The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) sixth round of public hearings focused on insurance (life insurance, general insurance and the regulatory regime). A high level overview the policy questions arising from round 6 hearings is below.
[Note: See: Round 6 Insurance Hearings: week 1 Life Insurance case studies and Round 6 Hearings: Overview of week 2 life insurance and general insurance for coverage of some of the case studies considered over the course of the Insurance hearings.]
Some key questions identified
- Are consumers adequately protected? 'Is the current regulatory regime adequate to minimise consumer detriment? If the current regulatory regime is not adequate to achieve that purpose, what should be changed?' (eg is there any reason not to extend unfair contracts protections to insurance contracts?)
- What role do regulation and the regulators play in enforcing culture? 'When a financial services entity identifies that it has a culture that does not adequately value compliance, what should it do? What role, if any, can financial services laws and regulators play in shaping the culture of financial services entities? What role should they play?' (eg should ASIC have jurisdiction in respect of the handling and settlement of insurance claims?
- Role of incentives: Is banning conflicted remuneration 'sufficient' to address the use of inappropriate sales tactics by sales representatives (and the consequent risk to consumers)?
- Resourcing compliance systems: 'Should there be greater consequences for financial services entities that fail to design, maintain and resource their compliance systems in a way that ensures they are effective in: preventing breaches of financial services laws and other regulatory obligations; and ensuring that any breaches that do occur are remedied in a timely fashion?'
- Should certain products be sold at all? Should outbound sales be banned? Among the policy questions identified were the questions of whether the sale of accidental death and accidental injury products and the sale of add-on insurance by motor dealers should be prohibited. The Commission also questioned whether the use of sale of insurance via direct phone calls (outbound sales) should be banned.
Further detail
Policy questions identified include the following.
- Adequacy (or not) of existing the regulatory regime? Is the current regulatory regime adequate to minimise consumer detriment? If the current regulatory regime is not adequate to achieve that purpose, what should be changed?' are the general policy questions identified in relation to the Insurance hearings. The theme of the adequacy (or not) of the existing regulatory regime, and what further changes may or may not be necessary to address the issues identified over the course of the Round 6 hearings runs through many of the more specific questions outlined below.
- Extension of unfair contacts terms protects to insurance contracts: Is there any reason why unfair contract terms protections should not be applied to insurance contracts in the manner proposed in "Extending Unfair Contract Terms Protections to Insurance Contracts", published by the Australian Government in June 2018?
[Note: On 27 June, the government released a proposal paper: Extending Unfair Contract Terms Protections to Insurance Contracts outlining a model to extend unfair contract term (UCT) provisions to insurance contracts regulated under the Insurance Contracts Act 1984 (Cth) (IC Act) for consultation. The Model proposed amending s15 of the IC Act to allow UCT provisions in the ASIC Act to apply to insurance contracts regulated by the IC Act and tailoring the application of the UCT provisions o 'take account of the specific features of insurance where necessary'. Consultation closed on 27 July. See: Proposed model to extend Unfair Contract Terms (UCT) Protections to Insurance Contracts]
- Role of regulation and regulators in enforcing culture: When a financial services entity identifies that it has a culture that does not adequately value compliance, what should it do? What role, if any, can financial services laws and regulators play in shaping the culture of financial services entities? What role should they play?
[Note: The Interim Report which raises policy questions in relation to the first four rounds of public hearings was released on 28 September. Chapter 8 (Volume 1) of that report focuses on the role of regulators and regulation in shaping culture/preventing misconduct and questions (among other things) whether a different approach to enforcement, should be considered.]
- Stronger powers for ASIC? Are there any recommendations in the ASIC Enforcement Review Taskforce Report published by the Australian Government in December 2017, that should be supplemented or modified?
[Note: The ASIC Enforcement Review Taskforce report, which included 50 recommendations, was provided to the Government in December 2017 and released publicly in conjunction with the government response on 20 April 2018. The Report makes recommendations to improve ASIC's ability to gather information, strengthen ASIC's licensing and banning powers, increase civil and criminal penalties for corporate misconduct and encourage greater use of industry codes of conduct. The government agreed, or agreed in principle, to all Taskforce recommendations. See: Governance News 23/04/2018. Consultation on draft legislation to implement recommendations in relation to stronger civil and criminal penalties for corporate misconduct is currently on foot, and will conclude on 23 October. The draft legislation: Treasury Laws Amendment (ASIC Enforcement) Bill 2018 is covered in a separate post in the 08/10/2018 issue of Governance News.]
- Resourcing compliance systems: Should there be greater consequences for financial services entities that fail to design, maintain and resource their compliance systems in a way that ensures they are effective in: preventing breaches of financial services laws and other regulatory obligations; and ensuring that any breaches that do occur are remedied in a timely fashion?
- Product Design:
- 'Are there particular products – like accidental death and accidental injury products – which should not be sold?'
- 'Should the requirements of the Life Insurance Code of Practice in relation to updating medical definitions be extended to products other than on-sale products?
- Disclosure Adequacy of the existing statutory requirements:
- 'Is the current disclosure regime for financial products set out in Chapter 7 of the Corporations Act 2001 (Cth) and Division 4 of Part IV of the Insurance Contracts Act 1984 (Cth) adequately serving the interests of consumers? If not, why not, and how should it be changed?'
The Commission requested that submissions address the following: the purpose(s) that the product disclosure regime should serve; whether the current regime meets that purpose or those purposes; and how financial services entities could disclose information about financial products in a way that better serves the interests of consumers'. The Commission notes that despite the reference to the Insurance Contracts Act, the question is 'not limited in scope to contracts of insurance?
- Standardised definitions: 'Is the standard cover regime in Division 1 of Part V of the Insurance Contracts Act 1984 (Cth) achieving its purpose? If not, why not, and how should it be changed? Is there scope for insurers to make greater use of standardised definitions of key terms in insurance contracts?'
- Sales practices:
- Payment of incentives: 'Should monetary and non-monetary benefits paid in relation to general insurance products remain exempt from the ban on conflicted remuneration and if so, why? In addition, should monetary benefits given in relation to life risk insurance products remain exempt from the ban on conflicted remuneration? Why shouldn’t the cap on such benefits continue to reduce to zero?'
- Is banning conflicted remuneration sufficient? 'Is banning conflicted remuneration sufficient to ensure that sales representatives do not use inappropriate sales tactics when selling financial products? Are other changes, such as further restrictions on remuneration or incentive structures, necessary?'
- Ban on outbound sales? 'Should the direct sale of insurance via outbound telephone calls be banned? If not, is the current regulatory regime governing the direct sale of insurance via outbound telephone calls adequate to avoid consumer detriment? If the current regulatory regime is inadequate, what should be changed?'
- Should 'general advice' be renamed (in line with Productivity Commission Report recommendation 10.2)? The Productivity Commission report (PC Report) into Competition in the Financial System included the recommendation that 'general advice' be renamed (and more particularly that the term 'advice' should 'only be used in association with 'personal advice') to improve consumer understanding of the nature of the information being provided (recommendation 10.2). The PC recommended that the change should be implemented by mid-2020. The Commission asked whether this is 'sufficient to address the problems that can arise where financial products are sold under a general advice model' and 'If not, what additional changes are required? Are there some financial products that should only be sold with personal advice?'
- Use of approved product lists? 'Should all financial services entities that maintain an approved product list be required to comply with the obligations contained in FSC Standard No 24: Life Insurance Approved Product List Policy?'
[Note: The FSC Standard No 24: Life Insurance Approved Product List Policy states that the purpose of the policy is 'to encourage high standards in life insurance Approved Product List (APLs) construction practices that encourage competitive access and choice for advisers and their clients in life insurance products. The Standard also outlines processes for ‘off’ APL recommendations to ensure that adviser can access other products to enable them to meet best interest obligations.]
- Ban on motor dealers selling add-on insurance? 'Should the sale of add-on insurance by motor dealers be prohibited? Alternatively, should add-on insurance only be sold via a deferred sales model? If so, what should be the features of that model? Would a deferred sales model also be appropriate for any other forms of insurance? If so, which forms?'
- Should commissions be banned in this context? ‘If the ban on conflicted remuneration is not extended to apply to general insurance products, should the payment of commissions for the sale of add-on insurance by motor dealers be limited or prohibited?’
- Claims Handling: ‘Should the obligations in section 912A of the Corporations Act 2001 (Cth) apply to all aspects of the provision of insurance, including the handling and settlement of insurance claims? Should ASIC have jurisdiction in respect of the handling and settlement of insurance claims?
- Life insurance:
- Pre-existing conditions: ‘Should life insurers be prevented from denying claims based on the existence of a pre-existing condition that is unrelated to the condition that is the basis for the claim? Should life insurers who seek out medical information for claims handling purposes be required to limit that information to information that is relevant to the claimed condition?’
- Use of surveillance: ‘Should life insurers be prevented from engaging in surveillance of an insured who has a diagnosed mental health condition or who is making a claim based on a mental health condition? If not, are the current regulatory requirements sufficient to ensure that surveillance is only used appropriately and in circumstances where the surveillance will not cause harm to the insured? If the current regulatory requirements are not sufficient, what should be changed?’
- General insurance: 'Should the General Insurance Code of Practice be amended to provide that, when making a decision to cash settle a claim, insurers must: act fairly; and ensure that the policyholder is indemnified against the loss insured (as, for example, by being able to complete all necessary repairs)?'
- Insurance in Superannuation:
- Universal minimum coverage requirements? 'Should universal minimum coverage requirements; and/or key definitions; and/or key exclusions, be prescribed for group life policies offered to MySuper members?'
- Definitions: 'Should group life insurance policies offered to MySuper members be permitted to use a definition of 'total and permanent incapacity' that derogates from the definition of 'permanent incapacity' contained in regulation 1.03C of the Superannuation Industry (Supervision) Regulations 1994 (Cth)?'
- Role of RSE Licensees:
- Should RSE Licensees be obliged to ensure that their members are defaulted to statistically appropriate rates for insurance required to be offered through the fund under section 68AA(1) of the Superannuation Industry (Supervision) Act 1993 (Cth)?
- ‘Should RSE Licensees be prohibited from engaging an associated entity as the fund’s group life insurer? Alternatively, should RSE Licensees who engage an associated entity as the fund’s group life insurer be subject to additional requirements to demonstrate that the engagement of the group life insurer is in the best interests of beneficiaries and otherwise satisfies legal and regulatory requirements, including the requirements set out in paragraphs 22 to 24 of Prudential Standard SPS 250, Insurance in Superannuation?’
- Voluntary Code of Practice: ‘Are the terms set out in the Insurance in Superannuation Voluntary Code of Practice sufficient to protect the interests of fund members? If not, what additional protections are necessary?
Round 7 hearings
The seventh and final round of public hearings will focus on policy questions arising from the first six rounds of hearings (ie including superannuation and insurance). Hearings will take place between 19 November and 23 November.