How do we know this?

Well, ASIC’s modus operandi is to first investigate potential regulatory issues within big targets – where misconduct is widespread and evidence is easy to find. This serves as a learning exercise, helping ASIC to ascertain the nature and scale of misconduct, and what to look for.

Investigation complete, ASIC generally releases a report on its findings and concerns. You’d expect that diligent compliance teams would read those reports, look within for similar problems, notify ASIC of any breaches and start a clean-up.

That’s what ASIC hopes for too. But, if no one falls on their swords – and the past few years have demonstrated how reluctant licensees are to do so – ASIC brings out the big guns of enforcement.

Naturally, they’ll start with the big AFSLs, who’ve proven to be easy to make examples of.

But here’s the rub. By the time that work is nearing completion, ASIC has a template for investigating smaller players. They know what to look for, where to find it, what questions to ask – and they have a standard methodology for doing so.

It goes like this:

• Require the AFSL to provide a list of clients and information about the advice provided to them in the form of a spreadsheet (a s912C notice).
• At the same time, require production of policies and procedures dealing with the area of concern (a s33 notice).
• Having reviewed all this, ASIC then request and review a curated sample of past files (a s33 notice).
• If their concerns are borne out, some recent files may be requisitioned to see if any improvements have occurred – hoping that, by now the firm’s compliance team will have acted on the report (another s33 notice).
• An optional next step is a s19 examination, where ASIC brings the CEO or other senior managers in for questioning.

If ASIC finds breaches which haven’t been voluntarily reported, enforcement action will follow, as night follows day.

So reading the tea leaves to be found in ASIC’s Corporate Plan for 2017/18 to 2020/21, its Enforcement Outcomes report for Jul-Dec 2017 and the carnage emerging from the Royal Commission, here’s a snapshot of what non-bank financial planners, accountants and life advisers should be looking for in their businesses – because if you don’t ASIC will!

• Charging fees for no advice. So far, over 27,000 customers have received a refund of fees charged for ongoing services that weren’t provided. ASIC estimates at least 150,000 more refunds will be required, demonstrating that the problem can’t be limited to the banks! This means that selling grandfathered investment trail commission books must be a thing of the past – even if the government doesn’t legislate to end grandfathering.
• Life insurance churning and inappropriately recommending super money be used to pay for life premiums – ASIC now receives regular exception reports on high lapse rates from insurers, from which they’ve become highly adept at detecting bad practices.
• Failing to consider whether clients’ existing products will meet their objectives before recommending replacement – the minimum standard requires financial modelling of both options and a clear case for change, all of which is clearly explained in the SoA.
• Inappropriately recommending SMSFs – it’s not just low balances that ASIC is concerned about – client financial literacy and willingness to manage the responsibilities inherent in an SMSF are just as important.
• Recommending services that clients don’t need or don’t value – these could include platforms or simply high ongoing service levels.
• Recommending in-house financial products to generate extra revenue when there’s no additional benefit for the client. Vertical integration isn’t limited to banks. Advisers who operated MDAs or SMAs run all the same risks. We’ll blog more on what good vertical integration looks like shortly.

In the second half of 2017, ASIC’s enforcement actions resulted in criminal penalties, civil remedies, enforceable undertakings and administrative action, demonstrating the breadth of its powers. Indeed, ASIC has banned over 100 financial advisers in the last three years alone.

If you’re not sure whether your business is at risk, or if you receive an ASIC notice, it’s best to get on the front foot.

By Claire Wivell Plater

The post SME planners, accountants and life advisers next in line for ASIC scrutiny appeared first on AdviserVoice.

Claire Wivell Plater

Although recent ASIC enforcement action and the Royal Commission have predominantly focused on the major banks and AMP, it would be foolhardy to assume that non-bank advice firms are not a focus. Patterns emerging teach us that you are the next focus.

How do we know this?

Well, ASIC’s modus operandi is to first investigate potential regulatory issues within big targets – where misconduct is widespread and evidence is easy to find. This serves as a learning exercise, helping ASIC to ascertain the nature and scale of misconduct, and what to look for.

Investigation complete, ASIC generally releases a report on its findings and concerns. You’d expect that diligent compliance teams would read those reports, look within for similar problems, notify ASIC of any breaches and start a clean-up.

That’s what ASIC hopes for too. But, if no one falls on their swords – and the past few years have demonstrated how reluctant licensees are to do so – ASIC brings out the big guns of enforcement.

Naturally, they’ll start with the big AFSLs, who’ve proven to be easy to make examples of.

But here’s the rub. By the time that work is nearing completion, ASIC has a template for investigating smaller players. They know what to look for, where to find it, what questions to ask – and they have a standard methodology for doing so.

It goes like this:

• Require the AFSL to provide a list of clients and information about the advice provided to them in the form of a spreadsheet (a s912C notice).
• At the same time, require production of policies and procedures dealing with the area of concern (a s33 notice).
• Having reviewed all this, ASIC then request and review a curated sample of past files (a s33 notice).
• If their concerns are borne out, some recent files may be requisitioned to see if any improvements have occurred – hoping that, by now the firm’s compliance team will have acted on the report (another s33 notice).
• An optional next step is a s19 examination, where ASIC brings the CEO or other senior managers in for questioning.

If ASIC finds breaches which haven’t been voluntarily reported, enforcement action will follow, as night follows day.

So reading the tea leaves to be found in ASIC’s Corporate Plan for 2017/18 to 2020/21, its Enforcement Outcomes report for Jul-Dec 2017 and the carnage emerging from the Royal Commission, here’s a snapshot of what non-bank financial planners, accountants and life advisers should be looking for in their businesses – because if you don’t ASIC will!

• Charging fees for no advice. So far, over 27,000 customers have received a refund of fees charged for ongoing services that weren’t provided. ASIC estimates at least 150,000 more refunds will be required, demonstrating that the problem can’t be limited to the banks! This means that selling grandfathered investment trail commission books must be a thing of the past – even if the government doesn’t legislate to end grandfathering.
• Life insurance churning and inappropriately recommending super money be used to pay for life premiums – ASIC now receives regular exception reports on high lapse rates from insurers, from which they’ve become highly adept at detecting bad practices.
• Failing to consider whether clients’ existing products will meet their objectives before recommending replacement – the minimum standard requires financial modelling of both options and a clear case for change, all of which is clearly explained in the SoA.
• Inappropriately recommending SMSFs – it’s not just low balances that ASIC is concerned about – client financial literacy and willingness to manage the responsibilities inherent in an SMSF are just as important.
• Recommending services that clients don’t need or don’t value – these could include platforms or simply high ongoing service levels.

Recommending in-house financial products to generate extra revenue when there’s no additional benefit for the client. Vertical integration isn’t limited to banks. Advisers who operated MDAs or SMAs run all the same risks. We’ll blog more on what good vertical integration looks like shortly.
In the second half of 2017, ASIC’s enforcement actions resulted in criminal penalties, civil remedies, enforceable undertakings and administrative action, demonstrating the breadth of its powers. Indeed, ASIC has banned over 100 financial advisers in the last three years alone.

If you’re not sure whether your business is at risk, or if you receive an ASIC notice, it’s best to get on the front foot. Having helped many financial advice firms with breach and enforcement matters, The Fold’s regulatory experts can assist you to do so. Contact us, we’re always happy to help.

By Claire Wivell Plater

The post SME Planners, Accountants & Life Advisers Next In Line For ASIC Scrutiny appeared first on AdviserVoice.

Claire Wivell Plater

ASIC’s new fee and levy structure, introduced on 1 July 2017 means that users now pay for most of the regulator’s costs. As of June this year, you’ll need to start providing information to ASIC about your business so they can calculate your levy.

Different payment methods and calculations will apply to each industry sector you’re in. ASIC has released indicative levies for about 80% of affected businesses, but not most credit and financial services providers who will need to wait until November 2018 to find out what you’ll be paying for this year.

How will it work?

Here’s what AFS and Credit licensees will need to do this year:

• June 2018: ASIC will send a key to enable you to login to their new Regulatory Portal. Follow the instructions when logging in.
• July to September 2018: Provide ASIC with business activity metrics through the new portal. Penalties will apply if you don’t.
• November 2018: Calculate how much you’ll need to pay based on the ‘legislative instrument’ that ASIC will publish.
• January 2019: ASIC will send you an invoice for the 2017/18 financial year. Pay your invoice within 30 days to avoid a penalty.

You can find out more information about this user-pays system here.

By Claire Wivell Plater

The post It’s time to pay up – AISC’s new funding system appeared first on AdviserVoice.

Claire Wivell Plater

In the past 2 months, waves of information have rolled in from global regulators about the legal status of ICOs – welcome news to the blockchain community which has been labouring in a sea of uncertainty.

Following the early lead of the US Securities & Exchange Commission, regulators in Ontario, Canada, Hong Kong, Singapore and as recently as 28 September 2017, our own ASIC are taking a broadly consistent approach.

While China has bucked the trend by banning ICOs for the time being, these regulators have clarified that they will regulate ICOs within existing legal frameworks, which will depend on the underlying features of the token.

This means that pure cryptocurrencies such as bitcoin and ethereum will generally not be regulated – although their uses may be, e.g. if they’re used as a payment facility. Other types of tokens could be one of a number of financial products, depending on the rights that attach to the token.

Which financial product is my ICO?

Using Australian terminology, the financial product categories and their implications are:

• Shares – if the rights attaching to a token are similar to those which commonly attach to shares, such as ownership of the company, voting rights in the decisions of the body, entitlement to share in future profits through dividends, or a claim on the residual assets of the company if it is wound up, the token is likely to be a share.
• Managed investment scheme – if the proceeds of the token sale are pooled to produce a return or an interest in an asset and the token holders have no control over the way in which the enterprise is managed, the ICO is likely to be a managed investment scheme. This could apply even if the token issuer markets the entitlements of token holders as receipt of a purchased service, if it has the characteristics of an investment.
• Debenture – if the ICO is used to create a loan by token holders to the issuer, the token is likely to be a debenture.
• Derivative – a token that offers a return based on factors such as the movement of an asset price in a certain direction before a certain time or event, is likely to be a derivative

So if you’re planning an ICO, you’ll need to:

• Carefully examine the characteristics of your token
• Analyse which type of financial product it is, and
• Ascertain and comply with the regulatory and licensing obligations that apply to the ICO

What about ICO issue and trading facilities?

Businesses facilitating ICOs and secondary trading of tokens that fall into any of the above categories are likely to be operating a market.

It’s unlikely that the crowd sourced funding regime will suit ICOs, due to the limits on the amounts that can be raised, amongst other restrictions. A markets licence will be needed.

Until recently, markets licences were highly regulated and challenging to obtain and maintain. However Australia has recently introduced a second, and more lightly regulated tier of markets licences, to facilitate more innovative and nimble market venues.

Similarly exchanges or other businesses that facilitate ICOs and token trading will need to:

• Analyse the tokens they’re facilitating to determine what type of financial product they are, and
• Ascertain and comply with the regulatory and licensing obligations that apply to their services.

Almost 9 years from initial release of the first Bitcoin whitepaper, cryptocurrencies and blockchain have evolved considerably and are likely to continue to do so. It’s now clear that like any other technology, regulators will regulate its uses, not the underlying technology, which is entirely appropriate.

The key message for startups looking to raise funds through an ICO is – be careful! Regulators are now watching – in many jurisdictions. You’ll need to understand and comply with the regulatory requirements in each jurisdiction in which you propose to promote your ICO. The requirements are complex.

Remember, the old saying – a person who acts for himself has a fool for a client!

By Claire Wivell Plater

The post Global regulation of ICOs appeared first on AdviserVoice.

Simon Conroy is a senior investment and banking professional whose previous roles include Head of Investment Strategy and Head of Private Markets at the Macquarie Group, where he served for more than a decade.

“Ignition Wealth continues to expand our leadership team. The appointment of Simon Conroy as Chairman of the Ignition Wealth Investment Committee is part of our ongoing commitment to drive the business forward,” said Mark Fordree, CEO, Ignition Wealth.

Simon Conroy joins several financial services leaders at Ignition Wealth. Industry veteran Peter Meurer serves as Chairman of the Board of Directors, while Tom Pockett, Claire Wivell-Plater and Peter Oakes are all members of the Ignition Wealth Advisory Board.

The post Ignition Wealth appoints Simon Conroy as Investment Committee Chair appeared first on AdviserVoice.

Claire Wivell Plater

How time has flown! We’re 6 months into the revised MDA services framework, but what with Christmas and all, we’ve not seen much evidence of MDA providers changing their processes.

But the first deadline – for full service MDA providers – is approaching, people. It’s time to get your skates on!

Here’s the first of 4 blogs – this one looks at what full service MDA providers and financial advisers who recommend those MDA services need to do before 1 October 2017.

NB: MDA providers who operate through a regulated platform have another 18 months before they need to operate in line with the changed requirements. But because you need to apply for a licence variation and it can take up to 9 months for variations to be processed by ASIC, you’d be well advised to start soon.

By Claire Wivell Plater

The post MDA changes – what, when and who? appeared first on AdviserVoice.

Digital financial advice has the capacity to introduce rigour and excellence into client servicing.

Australia has the one of the strongest regulatory environments in the world. “Operating under the Australian regime automatically provides confidence to investors and consumers. Most importantly ASIC regulates towards consumer-first best practice and we embrace that,” says Ignition Wealth CEO Mark Fordree.

Since July 1, 2013, the best interests duty and related obligations to manage conflicts have become an important part of every financial advice business, recognising that advisers owe fiduciary duties to their clients. Digital advice brings 21st century technology to this age old principle.

Digital financial advice has the capacity to introduce rigour and excellence to the three key requirements of the best interest duty: ensuring that the adviser acts in the client’s best interest, provides advice that is appropriate and prioritises the client’s interest over the adviser’s interest.

Acknowledged as a leading fintech regulatory expert, Claire Wivell Plater is Managing Director of The Fold Legal and a member of Advisory Boards for three Australian fintechs: Red Marker, HashChing and Ignition Wealth. Claire’s industry experience is unrivalled, she is a member of the Federal Treasurer’s FinTech Advisory Group and a long standing member of the Business Advisory Committee to ASIC’s Licensing Division. The Fold Legal is also Honorary Legal Counsel to Fintech Australia.

Claire embraces regulation, believing that she can help businesses to integrate with compliance in a light, elegant manner, focussed on the underpinning requirements for trusted advice – honesty, efficiency and fairness.

Drawing on her extensive experience, Claire believes that far from being adversarial, licensed businesses need to develop collaborative relationships with their regulators, to create outcomes which support the philosophy of regulation and most importantly benefit the consumers they both serve.

Claire is a champion of the fintech industry, with over 35 Australian fintech businesses now advised by The Fold Legal. Fintech businesses are drawn to Claire because she understands the intersection of technology with law and regulation and is exceptionally well networked with people who can help the business. With a strong reputation, Claire has an ability to open the right doors for her clients, and also add gravitas to their brand.

Claire says, “I have always acted for entrepreneurs. I’m drawn to their spirit of innovation and thinking outside the box. I find emerging fintech players to be altruistic; seeking to shake up established players for the benefit of the consumer. And I have always been a connector; I am always thinking who can I introduce to whom. It’s an enormous privilege to be asked to work with businesses I can add that to.”

As a result of her involvement with entrepreneurial businesses, Claire knew that the regulatory knowledge and experience held by The Fold Legal could be of great benefit to the fintech startup community.

Claire says, “I could see business opportunity of course, plus an opportunity to contribute to the innovation boom sweeping Australia. Startups are exciting, often staffed by young, highly intelligent people who are looking to radically change financial services. They’re at the cutting edge of regulation and consumer protection – which is exciting for us as lawyers.”

In her various roles, Claire performs a vital role interpreting the needs, ideas and innovations of the industry , identifying where change could facilitate the fast emerging sector and providing feedback directly to ASIC and to the Federal Treasurer.

Much of the Australian legislation was enacted more than a decade ago. In the past ten years the global business environment has undergone a digital revolution with the vast majority of financial services businesses in Australia now operating in a digital environment, at the bare minimum owning their own website and interacting primarily by email, while some have gone further and are also using social media and omnichannel media to market to and service their customers.

The law and regulatory policy are struggling to keep up. “Some of our regulation is framed in a painfully analogue manner, unsuited to digital dealings. A good example is the expectation that disclosure is a point in time obligation, rather than providing the flexibility to logically locate the required information where it is likely to be seen, based on usage patterns.” Claire cites Financial Services Guides as an examples, “The FSG is a document which is required to provide consumers with a list of information about a business, most of which is on their website. A static FSG is outmoded in an online environment”, she says.

New compliance obligations have recently been layered on top of disclosure requirements that have been proven to be ineffective. But nothing has been taken away. In addition, various regulatory regimes result in multi layered and inconsistent consent requirements – think privacy, AML-CTF and electronic dealings, to name just a few.

Ideally law and policy makers would learn from the digital age – and focus on holistic user experience as well as the cost to business when considering the impact and likely effectiveness of regulation. The financial services industry would benefit from a ‘stocktake’ of the consumer journey to remove unnecessary and ineffective regulatory requirements”, Claire suggests.

Claire states that the policy principles that underpin financial services regulation in Australia are sound. “But all too often, regulation is framed around the activities of a few bad actors. ASIC’s recent commitment to focus more on ‘what good looks like’ is a big cultural change and very welcome.”

ASIC is engaging with the fintech industry in a number of ways including the regulatory sandbox licensing exemption, intended to facilitate innovation, which Claire has been actively involved in shaping. Unlike sandbox options currently operating globally, the Australian model will be opt in, allowing eligible fintechs to start with no delay, allowing a much faster route to market than Hong Kong, the UK or Dubai.

Moving forward into the world of digital financial advice, Claire advocates a blend of digital and traditional advice as the best solution for consumers allowing the robo to automate the administration while the financial adviser brings real value in the role of a financial coach and mentor. For consumers, one of the key challenges will be to know when their advice is suitable and when they need more, better or different advice and without a traditional advice element and human expertise it will be difficult for consumers to know when the tipping points happen.

With a number of digital financial advice businesses operating in the Australian market Claire chose to work with Ignition Wealth following the Afiniation Fintech Showcase in Sydney. Claire was one of the judges on the panel that awarded Ignition Wealth Best Robo Adviser.

Claire was drawn to the team and to the technology. She says, “I was impressed by the level of conviction, the quiet assuredness and the seniority of the people involved. Ignition Wealth has robust technology and methodology while founders Mark Fordree and Mike Giles have a deep understanding of the adviser business from both an adviser and consumer point of view, giving them a good prospect of leading what is already becoming a crowded market.”

In 2015 Ignition Wealth became the first Australian digital financial advice business to obtain their own AFSL and the company continues to lead the way, developing a new financial services paradigm that innovatively addresses the regulatory requirements.

Ignition Wealth sets the benchmark for digital financial advice in Australia. According to Mark Fordree, “Advisers are drawn to the company for three main reasons: the technology is designed to seamlessly intersect with advisers’ existing working practices, the process to adopt the technology is quick and easy and the technology, management, board and investor team are experienced and trusted.”

The post How can Robo-advice meet Australia’s strict regulatory best interest duty requirements appeared first on AdviserVoice.

Claire Wivell Plater

Ignition Wealth CEO Mark Fordree has announced the appointment of Claire Wivell Plater to the Ignition Wealth Advisory Board.

“Claire Wivell Plater is a leading Australian expert on compliance and regulatory issues and concerns. Claire’s knowledge, insight and innovative approach will assist Ignition Wealth as we ongoingly develop our digital advice solution. We believe working with industry leaders like Claire will allow us to maintain our position offering a best in class product” said Mark Fordree, CEO, Ignition Wealth.

Claire is a long standing member of the Business Advisory Committee to ASIC’s Licensing Division, and a member of the Federal Treasurer’s FinTech Advisory Group. She is an active supporter of FinTech Australia and was instrumental in working with the industry and ASIC to co-develop the regulatory sandbox for innovative businesses.

Claire is currently Managing Director and majority owner of The Fold Legal which has provided specialist regulatory, corporate and commercial advice to financial services businesses since 2002. Claire also contributes extensively to the industry as a prolific author, commentator and public speaker on regulatory and legal issues. Claire was recently named as a Financial Services finalist in the 2016 Lawyers Weekly Partner of the Year Awards.

“I believe that digital advice will play an increasingly important role in wealth generation and I’m delighted to have the opportunity to actively contribute to its development by working closely with Ignition Wealth” said Claire Wivell Plater, Member of Advisory Board, Ignition Wealth and Managing Director, The Fold Legal.

Claire joins Henry Capra and Tom Pockett on the Ignition Wealth Advisory Board.

The post Leading Australian legal FinTech expert Claire Wivell Platter joins Ignition Wealth Advisory Board appeared first on AdviserVoice.

There’s no point fighting it. It’s inevitable, not least due to the inappropriate advice practices of the past.

In my view, the real risk to life advisers is not the change from upfront to level or hybrid commissions. The real threat is the complete abolition of commissions for life advice.

The industry should see the opportunity to move to level and/or hybrid commissions as an olive branch and a chance to assist to clean up the churning practices that have so bedevilled the industry in the past. It’s the chance to “encourage” life risk advice practices that have a shot of universally being in clients’ best interests, without throwing the commission based remuneration baby out with the bath water.

Anyone who thinks otherwise is living in a parallel universe that ignores the evidence of widespread misconduct that has so conclusively been presented through numerous industry studies, FOS determinations and ASIC reviews.

They’re also ignoring the trend towards client determined remuneration models that are already in place for investment advice and are currently under serious consideration for mortgage broking services.

Not only that, it makes good business sense.

I think advisers whose business models depend on 100%-120% upfront commissions and 10-15% trail demonstrate short term thinking. Recurring income models based on, for example, a 20% ongoing commission will result in much higher overall valuations. After some initial transitional cash flow challenges, the numbers will speak for themselves. And the staged introduction of the changes will assist with the cash flow challenges.

It’s not as if life brokers have to do an awful lot to earn the ongoing commission. Stay in touch with the client, review their insurance needs periodically and only make a change when it’s really needed. Contrast this with general insurance brokers who, at best, earn 22-25% level commission and potentially have to completely re-market their non-automatically renewable policies year on year.

So what I say to the opponents of this reform is, be careful what you wish for; keep the existing regime, allow the existing practices to continue, and you face a very real risk of complete abolition of commissions for life advice.

And for those of you who are AFA members, don’t fetter your industry organisation’s ability to effectively represent you with government.

By Claire Wivell Plater

The post Life commissions and ostriches appeared first on AdviserVoice.

Claire Wivell Plater

ASIC’s damning investigation into the sale of insurance by car dealers is likely to drastically change the add-on insurance market. Insurers and their agents must act quickly to avoid enforcement action by ASIC.

Here’s what insurers need to do. Now. If not sooner.

Reduce excessive commissions

Review and adjust add-on remuneration arrangements. ASIC has called for significant cuts in commission after finding that car dealers are receiving commissions that are as much as 3 – 4 times the amount that consumers receive as claims payments – and it appears that there’s a direct link between higher commissions and higher premiums.

ASIC expects all cost savings to be passed to consumers.

Review policy coverage

Low claims ratios represent poor value for consumers. While the reduction of high commissions and a lowering of premiums will naturally increase claims ratios, insurers should also consider redesigning some products.

Restrictive insuring clauses, expansive exclusions and low sub-limits all contribute to poor claims ratios. ASIC believes unrelated ‘additional’ covers represent poor value because they are unlikely ever to be used. And extended warranty insurance should not cover rights that consumers already receive at no cost under the Australian Consumer Law.

End unfair pricing practices

‘Dual pricing’, where higher premiums are charged to business customers for products that are identical to cheaper personal-use products will need to cease.

So will ‘discretionary pricing’ practices where car dealers are permitted to charge flexible premiums within pre-set ranges, resulting in price disparity for consumers.

Bundled covers that provide ‘overlapping’ benefits, where consumers can only claim under one cover (but can’t only buy one cover) will need to be discounted to reflect the reduction in risk.

Eliminate low or negative value products

Policies which do not offer real value to consumers will need to be redesigned. A classic example is sub-limits which have the effect that consumers’ claims entitlements only marginally exceed the premium, or not at all.

Insurers who have been selling these products are expected to immediately start a process to refund these customers.

Stop charging single premiums

Upfront payment of the full premium for a multi-year policy increases interest charges, and reduces consumer awareness, the number of claims and the likelihood of a refund for early termination. This practice will need to cease. Immediately.

Although ASIC did not suggest an alternative, monthly repayments increase consumer awareness and eliminate the problem of affordability if the full premium cannot be financed.

Implement best practice sales processes

A best-practice sales process:

• Asks the consumer early if they wish to discuss insurance (and provide the opportunity to opt-out);
• Establishes the consumer’s eligibility for an insurance product;
• Promotes clear understanding of the policy cover;
• Presents a small number of simple options;
• Discloses upfront the full policy cost before the consumer makes a decision;
• Alerts the consumer to important policy exclusions; and
• Eliminates unfair sales tactics and pressure selling.

According to ASIC, most sales processes are designed to maximise sales by telling the consumer as little as possible about the policy price, exclusions or eligibility. Only one insurer asks questions to determine if consumers are eligible for a policy. ‘Decision fatigue’ is a key concern, due to the overwhelming number of options presented. This leads to poor choices, and fails to promote understanding of the product being sold.

Even more concerning, some insurers train dealers to deliberately conceal the price or to use unfair tactics to increase sales. This must immediately cease and victims of pressure selling will be entitled to refunds.

Review supervision arrangements

Comprehensive and effective monitoring and supervision programs aimed at detecting mis-selling will be required to ensure compliance.

Both random and targeted offsite and onsite reviews of dealer activities will be required, and well-structured consequence management frameworks, which rate various actions and apply consistent consequences, are essential.

For serious non-compliance, clawback of commissions, suspension or termination may be required.

There’ll be more to come

ASIC has presaged future changes in a number of areas, while not yet committing to a specific course of action:

• Training – ASIC is considering whether RG146 Tier 1 should be the minimum training standard for add-on insurances. This will impose significant additional training time and cost;
• Cooling Off – Although noting that add-on insurance cannot be sold for a period after the vehicle purchase is settled in the UK, ASIC hasn’t yet advocated a similar system for Australia. It remains to be seen whether this will occur;
• Product Suitability – Product providers are not currently required to ensure their products meet the buyer’s needs, but ASIC could be signalling a move to a ‘responsible lending’ style obligation for insurance sales.

A step too far?

Some of ASIC’s views potentially push regulatory oversight too far. One of the emerging themes would see insurers become responsible not just for treating consumers fairly, but for meeting a ‘best interests’ duty that resembles the fiduciary duty of brokers who actually act for the client.

Here are some examples…

Disclosure

Because consumers don’t read disclosure documents, ASIC is concerned that merely providing them is inadequate. But neither the Corporations Act nor the Insurance Contracts Act requires documents to be read, only provided.

While, it’s important that consumers have time to read them, they cannot be forced to do so. Oral disclosure of terms and conditions is unlikely to be more effective, since ASIC has also noted that consumers quickly become overwhelmed.

An alternative solution may be to collect better underwriting or eligibility information in the application form, so insurers don’t have to assume a quasi-broker role.

Better still, let’s move to mandatory simple disclosure documents – this has been particularly successful for managed investment schemes.

General advice

General advice and ‘no advice’ sales models are considered by ASIC to increase the risk that insurance will be inappropriate for the consumer.

Implicit in this, would be mandatory personal advice on the sale of add on insurance. But surely this would only serve to create new conflicts of interest for sellers, without improving outcomes for consumers?

Premium refunds

ASIC advocates that insurers adopt processes to ensure that consumers obtain refunds to which they are entitled.

It goes without saying that insurers who have issued multiple policies who are asked to cancel, say, the motor vehicle policy, should identify related policies and check whether the insured also wishes to cancel them.

But it would impose an unreasonable burden if a number of different insurers underwrite the policies. It should be sufficient for the insurer of the cancelled policy to suggest the insured check whether other policies need to be cancelled.

An obligation on insurers to make periodic investigations into whether insureds still need a single premium policy would go beyond the duty imposed even on insurance brokers.

A move to monthly instalment premiums would surely sufficiently increase consumer awareness of whether they are paying for insurance they don’t need without imposing broker-type obligations on insurers?

And then there’s Consumer Credit

Motor financiers also need to pay attention. ASIC has made much of the fact that add-on insurance is unsuitable for the consumer’s needs, and that insurance is also frequently financed.

Consumer lenders cannot enter into loans unless they are not unsuitable for the borrower. Loans which relate to unsuitable insurance policies, e.g. negative value policies or where the consumer is not eligible for cover, such as gap insurance where there is no gap, can hardly be assessed as ‘not unsuitable’.

Financiers will need to be more wary of the nature of financed insurances, especially if they are also selling the insurance.

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