Car dealers face prospect of lower earnings

Could the ACCC slash commissions on add-on insurance products issued by car dealers?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

New motor vehicles could be more expensive within weeks if a decision by the Australian Consumer and Competition Commission (ACCC) goes against car dealers.

The ACCC is expected to announce its ruling on add-on insurance products sold by new car dealers to customers. It could affect hundreds of millions of dollars of commissions generated by the $86 billion car dealership industry according to Fairfax Media.

It's almost standard practice that dealerships don't make much profit from the sale of new cars, but bump up their margins through the sale of add-on products like accessories, tinted windows, rust protection, consumer credit insurance (CCI), mechanical breakdown insurance, gap insurance, loan termination insurance and tyre & rim insurance.

A report by the Australian Securities & Investments Commission (ASIC) has found that the market is failing consumers, with add-on insurance "represents poor value for consumers and is designed and sold in a way that may not meet consumer's needs."

According to ASIC, car dealers were paid more than $600 million in commissions over three years, but consumers were only paid $144 million in successful claims. Additionally, consumers paid $1.6 billion in premiums.

That suggests that most people either don't need the insurance that was sold to them, that it is extremely overpriced or a combination of both.

ASIC has already called on the insurers to address the high costs, poor value and poor claims outcomes.

The regulator has also suggested a voluntary cap of 20% on commissions paid to anyone who sells an add-on insurance product to consumers through car dealers (some can be as high as 79% according to ASIC).

ASIC has also found that consumers find it hard to say no to the salesperson when they are buying a new or used car when it comes to add-on products. ASIC also found that at least one insurer trained car dealers in how to avoid disclosing the price of the insurance, even if asked.

As well as impacting car dealers like AP Eagers Ltd (ASX: APE), Automotive Holdings Group Ltd (ASX: AHG) and Autosports Group Ltd (ASX: ASG), the ACCC's decision could also impact on the insurers, including Insurance Australia Group Ltd (ASX: IAG), Suncorp Group Ltd (ASX: SUN) and QBE Insurance Group Ltd (ASX: QBE).

Some dealer groups have already claimed that slashing these commissions would force up the price of new cars, or at worst force the closure of every motor dealership in Australia. That may be a bit extreme though.

But a valid concern for investors is that some dealerships may not be profitable if commission rates are capped, and if the watchdog forces insurers and dealers to refund millions to customers who purchased insurance they didn't need or paid too much for. It happened in the UK in 2011 with consumer credit insurance (CCI), so it could happen in Australia too.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »