Regulator probes insurance add-ons

The Commerce Commission has released a report following its review of motor-vehicle financing and related add-on products.

The regulator has looked at add-on products sold alongside cars bought on finance by adding their price to lending taken out to buy the vehicle. 

They included mechanical breakdown insurance (MBI), cover for any shortfall arising between the insurance paid and any unpaid loan balance in the event of a total loss on the car, and insurance cover if the borrower is unable to make their loan repayments for a range of reasons including illness and redundancy. 

The policies also included products offered by financiers that provide for loan repayments to be waived in defined circumstances.

The review aimed to understand the roles and responsibilities of industry participants during the sales and lending process, and to identify business practices that have the potential to cause harm to consumers. 

It has improved the commission’s understanding of the industry, identified opportunities to provide guidance to industry participants, and will inform its future compliance and enforcement work under the Credit Contracts and Consumer Finance Act (CCCFA) and the Fair Trading Act (FTA).

During the project, the commission spoke with a range of parties including a selection of 15 lenders offering vehicle finance, five of whom also offer repayment waivers, as well as five insurers offering insurance products under consideration.

Sixty-two consumers spoken to by the commission had purchased a product that fell within the definition of credit-related insurance or a repayment waiver for CCCFA purposes. 

Their feedback suggested some industry participants may be falling short of their legal obligations to assist consumers to reach informed decisions about purchasing an add-on, with some consumers reporting they either didn’t understand the add-on they had purchased or were unaware they had bought an add-on at all.

The regulator has identified the potential for non-compliance and poor consumer outcomes in the way add-ons are sold – and by virtue of the relationships between lenders, dealers and insurers. 

“The dominant sales model for add-ons relies on intermediaries, with add-ons typically sold at the vehicle’s point of sale by dealers who have the ability to earn commission on those sales, alongside the ability to earn commission and fees for arranging the finance,” states the report.

“While lenders generally assess the affordability of the finance and add-ons themselves, they typically rely on dealers to assess the suitability of the add-on and to assist the consumer to reach an informed decision about purchasing that. 

“The ability for dealers to earn a sales commission may mean they prioritise selling add-ons over adequately assessing suitability for the consumer or assisting them to make an informed decision. Therefore, there is a possible tension with lenders relying on dealers to perform these tasks in relation to products where sales commissions can be earned.

“While agency arrangements such as these are commonplace in many sectors, in these circumstances lenders must be vigilant to ensure dealers perform any delegated duties appropriately to enable lenders to comply with their legal obligations. 

“Lenders need to have sufficient audit and assurance processes in place to ensure that dealers – as their agents – act appropriately so as to ensure the lender’s legal obligations are properly discharged, and do not prioritise making a sale over performing any delegated duties.”

Anna Rawlings, pictured, commission chair, says: “Dealers are often responsible for arranging finance for consumers and assessing their suitability for add-ons on behalf of lenders, while also earning a commission on any sales. 

“Lenders must have adequate processes in place to ensure that dealers perform their delegated duties appropriately and do not prioritise sales above the performance of those duties. 

“We will be meeting with lenders and insurers who participated in the review to discuss our observations and, where necessary, we will issue advice about compliance with the relevant laws, including changes to the CCCFA, which come into force on December 1, 2021. 

“We are also meeting with key industry stakeholders and the consumer advisory sector to share the information we have gathered about add-on products and how they are sold.” 

The report adds that as part of the commission’s wider compliance and enforcement strategy, it will “continue to assess compliance within the industry, including in relation to the new requirements for add-ons, and take enforcement action where appropriate”.

The regulator will also undertake advocacy work with the consumer advisory sector, including financial mentors, and share its observations with other relevant agencies, including the Financial Markets Authority and Ministry of Business, Innovation and Employment.

The CCCFA lays down responsibility principles, which require lenders to make reasonable inquiries to be satisfied finance and add-ons purchased by consumers are likely to be affordable and suitable, and to help consumers reach informed decisions as to whether or not to enter into any such contracts.

And there are provisions in the FTA that prohibit car dealers – as well as lenders – from making false or misleading representations.

A copy of the commission’s motor-vehicle financing and add-ons review is available online here.