distance from alleged wrongdoing in systems they put in place.
Better access to justice
There has been a rise in consumer protection class actions in recent years, supported by changes in rules of procedure in several jurisdictions.
Justice Bernard Murphy of the Federal Court of Australia has argued these changes promote the important value of access to justice:
The important thing to remember is that class actions are critical in ensuring that people can obtain redress for mass civil wrongs. Laws which are not, in fact, readily capable of enforcement by ordinary Australians are little more than an illusion.
This trend is important. Dishonest or unfair conduct has long been prohibited in the National Consumer Credit Protection Act, but this hasn't been used much to date.
Given the current flex commission actions closely follow the findings of ASIC, we should watch the regulator closely for hints of any future actions in other areas. Many could spark discussions that ultimately lead to stronger protection for consumers.
But when they are successful, we also need to keep an eye on the actual payout to borrowers and hope it takes place without undue delay.
Jeannie Marie Paterson has previously received funding from the Australian Research Council, DFAT and the Menzies Foundation.
