Lydia Carstensen

The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 was passed by Parliament on 10 December 2020.

It covers a range of reforms, in line with the revised regulatory timetable and includes claims handling and settling services for insurance products regulated by ASIC (Claims as a Financial Service). ASIC also issued a draft information sheet on 27 November and we extract the key points for you in this article.

Key takeouts

While the definition of claims handling activity is broad, the range of providers that need an AFSL or to be an Authorised Representative is limited to those with the authority to reject all or part of a claim. Those doing only claims fulfilment or making a recommendation to the insurer, like an adjuster or investigator, do not need their own authorisation, with the insurer being responsible for their actions.

AFSL applications and AR appointments need to be in by 30 June 2021, but the authorisation requirements are effective from 31 December 2021 giving ASIC time for licensing. An AR can represent more than one AFSL holder without getting cross-approval from others, removing a potential problem.

Who must hold an AFS licence with a claims handling authorisation

What does “authority from an insurer to reject all or part of a claim” mean?

Precisely what it says. If you only have the authority to recommend, then you don’t need a licence. It comes down to decision-making authority so insurers and fulfilment providers should clarify their roles and responsibilities to avoid any unintended consequences.

How to apply for an AFS licence or variation to provide a claims handling service

ASIC’s draft information sheet is clear: “Select the elements of a claims handling and settling service that apply to you – ASIC will grant an AFS licence or variation with an authorisation that covers only those elements. In your application, you will need to specify if you are: an insurer; a member of one of the categories of person who act on behalf of an insurer and require a claims handling authorisation, or neither (in which case you will be assumed to be a claimant intermediary).

In your application, you will need to specify if you are:

• an insurer
• a member of one of the categories of person who act on behalf of an insurer and require a claims handling authorisation, or
• neither (in which case you will be assumed to be a claimant intermediary).”

Who is exempt from the AFS licensing regime

A ‘general exemption’ means that some persons who are often involved in the claims handling process do not need to hold a licence. Some examples are:

• loss assessors or loss adjusters
• specialists who are providing an expert opinion to help an insurer assess a claim (e.g. engineers, geologists, forensic accountants)
• investigators
• other ‘fulfillment providers’ (e.g. builders, smash repairers) – unless they are authorised to reject claims
• independent medical examiners
• debt collection agents, and
• superannuation trustees.

There are some specific exemptions for foreign insurers and wholesale insurers if they have an authorised intermediary. Lawyers providing legal services relating to claims handling are also exempt.

What about authorised reps?

As an AFS licensee, you can provide financial services directly or through a representative or another AFS licensee who acts on your behalf.

ARs are ‘external’ to you and would otherwise require an AFS licence with a claims handling authorisation to provide these services (e.g. a financial adviser or claims manager who handles claims on behalf of an insurer).

There are formal processes for appointing and notifying ASIC about your authorised representatives:

• Authorised representatives are your representatives by law. They may be an individual or another company (a ‘corporate authorised representative’).
• A person can be the authorised representative of multiple claims handling licensees.
• An authorised representative can ‘sub-authorise’ other people with the consent of the AFS licensee.

As an insurer, if you want another AFS licensee to be your authorised representative (e.g. a financial adviser or insurance broker), you must give them a binder.

AFS licensees with a claims handling authorisation may provide their services to multiple entities, including other AFS licensees (e.g. a claims management company which holds its own AFS licence with a claims handling authorisation and provides services to multiple insurers).

Insurance fulfilment providers are deemed to be acting on your behalf when providing services or goods to satisfy an insurer’s liability. These providers are your representatives by law because they provide claims handling and settlement services on your behalf (e.g. a smash repairer who is engaged by an insurer but who does not have authority to reject claims).

You do not need to appoint these people as your authorised representatives, and there is no process you need to follow under the Corporations Act to engage these persons to provide claims handling services on your behalf.

Other people involved in claims handling may also be acting on your behalf (e.g. loss assessors, loss adjusters, investigators). They also do not need to be appointed as authorised representatives unless they have authority to reject claims.

Providing financial product advice

Thankfully, giving a recommendation or opinion (or a report of either of those things) which is reasonably necessary as part of handling and settling an insurance claim is not providing financial product advice.

However, if you recommend how a settlement amount is to be structured or should be managed or if you recommend an insurance product, then you will be providing financial product advice.

What are your obligations as an AFS licensee?

As an AFS licensee, you must comply with the obligations in sections 912A and 912B to:

• do all things necessary to ensure that the financial services covered by the AFS licence are provided efficiently, honestly and fairly
• have adequate arrangements in place to manage your conflicts of interest
• comply with your AFS licence conditions
• comply with the financial services laws
• take reasonable steps to ensure your representatives comply with the financial services laws, unless those representatives are insurance fulfilment providers
• have available adequate financial, human and technological resources, unless you are also regulated by APRA
• maintain the competence to provide the financial services
• adequately train your representatives and ensure they are competent to provide the financial services
• have a dispute resolution system that satisfies section 912A(2) where financial services are provided to retail clients (including an internal dispute resolution system and membership of the Australian Financial Complaints Authority (AFCA))
• have adequate risk management systems, unless you are also regulated by APRA, and
• have compensation arrangements if financial services are provided to retail clients.

This is a long list and the fear is that licensees will become lost in the detail. For GI insurers my top 5 are:

1. Abide by the GI Code of Practice including following timeframes and communication standards
2. Get your dispute resolution processes sorted – see Reg Guide 271
3. Manage conflicts of interest – this includes ensuring that incentives, KPIs and remuneration arrangements do not derogate from your obligations to claimants
4. Ensure you can provide evidence of a competent, properly trained and adequately resourced workforce
5. Have robust supervision of your providers – from the selection process to training and competency requirements through to performance and ‘consequence management’.

You will need to demonstrate that you can meet these obligations when applying for an AFS licence (or a variation to an existing AFS licence) to authorise you to provide a claims handling and settling service.

As an AFS licensee, you also have obligations to ASIC under sections 912C–912E to:

• comply with ASIC’s directions to provide a statement about the financial services you provide
• notify ASIC of breaches or likely breaches of any of your obligations as an AFS licensee
• assist ASIC with surveillance checks on your compliance with your obligations
• notify ASIC of any change in control of your organisation, and
• notify ASIC if you have not started providing financial services within six months after you are granted an AFS licence.

ASIC can take enforcement action if you breach your obligations as an AFS licensee. This includes cancelling or suspending your AFS licence or imposing conditions on your licence, as well as seeking civil penalties.

Pages 11 – 22 of the ASIC Draft Information Sheet contain further details about what the obligations mean and what you must do.

A couple more specific details:

For cash settlements the requirement is to give the insured a Cash Settlement Fact Sheet which seems rather easier than a Statement or Opinion of some kind. It is only needed if the claim can be legally settled in some form other than by cash. It must contain:

• options for settlement legally available under the insurance contract (e.g. to have the insured’s product repaired or replaced, or to receive a cash payment)
• the sum insured
• the amount of the cash settlement in total and as a breakdown of each component (e.g. sum insured, emergency payments and ex gratia payments), and
• a statement that the client should consider obtaining independent legal or financial advice before agreeing to the cash settlement.

Claimant intermediaries who carry on a business of representing insured people in pursuing a claim and do so in return for any benefit (monetary or otherwise) will need to be licensed or authorised and subject to the corporations law requirements. Clearly, this will include claims preparers, ‘storm chasers’ and advisors – perhaps credit hire companies will also be regulated under this category.

Timing

How can we help

How Finity can help

At Finity we have management consultants and claims experts and can assist with:

How The Fold Legal can help

The Fold Legal has extensive experience with licensing applications and advice on claims management. Based on this experience, there are a few key take-aways to consider:

a. making a recommendation or stating an opinion in response to an inquiry about a claim or potential claim
b. making a recommendation or stating an opinion that could influence a decision about making or continuing with a claim
c. representing someone in pursuing a claim
d. assisting another person to make a claim
e. assessing whether an insurer is liable under an insurance product
f. making a decision to accept or reject all or part of a claim
g. quantifying an insurer’s liability under an insurance product
h. offering to settle all or part of a claim, or
i. satisfying a liability of an insurer under a claim.

By Raj Kanhai and Lydia Carstensen

The post Regulatory response – What you need to know about claims as a financial service appeared first on AdviserVoice.

Jaime Lumsden Kelly

Finity and The Fold Legal released an update on the Royal Commission’s recommendations into add-on insurance in July 2019.

After two separate consultation papers, Treasury has recently released:

• An Exposure Draft Bill;
• Exposure Draft Regulations;
• An Explanatory Memorandum; and
• An Explanatory Statement.

The consultation period for these draft documents ends on 28 February 2020. Assuming that there are no substantive changes to the Exposure documents, then this is what we know about the deferred sales model (DSM) for add-on insurance.

What aspects of the changes are now known?

• The deferral period begins at the later of:
  • The date the customer makes a financial commitment; or
  • The date that the seller provides the ‘prescribed information’ to the customer.

The exposure draft regulations identify when a consumer enters into a ‘commitment to acquire a product or service of a class’ for some transactions. However, this list is not exhaustive, and where a product is not on the list, the product issuer will need to determine what amounts to a commitment. The list may provide guidance in this respect, e.g. Insurance for removalists’ liability is not listed, but it may be considered analogous to the hire of a motor vehicle. Therefore, the commitment would be when the customer makes a reservation for the move or (less likely) the time at which the move actually takes place.

The content of the prescribed information and how the information must be given to ASIC has been left to ASIC to determine. Product issuers may prefer to give this information to the customer early in the process, so that the customer can consider the various products and the deferral period will trigger as soon as the customer makes a financial commitment.

• The deferred sales period is 4-5 days. The deferred sales period runs for a period of 4 days commencing on the day after the day the prescribed information is given or the financial commitment is made (whichever is later). This means if the deferred sales period is triggered at 9am on a Monday, it will end at midnight on Friday, which is practically a period of 5 business days. If it is triggered at 11pm on Monday night, it still ends at midnight Friday, which is closer to 4 business days.
• Customers cannot opt to end this period early. This means that no consumer (even a small business or savvy investor) can end the deferral period, regardless of the urgency of the need for the insurance.
• How and when customers can be contacted. Before the deferred sales period starts providers may provide information about the insurance to consumers verbally and in writing, but cannot conclude a sale. Once the period starts, information can only be provided in writing, and no sales may be concluded. If a consumer asks a question inside the deferred sales period, providers may provide answers verbally, but must contain their answers to the question asked. Once the period ends, until the date 6 weeks after the period commenced, providers may only provide information in writing, but if consumers ask for more information, providers may answer verbally and need to confine their responses to the specific question. Sales may now be concluded.

Anti-hawking

• The product seller can contact the customer for 6-weeks after the start of the 4-day period, but cannot contact the customer after the 6-week period has ended. This is because so long as the deferred sales rules apply, there is an exemption from the new hawking rules.

Exemptions

There are various powers to make exemptions, but currently the only proposed exemption is for comprehensive motor vehicle insurance.

A class of products may be exempted by Regulations (but none are presently proposed except comprehensive motor). ASIC also has the power to make exemptions, which it may choose to do itself by providing class order relief, or which it may exercise individually upon receipt of an application for relief. Relief applications will need to be made in accordance with ASIC’s Regulatory Guide 51 Applications for relief. In exercising its powers, it must have regard to:

• Any evidence as to whether the product has historically been good value for money;
• Whether there is a high risk of underinsurance or non-insurance without the exemption;
• Any evidence as to whether the product is well understood by consumers;
• Any differences between the product and financial products of a similar kind that are not sold as an add-on; and
• Any other matters that ASIC considers relevant.

ASIC has a separate relief power to exempt classes of products where ASIC considers consumers are likely to need to be covered by the products immediately.

There are a number of situations where this exemption may be needed, such as:

• Strata managers have a fiduciary duty to lot owners and this includes an obligation to protect the building by obtaining insurance. However, if strata managers are required to wait for the expiry of the deferred sales period providing strata insurance, there is a risk that they will be in breach of their fiduciary duties.
• Postal insurance, where the parcel has already been delivered by the time the deferred sales period has ended, and travel insurance, where the travel commences inside the deferred sales period, and rental car insurance where the hire has commenced (and possibly ended) inside the deferred sales period.

There is also an exemption for persons who give personal advice. The exemption for personal advice exists to avoid a double up with the best interests duty where it applies instead.

Where do the Design and Distribution Obligations fit in?

The design and distributions obligations will apply to all insurance products, including add-on products.

The Fold’s view:

Unless the DSM can be built into the sales process, product manufacturers should consider the merits of seeking an exemption from ASIC.Applicants for an exemption will need to be able to demonstrate (among others):

• Value for money;
• Significant consumer convenience and benefits; and
• Appropriate loss ratio.

Clearly stating their proposition and building a compelling case will be critical to success.

Finity’s view:

At least to some extent DDO and DSM are intended to address and mitigate similar types of consumer detriment, including poor product value. Treasury should consider the potential for overlap with DDO and which would be more likely to effectively reduce consumer detriment.We feel that the Exposure Draft documents leave some gaps and unanswered questions.  Our concerns include:

• the blanket approach with no ability to opt out
• there is still some room for uncertainty as to what amounts to a ‘commitment’, particularly for digital platforms
• for various product categories, it remains unclear as to what the best way forward will be; do the entities that provide, say, strata or landlords insurance need to change their sales model entirely or should they apply for an exemption?

Ultimately, it becomes an inconvenience if certain products cannot be purchased immediately – those of real value, such as removals insurance and travel insurance are likely to be the subject of an exemption – if they do not, there is a significant risk of underinsurance and financial loss to the consumer.

By Jaime Lumsden, Lydia Carstensen and Raj Kanhai

The post Deferred sales model for add-on insurance appeared first on AdviserVoice.

Geoff Atkins

Sale of so-called ‘add-on insurances’ has been widely criticised in Australia for some time. Here’s why:

• High pressure sales methods
• Poor value products, poorly understood
• Sometime a consumer is not even able to claim on the product
• Very high commissions for distributors
• Difficulty for buyers in making a considered decision

Regulatory scrutiny has been intense and regulatory action is well and truly underway – the extent of the customer remediation programs revealed by ASIC gives some evidence of this. However, there is still a long way to go before we have a confirmed regulatory approach to these product areas and the relevant markets have adjusted (or possibly disappeared).

What aspects of the changes are still unknown?

1. What products, distribution arrangements and customers will specific add-on provisions apply to?
2. In particular, in what situations will the deferred sales model (DSM) be required?
3. What will be the rules for the deferred sales model(s)?
4. Is the anti-hawking reform relevant and how does it interact with the deferred sales model?
5. Where do the Product Design and Distribution Obligations and the expected low value product regime fit in?

The Product Dimension – What ‘add-on insurance’ should be regulated?

Conceptually defining add-on insurance is not difficult – it is an insurance policy sold alongside a primary purchase of a product or service, including a credit product. This is not the same as saying that all such products should have extra regulation – at a detailed level the regulatory perimeter will need to be set with specificity.

The Code Governance Committee for the GI Code of Practice published a report in 2018 Who sells insurance? that identified more than 20 add-on products. An example along with our views on the potential regulatory boundaries is:

Logically, one could see circumstances where an add-on product sold through one channel does not risk consumer detriment while the same product sold through another channel could. We think it is unlikely, though, that the regulatory boundary will consider different selling situations.

Deferred sales

The extent and details of a DSM(s) is the topic of greatest immediate concern. Commissioner Hayne recommended that a Treasury-led working party develop the model “as soon as is reasonably practicable” – is this likely to take three months or three years?

In the meantime people are considering the following sources of comparison:

(a) The new (1 July 2019) Code of Banking Practice
(b) ASIC’s earlier discussions and consultations
(c) The UK models for CCI and GAP.

The Banking industry has bitten the bullet and included a series of requirements for CCI including a four-day deferred sale of CCI on credit cards and personal loans (Chapter 18 of the new COBP).

ASIC’s 2017 report into car-yard sales gave a thorough explanation of the perceived issues. A subsequent Consultation Paper 294 on DSM for motor dealers postulated anywhere from four days to 30 days deferral and possibly longer for extended warranty because the product does not give cover until other warranties have expired.

Learnings from the UK

The Treasury working group will undoubtedly look to overseas experience to guide its deferred sales model.

The UK has acted on deferred sales for two products – CCI (called Payment Protection Insurance or PPI in the UK) back in 2011 and Guaranteed Asset Protection (GAP) in 2015.

The deferral periods are seven days for CCI and four days for GAP, although the consumer can voluntarily complete the purchase after one day. There are other detailed aspects to the rules such as the information that must be given to consumers and the ability to buy the products stand-alone.

The UK Financial Conduct Authority reviewed the effects of the GAP legislative change in 2018 and came to the conclusion that under a deferred sales model:

• Customers engaged more with the decision-making process and the number of consumers who shopped around more than doubled;
• Add-on GAP insurance sales were 16% to 23% lower than previously because customers had the chance to decide whether they actually wanted GAP insurance; and
• GAP insurance prices are on average 2% to 3% lower than previously, but a stand-alone product still has an average premium less than half of an add-on product.

Other important findings included:

• The sales person still plays an important role in convincing consumers to buy add-ons like GAP (while salesperson influence dropped, it retains equivalent importance to other factors such as convenience);
• Attempts to break the point-of-sale advantage for ‘sold’ product are more likely to reduce total purchases, rather than divert consumers to the stand-alone.
• Add-on sellers play an important role in introducing the product to buyers, and standalone sellers tend to rely on add-on sellers introducing the consumer to the ‘concept’ of the insurance (in the absence of add-on sellers, the stand-alone market may be smaller and/or would need to invest more in sales).

While there is no certainty that the effects of a deferred sales model will play out in the same way in Australia, the UK results suggest that consumers experience better outcomes because they have more choice as to what they purchase and time to decide if they want the insurance.

We were surprised that the drop in sales volumes for GAP was not greater. With premiums remaining flat, we would expect the higher selling costs to have reduced margins for distributors and insurers.

There are other weapons in the regulatory arsenal

While attention is currently focused on a deferred sales model, there are other regulatory tools to deal with add-on insurance.

The anti-hawking recommendation might have a major impact on add-on sales depending on how the scope of anti-hawking is defined. It would be highly desirable that they are part of the same set of regulatory provisions rather than being independent (and possibly inconsistent) requirements.

The other important regulatory intervention for add-on insurance is the product design and distribution obligations, already legislated and effective in April 2021. Add-on products will be challenging for design and distribution obligations, and we expect will need to include a framework for assessing whether a product is of ‘low value’ to some or all consumers.

Finity’s view:

More regulation of add-on insurances has been flagged for some time and we are already into implementation, but still with many unanswered questions.

Most distributors and insurers have decided whether they see add-on insurance as part of their future business models, but for those deciding to continue there is much work ahead. The known withdrawals from the market so far seem to have been driven by reputation risk.

We expect most market participants (distributors and the specialist insurers) to adapt rather than withdraw. Selling costs will be higher (that is expenses not commission) and margins will be thinner.

DSM regulations should be applied to a narrow range of products, not all add-on insurances. Our reasons are firstly that there is a risk of onerous changes being applied that are against consumer interests rather than protecting them, and secondly that the DDO and ASIC’s Product Intervention Powers are a more nuanced set of measures that should focus directly on consumer interests.

The Fold’s view:

We agree with Finity’s view as set out above.

We also note that in our opinion, any withdrawals from the market will not take place as a result of the deferred sales model, but as a combination of other changes to the legislative environment, such as the design and distribution obligations.

We take this position because the obligations imposed under a deferred sales model are likely to be less onerous than being required to design a product for targeted markets or re-design a product to ensure that it is not unfair or is consistent with revised duty of disclosure requirements.

We think it is important for the industry to be heavily involved in any consultation on this recommendation. As there has been no prior consultation or discussion about regulating add-on insurance outside the motor dealer channel, we think it is unlikely that the regulators will have yet formed a view or have much prior exposure to the multitude of distribution channels and the differences in selling models in the market. For this reason, the industry should assist in shaping the regulation.

We also think it is appropriate for this recommendation to apply narrowly at first (ie only in relation to a limited range of types of insurance) and then gradually implemented in relation to other types of add-on insurance (as appropriate) to make it less likely that there will be unintended consequences, such as consumer detriment, from these changes.

By Geoff Atkins and Jaime Lumsden Kelly

The post Royal Commission response: Add-on insurance appeared first on AdviserVoice.

Geoff Atkins

In the last sitting week of parliament, the first piece of legislation responding to the Hayne Report was passed.

New product design and distribution obligations will apply to insurers (and underwriting agencies) from 5 April 2021 requiring them to develop and document a target market determination for each retail client product. New obligations will ensure that product sellers only provide the insurance to the target market.

The aim is to have insurers take more responsibility for the design and sale of their retail client products, to stop offering products with little to no consumer value and actively prevent mis-selling. The changes for insurers in designing their products will impact the product management function along with the compliance requirements for insurers and intermediaries.

In this note we discuss:

• The design obligations – essentially the target market determination
• The distribution obligations – conditions, restrictions and reporting

Design obligations

There are 4 new design obligations:

• to make publicly available target market determinations;
• review the target market determination as required to ensure it remains appropriate;
• keep records of decisions in relation to the design obligations; and
• notify ASIC of significant dealings in a product that are not consistent with the target market determination.

Target market determinations

A target market determination (TMD) only applies to retail clients including small businesses who acquire retail insurance products like motor and travel insurance.

The target market is determined by asking – Would it be reasonable to conclude that the product would be aligned with the likely objectives, needs and financial situation of the retail clients who form part of the target market?

Target customers must be considered holistically and insurers do not need information about individual customers. But they do need to consider the likely objectives, needs and financial situation of their target clients as a group, when developing the product and deciding how it is to be sold. This involves consideration of the key features of the product, including the benefits, risks, complexity and costs that are relevant to the target clients.

A TMD must be in writing and describe:

• the class of retail insurance clients that are the target market for the product;
• any conditions and restrictions on the sale and distribution of the product (i.e. how the product can be sold and who it can be sold to);
• the maximum review period of the target market determination (i.e. how often the product will be reviewed to asses whether it remains fit for the target market – for example every 2 – 3 years);
• the kinds of information that would trigger an early review of the target market (i.e. when the target market determination may be inappropriate including feedback from insureds) and when product sellers need to provide information to the insurer regarding the need to trigger an early review;
• the reporting obligations and reporting periods for a product seller to report to the insurer including reporting complaints information from insureds.

Other procedural and compliance requirements apply including:

• making the TMD available free of charge to the public, including superseded versions;
• mentioning the TMD in product advertising or directing clients to where the TMD is available.

Reviewing and reporting

TMDs can be reviewed or re-issued at any time but no products can be sold if a trigger event has occurred or it is likely that a product is no longer appropriate for sale. It must be reviewed at reasonable times including within the review timeframes stated in the TMD.

It is not enough to set an arbitrary or regular period (e.g. once a year) as the new laws contemplate that more regular reviews may be needed – for example where an event, factor or circumstance suggests that the TMD is no longer appropriate and the likelihood, nature and extent of the detriment to retail clients means a more prompt review is required. If a trigger event occurs, the insurer must review the product and the TMD quickly and within 10 business days of becoming aware of the event.

Record keeping and ASIC notification

Insurers and agencies making TMDs must collect and keep complete and accurate records of the decisions made and the reasons for those decisions. Records can be requested by ASIC and need to be maintained for 5 years.

If there are significant dealings in a product that are not consistent with the TMD the insurer must notify ASIC in writing within 10 business days of becoming aware. What is “significant” is not defined and will be determined on a case-by-case basis. It must be something that is “worthy of ASIC’s attention” to be significant enough to report.

Distribution obligations

The distribution obligations apply to any person who is selling or distributing a retail client product to a retail client.

Beyond the insurer, this includes AFS licensees like underwriting agencies and brokers acting under a binder, along with agents (including white label partners, authorised representatives and general insurance distributors). It does not apply to referrers or to brokers who give advice to and place insurance on behalf of the client.

A product seller must:

• Take reasonable steps to ensure their conduct is consistent with the TMD, especially with regard to restrictions or conditions in the determination
• Collect and provide to the insurer information specified by the insurer and information about complaints related to a product; and
• Notify the issuer of any significant dealings in the product that are not consistent with the target market determination.

This will require more oversight from insurers including with underwriting agencies that may have their own AFS licence and their product sellers to ensure the TMD is being followed.

It is an offence to distribute a product that does not have a TMD, or if a TMD has been withdrawn because it is no longer appropriate. A product seller has to make reasonable enquiries to identify whether a TMD has been made or if it is not required in order to avoid committing an offence.

Reasonable steps to achieve consistency

Insurers must take reasonable steps to ensure the sale of the product is consistent with the TMD. This includes taking reasonable steps to monitor the conduct of the people selling the product.

A key step for insurers is to decide whether they need to put any restrictions, conditions or special reporting requirements on product sellers. If there are none the only requirement is for the product seller to report complaints. If requirements are needed, though, there may be a need for changes to product seller contracts as well as operational systems, reporting and audit.

Deciding whether steps are “reasonable” includes assessing:

• the likelihood of whether the conduct of the product seller is consistent with the target market determination;
• the nature and degree of harm that may result from the product being issued outside the target market;
• the availability and suitability of ways to eliminate or minimise the likelihood of harm that may be caused; and
• what was known or ought to have been known about the above.

Insurers dealing with product sellers who have a poor track record of ethical and compliant sales conduct will need to do more to prevent mis-selling and promote compliance.

Collect, provide, and keep distribution information

A product seller is required to maintain complete and accurate records of the following:

1. the number of complaints that a product seller receives and the dates on which these are reported to the issuer
2. steps taken by the product seller to ensure that the product is sold in a manner consistent with the target market determination
3. the dates that the product seller reported information about significant dealings; and
4. any other information required by the insurer.

This will also give ASIC easier access to information when assessing compliance of insurers and product sellers.

Finity’s view:

For many uncontroversial insurance products (like home and motor) the changes will be limited to the processes, documentation and compliance requirements on insurers and product sellers with no discernible customer impact. TMDs will best be aligned with each PDS and it will be efficient to review the TMD each time there is a significant review of the PDS. Links with the complaints system need to established. There will of course be some increase in compliance costs.

For most add-on insurance products or those with high commissions and/or low claim ratios, the changes will be significant. The design and distribution obligations may be the most significant regulatory tool in response to the concerns about add-on insurance products and how they have been sold. We anticipate that insurers will need a ‘low value product’ framework to guide their decisions in this area and it will be a big challenge for many in the industry.

Much of the concern so far has been about the level of detail that the TMD should encompass. Finity’s view is that for most products the TMD should be simple. We suggest that all stakeholders keep their eye on the objective – to control mis-selling of low value products to vulnerable consumers.

The Fold’s view:

Insurers will need to take a more hands-on and principles-based approach to product development and distribution than they have previously. More is required than drafting a policy wording or writing a PDS, setting prices and then selling the product through a distribution channel.

Underwriting agencies and insurtechs who can leverage their client-centric focus to innovate and develop new products will easily adapt to these changes if they can also use technology to embed and monitor the compliance, review and reporting functions.

By Geoff Atkins and Charmian Holmes

The post Royal Commission response: Design and distribution obligations appeared first on AdviserVoice.

Charmian Holmes

This note discusses the Hayne Royal Commission recommendations 4.9 and 4.10 that the law should be amended:

• to provide for enforceable provisions of industry codes

• for the establishment and imposition of mandatory industry codes

• to empower the Code Governance Committee to impose sanctions for breaches of the Code.

With respect to GI, Hayne recommended that the Insurance Council of Australia and ASIC should take all necessary steps by 30 June 2021 to have the provisions of the COP that govern the terms of the contract made or to be made between the insurer and the policyholder designated as ‘enforceable code provisions’. More on enforceable provisions later.

Hayne recommended that customers should be able to seek remedies for enforceable code breaches by electing to go through EDR (AFCA) or the courts. Such breaches could also amount to a contravention of AFSL licencing conditions (by failing to comply with applicable laws).

What is an Industry Code of Practice?

Industry codes of practice (COP) aim to establish and deliver certain standards of practice and norms of conduct. They are key instruments for self-regulation. At the very least they set out the minimum standards to promote better consumer outcomes – at their highest, they can show industry leadership above and beyond what is required by law.

Financial services industries can apply to ASIC to approve a code, but historically have not done so. Of the 12 current codes in the financial services sector only two – Banking and Financial Planning Association’s Professional Practice – have been approved by ASIC.

The GI Code

The first GI COP was launched in 1994. It was one of the first codes of this nature in Australia. Members of the ICA offering products covered by the code must subscribe to it. Any other industry participants may also subscribe; on its website, the ICA encourages all general insurers to adopt the code. There are currently about 180 subscribers including many brokers and underwriting agencies as well as insurers.

The GI Code has been reviewed six times, most recently in 2017, with the final report published by the ICA in June 2018. The report contained recommendations that the next version of the COP ‘introduce new layers to the existing Code in the form of standards and guidance. This is necessary to reflect the need for industry self-regulation to commit, at times, to more than just minimum standards and create momentum for leadership in certain areas.’ So, in areas such as family violence, mental health, disclosure and add-on insurance, the report recommended that these be best addressed through best practice, non-mandatory guidance notes.

The final report was written prior to the Royal Commission, which meant that any changes needed to be postponed until after Hayne handed down his recommendations. It now means that the ICA will need to go back to the revised draft that was published last year, consult with its members and come up with:

1. Revised COP provisions, particularly in light of other legislative and regulatory changes that have either recently been instituted, in train or impending.
2. A position as to which provisions of the new COP it considers to be enforceable i.e. those that govern or are intended to govern the terms of the insurance contract made or to be made.

The industry, through the ICA, will then need to seek ASIC’s approval of the COP, including as to which provisions should be enforceable. ICA can consider whether to adopt an interim update now to take advantage of the substantial work already done.

Hayne recommended this process be given until June 2021 for all three insurance codes (Life, GI and Super), noting they are all at various stages of revision. Interestingly, he observed that the insurance codes ‘are not at the same stage of maturity (or particular specificity) as the 2019 Banking Code.’

What does the GI Code cover?

The General Insurance COP was developed after consultation with consumer groups, businesses and the insurance industry, and allows insurers to voluntarily commit to standards of conduct beyond ordinary legislative requirements. In general, the Code requires insurers to be “open, honest and fair” in their dealings with customers, and prescribes more detailed obligations around various areas of the insurance customer experience.

The main areas covered by the GI Code are the sales process, claims management, financial hardship requests and complaints handling.

The Code also establishes an oversight body known as the Code Governance Committee (the ‘CGC’), responsible for monitoring and enforcing code provisions.

Should the Code be mandatory?

If a code is mandatory you must subscribe to it in order to be in the industry. This should be simple to implement.

ASIC currently mandates that you have to belong to an approved EDR service (for retail) as a condition of having an AFSL. This could easily be extended to mandating that subscribing to an approved industry code is also a condition of having an AFSL.

Just making subscription to the Code mandatory should have no implications for those that already subscribe, whether a member of the ICA or another industry participant. It will also facilitate a more level playing field between subscribers and non-subscribers.

Should parts of the Code be enforceable?

The recommendation is that some (but not necessarily all) of the provisions of the Code should be enforceable by consumers. This means that subscribers must implement the decisions of AFCA (or the courts) or face immediate sanctions.

The RC said that enforceable provisions of the Code should include those that govern the terms of the contract made or to be made between the insurer and the policyholder. We think that making good decisions about which terms are made ‘enforceable’ is one of the keys to a successful implementation.

What we think ASIC will want

ASIC already has powers to approve industry codes, including voluntary codes. For this to occur, ASIC has previously advised that such codes must have an independent body that is empowered to administer and enforce the Code, including appropriate sanctions. ASIC has also stated that consumers must have access to IDR / EDR (for breaches resulting in direct financial loss) and the ability to complain to the independent body about any other code breach.

We think that ASIC will also want the following prior to approving any industry code:

• Prior stakeholder consultation including consumer groups
• Adequate provisions for dispute resolution, remedies and sanctions – this could potentially extend from the current ‘breach of promise’ provisions into areas such as misleading and deceptive conduct
• Most importantly, we think that provisions regarding code governance, compliance, monitoring and sanctions will need to be comprehensively addressed and strengthened.

Treasury Paper

Treasury has released a consultation paper on the enforceability of financial services industry codes. Submissions closed on 12 April 2019. The paper gives helpful background on industry codes including several that are administered by the ACCC and are of a different nature to those in financial services.

Finity’s view

We think that overall the GI Code of Practice has been an effective industry initiative over the last 25 years. In the current environment we think that making it mandatory and making it (selectively) enforceable is a good direction to take.

In responding to the Royal Commission it is our view that a desirable approach is to use the Code as a focal point for change. The advantages of this approach are:

• It remains in the self-regulatory space, even though it is not completely industry-controlled
• Maximises opportunities for stakeholder input and allows for a more nuanced implementation of Hayne’s recommendations, making it more fit for purpose
• Avoids overlaying a different regime of conduct regulation on top of an existing one
• Leaves ASIC as an escalation and enforcement player rather than a day-to-day supervisor
• Building on something that has been reasonably successful rather than creating something new.

The Fold’s view

Licensees are required to report any ‘significant’ breaches of financial services laws to ASIC. If certain provisions of industry codes apply as law, then logically breaches of those provisions will also be reportable.

Whether a breach is significant is determined on a case-by-case basis, however Licensees who consistently breach the enforceable provisions of the GI Code of Practice will be sanctioned by ASIC under the Corporations Act. The penalty regime has not yet been determined, but currently a range of civil and criminal penalties and enforcement powers apply under the Corporations Act.

It is clear Licensees will require much more stringent oversight of Code compliance to be alerted where they or their service providers breach the Code to prevent systemic failures and to manage their Licence conditions.

By Raj Kanhai and Charmian Holmes

The post Royal Commission Response: Enforceable codes appeared first on AdviserVoice.

Charmian Holmes

The recommendation to regulate claims handling as a ‘financial service’ impacts both general insurance and life insurance, although this analysis is limited to general insurance. The change may be more far-reaching in its impact for the general insurance industry than initially thought.

A government response could be quick

The government announced in February that it would move quickly on this recommendation. Treasury issued a consultation paper on 1 March seeking submissions by 29 March on how to implement this change.

It remains possible that we could see the outcome of consultation and draft legislation before the Federal election.

What is the goal of the recommendation?

Commissioner Hayne recommended that insurers should have a duty to handle claims ‘efficiently, honestly and fairly’. This is one of the core obligations imposed on AFS License holders. Because of the claims handling exemption, ASIC has had no jurisdiction to investigate unfair claims practices by insurers and third party administrators, which was raised as an issue in previous life insurance reviews. There were several case studies examined during the Royal Commission involving life insurance claims, as well as four cases of general insurance claims following natural disasters.

The goal is to apply the ‘efficiently, honestly and fairly’ obligation to claims handling and to give ASIC relevant regulatory authority to investigate and prosecute instances where this obligation is not met.

This goal can be met with modest changes to rules and practices, or it can be met with extensive changes and the consequent additional costs. This theme is explored throughout our analysis.

A best case outcome

The least disruptive and costly way of implementing the recommendation might be to:

1. Remove Regulation 7.1.33 which states that claims handling is not a financial service for the purpose of the Act. This brings in the overarching requirement to provide financial services ‘efficiently, honestly and fairly’.
2. Apply the AFSL requirements only to those with decision making authority over claims – such as insurers, third party claim managers and underwriting agents with claims authority and not regulate service providers such as loss assessors, adjustors and investigators.
3. Limit the licensing requirement to those providers who deal with retail clients. The licensees are responsible for the activities of their service providers.
4. Build the expectations regarding ‘efficient, fair and honest’ into the enforceable provisions within the General Insurance Code of Practice with AFCA responsible for first line supervision, leaving ASIC to intervene where there are significant breaches and systemic problems, by taking enforcement action (eg legal proceedings and penalties).

Unanswered questions

The ‘best case outcome’ outlined above makes assumptions regarding questions that are still unanswered including:

• How is ‘claims handling’ defined as a financial service in the Act?
• Would the requirements apply to ‘retail clients’, or a broader range of products, for example those insureds and products that are within AFCA‘s remit, including small business property risk?
• Would the obligations and AFSL requirements apply beyond the claim decision makers – to adjusters, investigators, inspectors, builders, medical experts, repairers?
• Which specific obligations will apply to claims handling – compliance systems, disclosure documents, resourcing, competence, conflicts of interest, training and the like?
• Will claims managers and officers now have to act differently with this new statutory duty to handle claims efficiently, honestly and fairly?

Defining the ‘claims handling’ activity

Treasury’s consultation paper suggests that the definition of ‘financial service’ in the Act may need to be expanded to clarify what is a claims handling activity.

The current exclusion in the Corporations Regulations specifies that the handling and settlement of claims is neither giving advice nor dealing in an insurance product. It gives specific examples:

• Negotiations on settlement amounts,
• Interpretation of relevant policy provisions,
• Estimates of loss or damage,
• Estimate of value or appropriate repair,
• Recommendations on mitigation of loss,
• Recommendation to increase limits or consider different cover options to protect against the same losses, and
• Claims strategies such as the making of claims under alternate policies.

These examples of what is currently not a financial service do not make a suitable definition of what constitutes claims handling when it is to be treated as a financial service. It may be that just the statement “handling or settlement of claims or potential claims” may be quite adequate as a definition.

Retail clients/products or all products?

As retail clients may be the most vulnerable to unethical or unfair claims decisions, there is a case for the requirement to be licensed for claims handling to be confined to retail clients/products. This would include products and clients as follows:

• Motor, home building, home contents, sickness & accident, consumer credit, travel and domestic & personal property insurance, and
• Where the policyholder is an individual or small business (up to 20 employees, or 100 if in manufacturing).

It seems unlikely, for example, that insureds holding a medical indemnity insurance product would need to be protected but this is unclear. Consumer groups may want claims handling to be regulated when dealing with some business insurance products such as fire or burglary (in line with the terms of reference for external dispute resolution by AFCA).

The requirements should not apply to motor injury insurance (CTP) or workers compensation even when these are underwritten by private insurers.

Who would the obligations apply to?

Most insurers hold an AFSL if they deal with retail clients and it is likely that they would vary their AFSL to include claim handling activities.

A third party claims administrator could manage the requirements to be licensed in one of two ways – obtaining its own AFSL or becoming an Authorised Representative of one or more insurers.

Insurance underwriting agencies (or MGAs) operating under a binder with claims handling authority that already have an AFSL are likely to vary their licence to include claims handling activities. If the regulations apply only to retail clients, this will result in consistent regulatory treatment as underwriting agencies are not required to hold an AFSL if they are acting on behalf of an APRA-regulated insurer and dealing only with wholesale clients.

Many have asked about whether service providers should be included – loss adjusters, investigators, builders, forensic accountants, medical experts, engineers, and the list goes on.

Our view is that there is no benefit in bringing any of these groups specifically under the ASIC regulatory umbrella just for their outsourced services in relation to claim handling activities. The law already makes the licensee (in this case the insurer, TPA or underwriting agency) responsible for activities undertaken on its behalf by others and we think taking this approach will keep additional compliance costs to a minimum without any detriment to consumer outcomes.

What further obligations would apply?

The Act has a long list of obligations that need to be met by an AFSL holder (and their representatives) in addition to the core ‘efficiently, honestly and fairly’ provision. These include:

• Management of conflicts of interest – this could be difficult to deal with, e.g.
  – If a claims officer suspects fraud, does the insurer have to disclose this to the claimant and when?
  – Staff KPIs that may be perceived to compromise the ability to manage claims ‘fairly’
• Comply with the financial services laws and licence conditions
• Have adequate resources to carry out and supervise activities – this could be particularly challenging when managing claims arising from cat events
• Maintain competence
• Ensure adequate training of staff and authorised representatives
• Have internal and external dispute resolution systems
• Have adequate risk management systems.

This is where a great deal of additional compliance costs could arise if all of these obligations apply to regulated claims service providers. For sales and advice businesses ASIC issues regulatory guidance and requires systems to be in place to demonstrate and monitor compliance. It is those systems that can create significant cost.

A good case could be made to not apply these more specific obligations to claims handling and instead include more specific requirements for claims handling activities in the General Insurance Code of Practice (as these provisions will be mandatory and legally enforceable under another Royal Commission Recommendation).

Is there ‘advice’ in claims handling?

Some of the other questions that have arisen based on extending the currently sales and advice rules are:

• Will there be new disclosure requirements (akin to FSG or PDS)?
• Is there a need for a ‘general advice’ warning?
• Would any claims handling activities constitute ‘personal advice’ and how should this be regulated?
• If a product terminates as a result of a claim (e.g. a total loss) does that constitute ‘disposal’ of the financial product?
• Would suggestions made about alternative products following claims constitute ‘financial advice’?

In our view it would be wrong to assume that all the obligations relevant to advice and sales would also be relevant for claims.

As an example the current law says that estimating the value of goods to be insured is not a financial service. Estimates of repair cost and values would arguably warrant the same treatment.

Finity’s view: The cost and disruption to the general insurance sector could be a little or a lot depending on how the law is changed, how ASIC rules and guidance are developed and then how they are applied and supervised in practice.

Insurers in the retail market will need to:

• Take a view on whether claims costs are likely to increase
• Factor in additional compliance expenses
• Make a commercial decision on whether to change premium rates
• Develop early warning indicators of changes in claims experience in order to respond quickly

The Treasury consultation paper brings out the question of benefits versus costs.  The consultation process, closing on 29 March, may be the last opportunity to put forward proposals (such as we outlined in our best case outcome) to achieve the desired objectives at an acceptable cost.

The Fold’s view: There will be opportunities for consumer action groups and ASIC to hold insurers more accountable if they do not change claims handling practices. This could spell the end of current practices like cash settlements following a natural disaster. A focus on protecting the most vulnerable insurance consumers is likely to prevail to temper the increased compliance and regulatory costs.

The transition to claims handling as a regulated financial service will be clearer for all industry participants after the end of the Treasury consultation process and once draft legislation is released. ASIC will also release regulatory guides and other policy guidance for claims handling services.

Anyone seeking an AFSL or to vary their existing AFSL will need to be able to demonstrate their previous experience in claims handling. At this time, it is unclear how ASIC will handle the licensing process and whether some applicants will be able to streamline their application if they already have an AFSL and have provided exempt services previously. ASIC will probably impose training requirements within ASIC Regulatory Guide 146 (RG146) but we expect it will give the industry time to comply with them (as it has done in the past).

By Raj Kanhai and Charmian Holmes

The post Royal Commission Response – Claims as financial service appeared first on AdviserVoice.