The modern HR professional plays an integral part in ensuring staff are getting maximum value from employee benefits like novated leasing. Sadly, they are often confronted with mistruths about novated leasing with a number of key facts often left unanswered or unexplained by some providers. The following 7 insights some compelling reasons to have a look at your current arrangements.
Whilst novated leasing is primarily an unregulated marketplace, there are a range of changes a HR professional needs to be aware of that will impact on how novated leasing programs are structured and managed.
1. Changes to interest rate margins
Effective from November 2018, ASIC will formally ban flex commissions in the car finance market. Lenders and dealerships have until November 2018 to update their business models, and implement new commission arrangements that comply with the new law. Learn More.
2. Opt-Out 'Junk' Insurance Regulations
Opt-out or 'junk' insurance has been under scrutiny by ASIC for some time with the release of a number of scathing reports about the practice of adding on insurance that gives the consumer little to no value and the provider, a hefty commission.
Typically novated lease providers and more importantly the sales staff make a large percentage of their incomes by selling add-on insurance products or “junk insurance.” These “add-ons” constitute a large proportion of some players profits, as they have very high profit margins. Because of the sales incentive structures in place with most providers, traditionally these products are added into your employees' quote from the outset, whether they are needed or not. It is normally then left up to your employee to remove the product. In most cases they don’t even know its there. This can potentially add thousands of dollars to a lease, and make it difficult to exit early.
Traditionally this has been a major source of income for specialised salary packaging companies. A recent survey by the Consumer Action Law Center revealed that up to one in five people did not know they had bought the insurance at the time. As such, the regulator is looking at ways to curb the Junk insurance across a range of sectors, including novated leasing. Learn More.
3. Introduction of new Australian Accounting Standards (AABS16)
Effective from January 2019, there will be a change in way that vehicle leases (used for business purposes) are recognised on the balance sheet. The impact on businesses, is that it may be more valuable to ramp up the novated leasing offer in your business, rather than car leasing. Learn more.
4. How often should a novated lease program/contract be reviewed?
Novated Leasing programs should be reviewed at least every two years to cater for changes in the industry and to ensure your staff are not being overcharged. By not reviewing what is actually taking place with your provider you can potentially be costing your employees hundreds of dollars a month. More on how to review later.
5. Hard to decipher interest rates
The risk in novated leasing is that it may be hard to decipher what the interest rate is on a novated lease, as the product is not covered by National Consumer Credit Protection Act (NCCP). Interest rate margins can be as high as 8% over cost of funds. If cost of funds are 6% that means your employees could be paying 14% interest or even higher! It is important to choose a novated lease company that has transparent interest rates.
The second trend in the industry is rate creep. This means that the provider increase the interest rate charged to employees over time. This tends to be driven by the need to maintain or increase shareholder value through constant growth in the bottom line.
6. Single funding partners
Diversity of lenders ensures employees will have access to the most competitive interest rates available at all times. Many providers tend to use one major funding partner, so it is important to use a novated leasing program that offers a diversity of lenders.
7. Lack of transparency with fees
It is important to ensure you choose a provider that discloses all the fees and charges upfront. A lot of the time you’ll find a management fee, fuel card fee, service authorisation fee etc built into your budgets. Read the fine print.
For example, many novated leasing providers will charge a dealer a fee to supply cars. These can be up to 1.8% of the purchase price, charged to the dealer and never disclosed to the client! This is passed onto your employees as an increase in the price of the car. Ie. If you buy a $50,000 car, and the fee is $900, your employee would be paining $50,900 for said car.
Without regular scrutiny and review, the original benefits of Novated Leasing programs can be eroded over time through changes in industry practices, a reliance on a single funding partner and overselling products not tailored to an individual’s circumstances.
We regularly see scenarios where an employee’s position could have been improved by hundreds of dollars each month through simple changes that could have been implemented at the outset through proper consultation with a professional adviser.
How to check your current novated leasing arrangements?
It can be hard to assess your current provider or potential provider. We have put together a simple guide which will give you a place to start. A simple and effective way to do this is an novated lease audit. Most companies and organisations have a central sign off for novated leases that you could contact to gather the relevant information easily. Start by collecting the last five leases that have been entered into by staff so you can gather the information listed below:
- Finance payments
- Any add-on insurance (GAP Insurance, Novated Lease Protections Insurance, Tyre and Wheel Insurance etc)
- Any aftermarket options including extended warranties (Tint, Protection Packs, Small Damage Programs etc)
- Any fees in the fine print (Service Authorisation, Fuel Cards, Application Fees etc)
- Amount Financed (this may be hard to find)
- Price of the car (if you can find it).
Once you have this information I’d suggest taking it to your provider for clarification. If there are any aspects of what we outlined above I would suggest looking or either an alternative provider to offer alongside the existing party, or a new provider altogether (depending on contractual arrangements). I would also be happy to help analysis your data and provide feedback or any potential savings.
Thanks for taking the time to have a look at my article. I hope it has helped in some small way to give you some clarity and cut through some of the noise that is out there around novated leasing. Please reach out to me if you would like Express Fund to do a comparative assessment of your current novated leasing program or if you have any further questions about novated leasing.