Insurance regulatory reforms proposed by the Financial Services Royal Commission are well under way with the passage of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020.
With royal assent given on 17 December 2020, this guide will assist insurers, underwriting agencies, brokers and service providers to navigate the changes.
1 January 2021
ENFORCEABLE CODE PROVISIONS MECHANISM
Subdivision A of Division 2 Part 7.12 of the Corporations Act 2001 provides ASIC with the ability to identify enforceable code provisions when approving an industry code of conduct.
Industry codes are currently self-regulated and a breach of a Code provision does not presently result in a breach of the law.
We expect ASIC to engage with industry and use this power in relation to the 2020 General Insurance Code of Practice and Life Insurance Code of Practice.
Enforceable code provisions can be designated in both voluntary and mandatory codes and will be agreed with the applicant and designated by ASIC through the code approval process. Provisions which could be designated as enforceable may include:
- cooling off periods (which already apply under s 1019B of the Corporations Act 2001 (Cth));
- providing information to consumers; and
- fees and charges.
A number of changes proposed by the Insurance Council of Australia were adopted.
These include tightening the minimum criteria for an enforceable code provision. The test is now whether a breach of the provision is ‘likely to result in significant and direct detriment to the person’.
Previously, the test was whether a breach ‘could result in significant detriment to the person’, which is much broader.
LIFE INSURANCE CHANGES
Section 29(3) of the Insurance Contracts Act 1984 has been amended so it now only permits a life insurer to avoid the contract for innocent misrepresentation if it would not have been prepared to enter into a life insurance contract on any terms.
Previously, s 29(3) only required the life insurer to prove it would not have entered into that particular contract.
DUTY TO TAKE REASONABLE CARE NOT TO MAKE A MISREPRESENTATION
A significant shift away from the traditional duty of disclosure, the new duty on intending insureds is to take reasonable care not to make a misrepresentation.
While the legislation is effective 1 January 2021, insurers can adopt the new duty at any time from 1 January 2021.
All general and life insurance contracts entered into on or after 5 October 2021 will be subject to the new duty.
A life insurance contract which is varied to increase the sum insured or provide additional cover on or after 5 October 2021 is, to the extent of the variation, treated as if it had been entered into on or after 5 October 2021.
CAPS ON COMMISSIONS
A new section 12DMC has been inserted into the Australian Securities and Investments Commissions Act 2001 which will allow ASIC to set a cap on commissions for add-on risk products supplied in connection with motor vehicles.
The mechanism apples to add-on risk products in connection with:
- the sale or long-term lease of a motor vehicle to the product recipient;
- the provision of credit connected with the sale or long-term lease of a motor vehicle to the product recipient; or
- the provision of a warranty by the product recipient in connection with the sale or long-term lease of a motor vehicle to another person by the product recipient.
As the commission cap will be set by ASIC by regulation, the value of the cap is not yet known. As a guide, consumer credit insurance is subject to a 20 per cent cap under the National Credit Code.
Insurers and intermediaries should consider whether affected arrangements are suitable moving forward, and whether their sales models are viable under the new regime without amendment.
REGULATION OF CLAIMS HANDLING
The Corporations Act 2001 (Cth) has been amended to include a licensing requirement for ‘claims handling and settling services’.
A person will require an Australian Financial Services Licence (AFSL), or be an authorised representative of an AFSL holder, in order to provide a claims handling and settling service.
The exposure draft had contemplated that only persons providing claims handling or settling service on behalf of an insurer were to be affected. However, the Act has adopted a more expansive approach by also regulating ‘claimant intermediaries’.
A ‘claimant intermediary’ is a person who carries on a business of representing persons insured under insurance products in pursuing claims under those products in exchange for a benefit (whether monetary or otherwise).
This is a significant change in approach, particularly since claimant intermediaries were not the subject of scrutiny during the Royal Commission.
Treasury is currently consulting on potential exemptions from the definition of ‘claimant intermediaries’.
There is also a new requirement to issue a Cash Settlement Fact Sheet (CSFS) where the cash settlement is not the only option to settle a claim.
The content requirements of the CSFS have also been bolstered to require a breakdown of each component of the cash settlement, and include details about the rights of review.
A transition period applies to this regulation.
To benefit from the transition period, an AFSL application or variation must be lodged with ASIC by 30 June 2021.
They are then able to continue providing claims handling and settling services unlicensed until ASIC makes a decision on the application or 31 December 2021 (this date may be extended by up to six months to 30 June 2022).
USE OF THE TERMS ‘INSURER’ AND ‘INSURANCE’:
Restrictions now apply on the use of the words ‘insurance’ and ‘insurer’.
Products that are not insurance cannot be called insurance. Similarly, a business cannot use the word ‘insurer’ to describe their products or services if the product or service is not insurance.
5 April 2021
UNFAIR CONTRACT TERMS REGIME
Amendments to the Australian Securities and Investments Commission Act 2001 (Cth) will mean insurance contracts will be subject to unfair contract terms laws from 5 April 2021.
Under section 12BF, a term of a ‘consumer contract’ or ‘small business contract’ is void if three essential elements are met:
- the term is unfair;
- the contract is a standard form contract; and
- the contract is a financial product, or a contract for the supply, or possible supply, of services that are financial services.
Affected policy wordings should be reviewed to ensure unfair contract terms are removed, which can be a lengthy exercise because it may result in changes to underwriting decisions and criteria.
ASIC may take action against an insurer for including unfair contract terms in contracts. ASIC has a track record of taking action in relation to unfair contract terms in other financial services contracts.
30 June 2021
CLAIMS HANDLING REGULATION
Last day to lodge an application for an AFSL or variation to an AFSL to benefit from the claims handling regulation transition period.
1 October 2021
STRENGTHENED BREACH REPORTING OBLIGATIONS:
The Corporations Act 2001 (Cth) is amended to clarify and strengthen the breach reporting regime for financial services licensees.
This includes a revamp of the breach reporting regime for AFSL holders under section 912D of the Corporations Act 2001. They key features of the amendments include:
- expanding the kinds of situations that need to be reported by licensees to ASIC;
- requiring licensees to lodge breach reports with ASIC; and
- requiring ASIC to publish data about breach reports on its website.
5 October 2021
PRODUCT DESIGN AND DISTRIBUTION OBLIGATIONS
The Product Design and Distribution Obligations (PDDO) commence under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.
An affected product cannot be sold unless it has a Target Market Determination (TMD) in place.
Products which usually require a PDS will be affected by the PDDO. ASIC has released Regulatory Guide 274 to outline its approach and guidance to the obligations.
The PDDO introduces for the first time, product governance requirements for insurance products. It also imposes obligations on distributors, who interact directly with the end consumer.
A distributor must not distribute a financial product unless the issuer has made a TMD, and will need to take reasonable steps that will, or are reasonably likely to, result in distribution of a product consistent with the TMD.
Current exemptions available in the Corporations Act 2001 (Cth) will be removed and a new hawking prohibition will apply.
The new prohibition makes it an offence to offer a financial product for issue or sale, or request or invite the consumer to apply for such a financial product, if the consumer is a retail client and the offer, request or invitation is made in the course of, or because of, an unsolicited contact.
The hawking prohibitions work hand in hand with the deferred sales model. If one applies, the other does not.
The Act provides some clarity to insurers that not all contact which ‘creates an expectation of an immediate response’ will be captured.
The Act now refers to ‘real time interaction in the nature of a discussion or conversation’. This would seemingly make it clear that emails are unlikely to be unsolicited contact.
The consent requirements have also been updated since the draft. While the customer must still give the consent, and the consent must be a positive and voluntary act, the customer no longer needs to specifically request the insurer/intermediary to issue or sell the product.
A customer can give consent to an insurer/intermediary to make the offer to sell the product. This removes one of the impractical hurdles to consent which was contained in the exposure draft.
DEFERRED SALES MODEL FOR ADD-ON INSURANCE
After multiple proposals and consultations, the deferred sales model for add-on insurance products has now become law.
The deferred sales model prohibits the sale of add-on insurance products for at least four days after a customer has entered into a commitment to acquire the principal product or service.
The amendments impose offences for any failure to comply with the new requirements.
Comprehensive motor insurance is exempt and Treasury is currently receiving submissions to exempt other classes of insurance.
The government has announced it intends to exempt travel insurance from the deferred sales model although stakeholder views on the appropriate definition for ‘add-on travel insurance products’ are currently being sought.
DUTY TO TAKE REASONABLE CARE NOT TO MAKE A MISREPRESENTATION
See our analysis above. The new duty applies by law from 5 October 2021 (insurers can opt-in before this date).
REGULATORY GUIDE 271
The new Regulatory Guide 271 (replacing Regulatory Guide 165) commences.
The standards and requirements highlighted in the guide are enforceable. The guide explains what financial firms must do to have a compliant Internal Dispute Resolution (IDR) system in place.
The passage of the Financial Sector Reform Act Act provides some more certainty as to the key dates and outcome of the consultation.
Insurers and intermediaries alike should plan ahead to ensure they understand the effect of the regulatory changes on their business.