Charmian Holmes

If you are appointed to provide financial services on behalf of an Australian financial service licensee, you must enter into an authorised representative (AR) agreement. In this blog we set out some tips and traps to be aware of when negotiating this agreement.

Authorisations

Of course you should only enter into an AR agreement with a licensee who has the appropriate authorisations for the services you want to provide. Other points to consider are:

• Are you able to sub-authorise representatives? Consider who is doing what in your business – your business may require you to sub-authorise one key adviser.
• Will you need the ability to sub-authorise advisers in the future? For example, will your business expand in the future? If you don’t need this ability, it’s not necessary to negotiate to include it, however you should ensure that you have the right to vary the agreement later in case it is required.
• If you’re able to sub-authorise advisers, are you or the licensee responsible for making the notifications to ASIC? Noting that these notifications must be made within certain periods of time.

For general insurance businesses, having the ability to sub-authorise employees and contractors to provide financial services may be essential to delivery of the financial services. Provided they have appropriate training and qualifications, their appointment as ARs can be managed by the corporate authorised representative/business rather than the licensee. Licensees can set conditions about who you can sub-authorise in the AR agreement.

Don’t forget that, generally, a licensee cannot appoint another licensee as an authorised representative. However, a licensee who is an insurer can appoint another licensee as an AR if they act under a binder with the insurer. Read the blog on negotiating binder agreements^[1] if you’re considering putting one in place.

The licensee may want to vary or replace the authorisations granted under the AR agreement if the licensee is planning to revise their service offering. In this situation, if the changes no longer suit the business and would restrict your delivery of services, you may need the ability to quickly terminate the AR agreement and find a new licensee with the appropriate authorisations.

Revenue and client servicing rights

The AR agreement must be clear about the revenue allocations. It’s common for the revenue to belong to the AR but be collected by the licensee. This is because, in some cases, it has to be banked in a statutory trust account managed by the licensee, but in other cases the product issuers will only deal with a licensee. Where the licensee collects revenue earned from services provided by the AR and it is owed a licensee fee, they may deduct their fees from the revenue before remitting the money to you.

Ensure there is transparency over the amounts collected and deducted. You should be able to request information from the licensee including tax invoices and revenue statements (within reasonable timeframes).

Client servicing rights should belong exclusively to the person who has the client relationship – and this means the AR. However, if there are issues in terms of delivery of the services (for example, the AR is incapacitated, suspended or banned and cannot service the clients), this might justify a situation where the licensee may need the right to step in and advise the clients directly.

Client records – confidentiality and intellectual property

The AR agreement should contain intellectual property obligations to protect both parties’ intellectual property, including where the AR is using the licensee’s branding. Both parties should be subject to confidentiality provisions, which should at a minimum apply to:

• Intellectual property;
• Client data and transaction/advice records;
• Business and finance data;
• Trade secrets; and
• Business operations and processes.

If you and the licensee will develop products, processes, strategies and other intellectual property together, ensure there are obligations in the AR agreement that clearly set out who owns the rights in that intellectual property.

Liability

An AR agreement will include liability and indemnity provisions. Licensees will want to be fully indemnified for any losses, costs and liabilities they have arising from your activities under their licence. However, it is important to ensure that your liability under the AR agreement reflects the extent to which you caused or contributed to the loss or damage, i.e. you should include ‘proportionate liability’ principles.

Many ARs do not negotiate changes to the liability provisions and simply accept them on a ‘take it or leave it’ basis. It is possible to negotiate reasonable changes to the AR Agreement to adjust your liability position.

You should ensure that your liability under the AR agreement will be limited to a specific amount, in the event that your insurance policies will not respond. If claims for client remediation are made and they relate to advice you gave or products you sold, you may be liable for those claims without recourse to insurance.

However, you should still be liable to the licensee for specific types of losses that are within your control, for example:

• serious adviser misconduct
• dishonesty
• gross misconduct
• fraud.

Depending on your relationship with the licensee, they may ask you to be liable for other losses. For example, AFCA claims, judgements and costs of insurance policy excesses. Never agree to provide a personal guarantee for these losses, as agreeing to this could expose you to personal bankruptcy if the licensee enforces its rights to be indemnified against your business and your business cannot pay.

Termination, cessation, and suspension

Termination, cessation, and suspension are three different things but they should all be addressed in the AR agreement.

Parties should be able to terminate the AR agreement for at least three reasons:

• If a party cannot perform the agreement. For example, if a party is insolvent/bankrupt, the AR is banned or disqualified by ASIC or the licensee’s licence is suspended or revoked. For serious events like these, termination is necessary and appropriate;
• A party has breached the agreement and failed to remedy the breach within a reasonable time frame; and
• A party voluntarily terminates by giving notice in advance. This is common where an AR is terminating because they will have their own licence or they are moving to another licensee.

Suspending the agreement might be appropriate in other cases, for example where the AR’s conduct is being investigated or where the AR is unwell for a temporary period and the licensee steps in to service the clients. It is important to ensure that suspensions are not indefinite. They should run for a reasonable period and, if the suspension exceeds this timeframe, it should become a termination event for which the agreement can be terminated.

If your AR agreement is suspended or terminated because a party has been banned or lost their authorisation, the agreement should cover how the services can continue to be provided to clients:

• If the AR is banned, is the licensee able to contact the clients to service them? If not, what happens to the clients? It’s essential that they continue to receive appropriate services.
• If the agreement is terminated because the licensee loses their licence, who is responsible for notifying the clients? Can the AR work with another licensee to ensure continuity of the services for the clients?

Where the agreement is terminated for any reason, the parties must agree what happens after termination to the clients, the client data and records, confidential information/intellectual property and revenue. Non-solicitation clauses and other restraints are common in AR agreements where the AR wants to protect the goodwill in their business.

By Charmian Holmes and Rachel Hart

———

[1] In a bind? Traps in binder agreements

The post Tips and traps for authorised representative agreements appeared first on AdviserVoice.

Charmian Holmes

From 1 July, subscribers to the General Insurance Code of Practice 2020 (Code) must take extra care of small businesses and individuals who have purchased a retail insurance product and are ‘vulnerable’.

When and who does the Code apply to?

The Code launched on 1 January 2020 but most of its provisions will take effect in 2021. One exception is the vulnerability provisions, which applied from 1 July 2020.

The Code applies to subscribers and their agents. Those agents may deal with insureds at the time the policy is purchased or at other times, like when a claim is made.

What is vulnerability?

The Code doesn’t define ‘vulnerability’ but it lists factors that may cause or contribute to vulnerability such as:

• Age;
• Disability;
• Mental or physical health conditions;
• Family violence;
• Language barriers;
• Literacy barriers;
• Cultural background;
• Aboriginal or Torres Strait Islander status;
• Remote location; or
• Financial distress.

Some of these factors are static and will exist at the time the insurance policy begins, like remote location or a language barrier. Other factors may crystallize after the policy inception or may be progressive and transpire at the time of making a claim, like if the insured person’s mental health is deteriorating.

What do you and your employees need to do under the Code?

There are several things you must do when dealing with an insured person or business including:

• Recognise that their needs can change over time and in response to particular situations. This may be difficult to identify, particularly if there is limited contact between you and the insured person or business after the policy has commenced. You can manage this risk by telling those who are insured about the vulnerability provisions and your vulnerability policies and procedures, both verbally and in writing.
• Encourage them to disclose their vulnerability. This can be difficult because it requires a level of self-awareness which the individual may not have.
• Take reasonable steps to identify actual or potential vulnerability. Insurers and their agents can do this by asking specific questions during the disclosure process.
• Provide additional support at all times. Vulnerable insureds may require additional support at any point in the life of the policy, even where they have not made a claim.

You must also have internal policies and training in place to make sure your employees are aware of and recognise signs of vulnerability and can provide support to vulnerable insureds as quickly as possible. These must assist employees to:

• Understand if an insured person or business is vulnerable;
• Decide how and to what extent you can support someone who is vulnerable;
• Take an insured’s particular needs and vulnerability into account;
• Engage with the insured with sensitivity, dignity, respect, and compassion. This may include having guidelines in place to allow them to arrange additional support or referring them to people or services with specialist training and experience, like a lawyer, consumer representative, interpreter or friend;
• Work with the insured to find a suitable, sensitive, and compassionate way to proceed as early as practicable;
• Protect the right to privacy of the people you insure;
• Escalate a case internally to seek a second opinion on whether an insured is vulnerable;
• Reach a decision on whether an insured is vulnerable quickly. This includes having timeframes in place and ensuring there are no delays; and
• Have their decision challenged. Your internal dispute resolution system must enable an insured to challenge an employee’s decision.

You must also have a publicly available family violence policy.

This is a challenging area as there are many factors that can indicate vulnerability, like a pattern of delayed payments or indications of mental illness. Each business and insured person must be handled on a case-by-case basis.

By Charmian Holmes, Lydia Carstensen

The post Protecting vulnerable insureds – Not as straightforward as it seems appeared first on AdviserVoice.

Charmian Holmes

With the ongoing COVID-19 pandemic, it’s fair to say that regulators and businesses have shifted their priorities. Timelines for legislative reforms driven by the Hayne Royal Commission and licence applications for wealth businesses have changed.

APRA and ASIC licences may be delayed

APRA has announced that it will not issue any new insurance or banking licences for at least 6 months. While ASIC has said it’s ‘business as usual’ for the Australian financial services licensing process, we expect timelines to be impacted by remote working and a reduced workforce.

Regulators have changed their priorities

ASIC is prioritising challenges arising from the pandemic and regulatory change where:

• There is the risk of significant consumer harm;
• There are serious breaches of the law;
• There are risks to market integrity; or
• The matter is time critical.

Policy work on key Royal Commission reforms were to start on 1 July 2020 but these will be delayed by at least six months.¹

To help you plan, we’ve identified which changes apply now and which ones are likely to be delayed. This means you may have more time to prepare. We’ll update this blog as more information comes to hand.

By Charmian Holmes, Simon Carrodus and Lydia Carstensen

The post How Covid-19 has affected reforms to wealth businesses appeared first on AdviserVoice.

Lydia Carstensen

Regulators have shifted their priorities to deal with the COVID-19 pandemic. This means significant reforms and legislative change to general insurance may be delayed. We outline what’s changed and when you need to be ready for reform.

Licence applications are delayed

APRA will not issue any new insurance or banking licences for at least 6 months. We also expect there will be a delay to the application process for Australian financial services licences because ASIC has a reduced workforce operating remotely.

New legislation and policy work

Consultation papers for ASIC regulatory guides relating to key Royal Commission reforms are likely to be delayed until at least October 2020. Many of these changes were originally to start on 1 July 2020.

ASIC has changed its priorities

Before COVID-19, ASIC was moving forward on a range of policy and legislative reforms that arose out of the Royal Commission.

ASIC will now prioritise regulatory efforts where:

• There is the risk of significant consumer harm;
• There are serious breaches of the law;
• There are risks to market integrity; or
• The matter is time critical.

This means you have more time to plan for key regulatory reforms. We’ve identified which changes apply now and which ones are likely to be delayed. We’ll update this blog as more information comes to hand.

Initiatives likely to be delayed

We know many businesses have increased capacity at the moment. This gives you time to tackle some of these changes head on so you’re prepared when ASIC and Parliament progress them.

By Charmian Holmes and Lydia Carstensen

The post The revised reform timetable for general 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.

Disruption is only a small part of insurtech. These trends are moving the industry towards disintermediation and innovation, which will have a far greater impact.

You might think that Australia is behind the rest of the world when it comes to insurtech – but it’s not. After seeing what’s on offer in both Europe and Australia recently, I identified four key insurtech trends.

1. Data is improving insurance products

Many incumbent insurers have legacy systems that hold important data. An increasing number of startups are focused on helping insurance companies retrieve this data. With this data, insurers can place more emphasis on statistical positions rather than the personal experience of underwriters and the information they receive from the insured. These insights will help them underwrite and price risk more effectively and pave the way for more innovative insurance products.

Brisbane-based insurtech Codafication is using data to empower the industry. Awarded the DIAmond award at DIA Munich in October last year, their API plugs into existing legacy systems and pulls data out so insurers can use it. Effectively, they help insurers mine their data and manage their various databases and systems using a user-friendly dashboard interface. This is just one example of an Aussie startup helping to solve a global problem.

2. Product innovation + data + tech is king

Parametric insurance is another area where data is being used to effectively price risk. The insured doesn’t need to establish they have suffered a loss. The insurer simply pays a claim when a defined event occurs. While parametrics won’t suit every scenario, they’re a useful client-centric alternative if data can be used effectively to get the pricing right.

Several companies in the UK are already using parametric insurance. FloodFlash uses a water depth measure in a property to calculate when to pay out a claim for flood. While Setoo provides a platform allowing insurers to design on-demand parametric insurance like a policy that pays out if it rains while you’re on holiday.

In Australia, Audemus Risk (2018 Fintech Startup of the Year winner) is using data mining, telematics and IoT in conjunction with parametrics to deliver a solution for business interruption and supply chain risk. Currently beta testing, they use a clever combination of business risk assessment tools that are data and technology driven.

Some products are also using big data analytics to price risk in real time. In the UK, Flock offers insurance for commercial drones that can be switched on and off depending on when the drone is being used. Precision Autonomy, who has partnered with QBE, is offering a similar product in Australia.

3. Digitisation is changing the value chain

The insurance industry currently has a crowded value chain – brokers, underwriters, reinsurers and insurers all take a cut. This can add up to 40% to the cost of insurance. New participants and non-insurers, like Amazon and Alibaba, are cutting this value chain to pieces and delivering significant savings to consumers. They’re doing this by building great digital platforms where people can buy insurance for less. We’re already seeing this in motor, home and travel insurance, and there are opportunities in the B2B space as well.

Blockchain is also providing new ways for businesses to manage risks more efficiently. Championed by shipping giant Maersk, Insurwave uses a private blockchain to report the real time location of ships as they move around the world. Maersk can now manage its risks by either redirecting ships or buying additional cover.

In Munich, the insurance community has come together to build a private blockchain through B3i. This initiative brings together 38 brokers, reinsurers and insurance companies who are exploring how to use distributed ledger technologies. This initiative has the potential to revolutionise the way insurance is transacted at the high end of the market.

In Australia, blockchain hasn’t captured the imagination of the insurance community (yet) but the rise of platforms is certainly beginning to dis-intermediate the value chain. Evari offers an end-to-end dynamic platform to build and launch insurance products. Whilst CoverGeniusoffers a digital product design and build solution and claims management platform known as X API and X Claim.

4. Machine-based learning and AI are improving data extraction

There are many solutions entering the market that leverage machine based learning and artificial intelligence to improve accessibility to data. The technology lets insurers extract data so they can better understand risk and improve how they manage their claims. Data can be extracted from documents, emails and other sources of information that they maintain. This is empowering insurers to martial their data in a meaningful way using AI.

The Australian market leader in AI is Flamingo. They’re working with a range of US health and life insurers to develop their cognitive virtual assistants. AI like this will dramatically change the landscape for customer and service interactions and transform the call centre environment. AI can also improve regulatory compliance by assisting many Australian insurers to face the challenges of reviewing and regulating point-of-sale processes. This includes giving advice on claims and insurance.

Call centres may not disappear altogether in the short term. While there’s a need for customers to speak to a human there will continue to be a compliance risk. Using clever AI and tech like the system offered by Ksndra will help support insurers to manage their regulatory risks from human interaction.

The customer is leading the charge

These new trends in insurtech are being driven largely by the customer. People want a better experience and insurtechs want to deliver it for them. While this has the potential to democratise the industry, I don’t think the insurance industry will have its disruptive Uber moment until customers can own their own data. Australia is currently implementing open banking reforms but a similar movement in the insurance industry doesn’t appear to be on the cards.

Disruption is only a small part of insurtech. These trends are moving the industry towards disintermediation and innovation, which will have a far greater impact. But rather than breaking the industry, startups need help from the incumbent community. This is because they still face many of the industry’s barriers to entry. Startups want to test their technology within the industry and are open to collaborating with incumbents to do this. Over the next period, I predict we’ll see more collaboration between insurers, reinsurers and technology startups. They will all become ‘tech-enabled’ – effectively every insurance business will become an insurtech.

By Charmian Holmes

The post Four emerging trends in insurtech appeared first on AdviserVoice.

Charmian Holmes

Currently insurers are not permitted to offer financial products for issue or sale to retail clients in the course of or because of an unsolicited meeting at all, or in the course of a telephone call unless they have met certain requirements.

The result is that there is virtually no cold-calling in general insurance because of the onerous compliance requirements under the current anti-hawking laws.

What does unsolicited mean?

The term ‘unsolicited’ is not defined in legislation, however in ASIC’s Hawking Guide (Regulatory Guide 38) they have adopted the view that a meeting or telephone call is unsolicited unless it takes place in response to a positive, clear and informed request from a consumer. Hayne has recommended that this definition be legislated.

The Hawking Guide also provides detailed guidance on when a positive, clear and informed request has been made.

There is no reason to believe that this guidance would be abandoned, and in fact, Hayne agreed that the law should work as described by ASIC. The guidance explains when discussing a financial product will be within the scope of a consumer’s request by reference to the consumer’s actual words, previous dealings with the offeror, and what a reasonable person would expect to discuss.

Impact for the general insurance industry

Professional insurance advisers such as brokers are unlikely to be significantly affected by changes to anti-hawking laws. Most offers of insurance that they make are solicited or would be solicited because of their previous dealings with clients, the nature of their engagement, and the fact that a reasonable person would expect to discuss a wide range of insurances with their broker.

Where a consumer deals with an insurance agent, it may be more difficult to offer an alternative product unless it was within the scope of the consumer’s initial request or reasonable to expect that that product would be discussed. This might occur where it is clear the insured is enquiring about the wrong kind of product for the risk, for example, the insured is enquiring about personal accident cover in circumstances where it is apparent life insurance or total and permanent disability insurance would provide better outcomes. That said, agents and insurers are already challenged in cross-selling in this way because they cannot tell the client what is best or appropriate for them.

On the other hand, an enquiry to an insurer or underwriting agency about building insurance which moves into a discussion about contents insurance is unlikely to breach anti-hawking laws because these two products are closely related—and arguably, one and the same in the consumer’s mind.

Examples of hawking

It seems more likely that the restrictions will draw additional scrutiny to sales situations where a consumer is offered one type of financial product in the course of a meeting or call to discuss something else. Practices which already exist in the industry may now be re-examined to determine if the meeting truly is solicited. Some sales models may need to be adjusted to more clearly demonstrate that the consumer has made a positive, clear and informed request:

• Cross-selling insurance on referral – An insurer offers consumer credit insurance to homebuyers. The insurer contacts those consumers through referrals from a third party mortgage broker. The consumer is made aware by their mortgage broker that they will be contacted, however the contact is initiated by the insurer. This will be hawking without positive, clear and informed consent from the consumer.
• Selling insurance as an add-on to other services – A vet offers pet insurance to pet owners who come in for a consultation regarding their pet. When the appointment is made, the vet does not make the pet owner aware that they will be offered pet insurance or that they will discuss pet insurance to cover future fees. This will be hawking without positive, clear and informed consent from the pet owner.
• Up-selling insurance – A tradie applies online for motor vehicle insurance for a ute and is contacted by the insurer’s call centre to complete their transaction. In the course of the call, the insurer offers the additional option of extending the policy for a privately owned vehicle. This is likely to be hawking without positive, clear and informed consent from the tradie. If the insurer asks if it can assist with private motor insurances and the tradie consents, this is not hawking.

Digital and email offers

Current anti-hawking laws do not apply to unsolicited emails and digital offers. Hayne’s recommendation refers to “meetings, telephone calls and other contact” and it is unclear what “other contact” might include. Arguably, it could extend to other forms of contact such as emails and digital messages. However, it appears unlikely this is the intent because such digital forms of contact do not cause the consumer detriment (for example, digital/online sales with opt-ins, chat bots, SMS messages, and emails). Any suggestion that anti-hawking laws should be extended to these more passive forms of contact should be vigorously challenged.

What will the changes be post-Royal Commission?

Realistically, the practical application of the anti-hawking laws are unlikely to substantively change, because the main recommendation is for ASIC’s guidance to now be enshrined as law. The approach is not therefore changing, it will merely carry the full weight of the law.

The biggest changes are:

• Telephone sales will now be dealt with identically to unsolicited meetings; and
• There may be renewed scrutiny of general insurance in add-on contexts. The question of whether the meeting is “solicited” for the purposes of offering the financial product has historically been given cursory consideration, and licensees will discover they need much more rigour in their sales process to obtain “positive, clear and informed” consent.

Strong industry consultation will be necessary to strike the right balance between protecting consumers and allowing a convenient and helpful offer of insurance products to consumers. The sales method and the capacity in which someone acts (whether as adviser or seller) are important considerations which should not be overlooked during the consultation process for the new laws, and more passive forms of contact which cannot, by their nature, involve pressure selling, should be excluded, such as online sales.

Leading consulting firm, Finity, have assisted with the preparation of this blog by discussing the issues with us and challenging our views. Whilst we appreciate Finity’s input, The Fold is responsible for this communication and the views expressed are our own.

By Charmian Holmes, Solicitor Director, Brisbane, and Jaime Lumsden Kelly, Solicitor Director, Sydney

The post Royal commission response: Anti-hawking 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.

Now that the hype cycle has almost reached full circle, we’re seeing a trend away from “unregulated” tokens and ICOs.

ASIC has recently stopped a number of retail initial coin offerings and token generation events (ICOs), has taken action in respect of a completed ICO and has even issued a stop order on a PDS for a crypto fund.

ASIC’s two key concerns – misleading and deceptive information in the materials used to market the ICOs and breaches of the financial services laws – have repercussions for anyone thinking about working with crypto assets in Australia.

If a crypto asset is a “financial product” under the Corporations Act, a raft of regulatory requirements will apply to not only the ICO, but also to anyone broking the token or listing it on an exchange. So unless you understand and can comply with these requirements, take care to ensure that the crypto assets you deal in are not financial products.

This isn’t always black and white; legal analysis is often required. Our September 2017 blog Global Regulation of ICOs explored typical crypto financial products. Since then, we’ve analysed some interesting crypto-assets and services, including:

• Value of the token tied to the price of gold or an interest rate – likely to be a derivative
• Token attached to a loan – likely to be a debenture
• Token backed by an asset like gold – likely to be a debenture
• Token issued as a reward for repaying a loan or making a loan to someone else – likely to be debentures
• Crypto purchasing service – if it only deals in crypto assets that are not financial products, no financial service is provided.

Tokens don’t always fit neatly into the financial product categories; many are hybrids and exemptions are available in some cases.

Here’s a quick list of things to look out for – if one or more of these features are present, the token is likely to be a financial product:

• Token issuers can buy back the coin
• Token holders have rights to profits of the enterprise
• Tokens are backed by an asset or commodity
• Tokens can be converted into another asset
• Investors have a right to receive profit now or at a later date
• Investors have the right to buy or sell the coin in the future
• A ‘smart’ or self-executing contract is embedded in the design of the token
• Tokens can be converted into shares or equity
• Tokens holders are lending money and can expect a repayment of the money
• Investors are pooling resources to invest in the token

Businesses who don’t identify whether the tokens in which they deal are financial products and prepare to comply with the relevant requirements early on, may:

Find that timelines for any ICO will change significantly;

• Have issues finding exchanges and markets who can support secondary sales of the token; and
• Face penalties or the risk that the offering will be shut down by ASIC – which could adversely impact your ability to raise funds and damage your reputation.

So it’s wise to get advice at the outset. It’s also a good idea to speak to ASIC directly, even if the tokens in which you deal aren’t financial products as ASIC is now responsible for all ICOs and businesses dealing in crypto assets.

By engaging with ASIC’s Innovation Hub, you can benefit from their insights and show them that you’re a responsible operator.

Your meeting with ASIC will go better if you demonstrate that you know what regulatory obligations apply to your token and/or service. For example for tokens that are financial products:

• The token will need a disclosure document such as a Product Disclosure Statement or registered prospectus or offer document;
• Token issuers and/or businesses who arrange for the issue will need an AFS licence;
• Broking services who deal in the token will need an AFS licence; and
• Exchanges who list the token will need a financial markets licence.

Now that the hype cycle has almost reached full circle, we’re seeing a trend away from “unregulated” tokens and ICOs. Reputable token issuers recognise the advantages of operating in a regulated market, for promoting investor confidence. And it’s usually cheaper to comply from the outset than to deal with regulatory intervention at a later date.

By Charmian Holmes

The post Why ASIC is stopping ICOs appeared first on AdviserVoice.

From 28 September 2017, a new source of capital will become available to unlisted businesses.

From 28 September 2017, a new source of capital will become available to unlisted businesses – funding by the ‘crowd’.

That’s you and me, mums and dads, and of course, the usual suspects – high net worth and institutional investors, who have previously had these investment opportunities pretty much to themselves.

How’s it happened?

Essentially, a ‘lite’ capital market has been established by creating a new category of financial service – a ‘crowd-sourced funding service’.

It’s pretty simple; ASIC will now administer a new type of financial services licence which needs to be held by companies who operate a ‘platform’ on which crowd-source funding offers are made. They’re called a crowd-sourced funding intermediary.

If you’re thinking of operating a crowd-sourced funding platform, don’t rush out and apply for a licence just yet – ASIC’s not accepting applications until after 28 September 2017. It is however, preparing guidance in preparation for the new regime.

Who can raise funds?

Australian based, public unlisted companies who are limited by shares and have a majority of their directors residing in Australia and annual consolidated revenue or gross assets of less than $25 million will be able to raise up to $5 million each year.

Politics permitting, the regime will shortly be extended to 2 director proprietary companies – by not counting crowd-sourced shareholders in the non-employee 50 shareholder limit. They’ll be exempt from the takeover rules if their constitution includes exit protection requiring anyone who acquires more than 40% of the company to offer to buy out all the remaining shareholders.

NB: Pure investment companies can’t use the regime – they’ll need to either list on a stock exchange or operate as a managed investment scheme.

Who can invest?

Both retail and wholesale clients can invest through the crowd sourced funding regime – but retail investors are limited to $10,000 per annum in each company and have the protection of a 5 day cooling off period.

How it’s done

The process is broadly similar to other types of fundraising, just simplified somewhat. Let’s run through the process . . .

Offer document – Companies who want to raise capital prepare an ‘offer document’. Although the regulations establishing the content requirements for these are not in final form, it’s likely that they will need to contain information about the company raising capital (including its capital structure and financial position), the nature of the offer (including the types of shares and the min and max amount sought) and how the funds will be used.

To protect investors, the offer document will contain information about any adverse history of the company or its directors (such as criminal or civil offences, disqualifications, banning or court orders and insolvency). It will also contain a risk warning and information about investor’s rights, including the 5 business day cooling off period, obligations to audit accounts, hold annual general meeting and the like.

Consents – All the existing and proposed directors and anyone who has provided information contained in the offer document (or on whose information the document relies) must consent to its publication.

Vetting – The crowd-sourced funding intermediary responsible for the platform on which the offer document is to be published must vet the document to a ‘reasonable standard’ (i.e. using reliable and independent documentation).

This requires them to ensure that the company is eligible to offer funds to the crowd (see above) and that the offer document contains all the required information. They’ll also need to check the name, ACN and addresses of the company (and any individual associated with the company who has an adverse history).
Publication – Once all the checks are complete, the offer document can be published on one crowd-sourced funding platform. The platform must prominently display information about applicants’ rights to withdraw their applications, the responsible intermediary’s fees and information about any interest the intermediary has or expects to acquire in the company.

Offer period – Crowd-sourced funding offers must be open for the lesser of 3 months, the time specified in the offer or when they are fully subscribed. The company can request the offer to be withdrawn any time.

The responsible intermediary is required to ensure that the offer opens and closes at the right times. They must suspend or close the offer if they become aware that the offer document is defective, e.g. because required information is omitted or changes have occurred that need to be included in it. If changes do occur, a supplementary offer document can be provided.

Transparency – Once of the key attributes of the crowd-sourced funding regime is its transparency; achieved by requiring the responsible intermediary to provide a communication facility on the platform. This enables information and questions (and answers) relating to the offer to be posted by applicants and the company during the offer period for all applicants to see.

Applications – Applicants must acknowledge that equity crowd funding is risky and that they may not be able to sell their shares, the value of their investment could dilute or be lost entirely and that they can bear that loss without undue hardship.

Managing applications – The responsible intermediary receives all applications and application money which is kept in a trust account pending finalisation of the offer.

Closing the offer – If the minimum subscription amount is achieved, the responsible intermediary must pay the funds raised to the company (after deduction of its fees) as soon as practicable.

If the minimum is not raised, the application money must be repaid to applicants.

Sounds simple. And it is, but as always, the requirements are quite detailed and there are traps for the unwary. So until the regime is better established, it will be wise to get legal signoff on offer documents.

Reporting and governance

Both public and proprietary companies who crowd-source funding will need to adhere to changed reporting requirements and governance standards. The requirements will be different for each. Companies will be well advised to compare the pros and cons of a public v proprietary structure – but that’s a subject for another blog!

To apply for a crowd-sourced funding licence, or to get ready to crowd source some capital, contact The Fold Legal. We’ll be happy to help.

By Lydia Carstensen and Charmian Holmes

The post Crowd sourced equity funding – a quick primer appeared first on AdviserVoice.