Westpac to Face Potential Class Suit over Exorbitant Car Loan Interest Rates

Compensation specialist Shine Lawyers is set to launch a class action suit against Sydney-based Westpac Banking Corporation in the Federal Court on behalf of Australians who took out car finance deals with the so-called “flex commissions,” which allowed car dealers to set high interest rates to earn higher kickbacks.

The potential class action, which the law firm plans to file in the coming weeks, will encompass car buyers who took out personal loans from Westpac or its subsidiaries (Capital Finance, St George, and Bank of Melbourne) from July 2014 to November 2018 through car dealers.

Those who have purchased a vehicle through a dealership with "in-store" personal loan within that period “may have been a victim” of a fraudulent or unfair flex car loan, warned Vicky Antzoulatos, class action practice leader at Shine Lawyers. They can contact the firm for assistance in pursuing their car finance claims against Westpac and its subsidiaries.

Shine Lawyers will allege that the bank did not act fairly and honestly when providing loans.

Flex Commissions

The so-called “flex commissions” is the focus of the case and it allowed car dealers to set the interest rates that customers will have to pay much higher from a “base rate” set by the bank in order to receive a bigger commission. In essence, the higher the interest rate the customer agreed to pay, the bigger the commission the car dealer can get.

Such a scheme was common in Australia’s car finance industry before it was banned effective 1 November 2018.

Series of Class Suits

The class action is just one of the many large-scale shareholder and customer class action lawsuits that were launched in response to fresh information that the Banking Royal Commission recently discovered and brought to light.

Maurice Blackburn, a competing law firm, is also pursuing a class action related to flex commissions on behalf of car buyers with loans from Macquarie Bank, Esanda, and ANZ.

Meanwhile, Shine Lawyers is currently focusing on Westpac due to its dominating market share, Antzoulatos explained.

Dealerships promoted cars with financing options while failing to disclose that the interest rates on the loans were negotiated with the lender in exchange for commissions, Antzoulatos noted, further stating that they will allege that the failure of the banks and its subsidiaries to disclose to the borrowers their actual commission arrangement with the car dealers was illegal.

In the Banking Royal Commission’s 2019 final report, Commissioner Kenneth Hayne has given a fierce assessment of the flex commission scheme and its lack of transparency, highlighting that many consumers do not know of these arrangements. He stated that the lenders didn’t publicise them while dealers didn’t reveal them.

The Commissioner noted that it's obvious that the dealers are interested in securing the highest possible rate at the expense of the consumer.

Flex commissions lead to “rip-off loans” that result in customers losing thousands of dollars, according to Antzoulatos. She further related that those who bought vehicles of similar value on the same day were charged anywhere from 6.5% to 15.5% interest in addition to the base rate.

ASIC, or the Australian Securities and Investments Commission, banned flex commissions  in 2018, citing concerns that they resulted in “very high interest rates” especially to “vulnerable consumers less able to protect their interests.”

Furthermore, the loan structures were condemned by consumer groups for prioritising the buyers’ bargaining power with the dealer over their creditworthiness or financial circumstances.

Westpac Retained Flex Commissions as the Ban Drew Near

ASIC notified the car finance industry in Australia at least a year before it banned the flex commissions. With the ban in place, the banks and lenders become responsible for determining the interest rate on a particular loan. The dealers, on the other hand, can’t increase the customers’ interest rates in an effort to receive larger commissions, but they can provide discounts.

Westpac was particularly in the spotlight during the banking royal commission due to the way the bank handled its vehicle finance products.

Despite agreeing to the abolishment of the flex commissions and introducing a maximum limit on how much car dealers could increase the interest rates, the bank told the inquiry that the commission structure was still in place as the ban drew near. Westpac contested that removing flex commissions before ASIC’s ban will mean leaving the car loan market to competitors who are still implementing it.

Commissioner Hayne viewed this situation as a "first-mover disadvantage" issue, which means that even when industry players acknowledge the need for change, a regulator's intervention is still required to implement it.

Antzoulatos noted that the evidence the representatives from Westpac gave during the inquiry demonstrate that the bank knew that the loan structure would lead to poor outcomes. "We think with that knowledge their conduct was particularly egregious," she added.