Lydia Carstensen

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

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

Key takeouts

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

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

Who must hold an AFS licence with a claims handling authorisation

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

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

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

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

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

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

Who is exempt from the AFS licensing regime

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

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

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

What about authorised reps?

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

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

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

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

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

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

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

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

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

Providing financial product advice

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

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

What are your obligations as an AFS licensee?

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

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

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

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

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

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

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

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

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

A couple more specific details:

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

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

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

Timing

How can we help

How Finity can help

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

How The Fold Legal can help

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

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

By Raj Kanhai and Lydia Carstensen

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

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.

Julie Hartley

Product Disclosure Statements (PDSs) are subject to a range of regulatory obligations but they can also support commercial objectives (for example, a business that prides itself on speaking in plain English might want to present easy-to-read documents).

Below is a short refresher on content vs convenience.

Living documents

PDSs are not ‘set and forget’ documents. They need to be regularly reviewed and updated based on:

• Changes to product, insurer or legislation – e.g. design and distribution and unfair contract laws will impact terms and conditions including the information contained in your PDS;
• Changes to other extraneous material included in the PDS – e.g. changes to the Insurance Contracts Act such as the wording of the duty of disclosure notice or other changes, including privacy disclosures;
• Regulatory guidance and instruments such as ASIC instruments, ASIC Regulatory Guides (e.g. Regulatory Guide 271 which includes enforceable provisions), good disclosure principles and other guidance contained in Regulatory Guides (like RG168 and RG221) or ASIC Information Sheets being developed or updated;
• Product intervention orders issued by ASIC – these may require product issuers to include additional disclosure;
• Industry code updates – e.g. the General Insurance Code of Practice was updated in 2020; and
• Customer feedback/complaints – e.g. reviewing relevant customer feedback allows you to identify any ongoing systemic issues that are causing customer complaints. These may need to be addressed in the PDS.

Tip: Staying abreast of regulatory changes and the regular review of your PDS should form part of your risk management and compliance framework. When DDO laws come into effect in October 2021, there is an expectation that all PDSs will be regularly reviewed and updated – start developing the review process now.

Supplementary documents

It is not necessary for a PDS to be a single document. PDS information can be incorporated by reference, i.e. the PDS can refer to other documents or information, provided the information is in writing, publicly available and easily accessible. For example:

• Supplementary PDSs: These can be used to correct misleading or deceptive statements, include missing information or update the information in a PDS;
• Terms and Conditions: These can be hosted on a website and updated regularly (however every update must be communicated to the insured); and
• Product Excess and Discount Guides (PED Guides): These are used for specific insurance products (e.g. motor vehicle and home and contents) to provide information about the costs of the insurance policy (e.g. premiums and excess payable, discounts available, no claims bonus) and the claims process. PED Guides are not required by law but insurers use them to move prescribed content into another document to simplify and shorten the PDS to promote product understanding.

Tip: Any information that is incorporated by reference is still subject to the same rules as a PDS, so make sure that a supplementary document is clear, concise and effective and is not misleading or deceptive. Sanity-check whether more than one document is really necessary – it can be hard to deliver and difficult to maintain.

Combining the FSG and PDS

In some cases, it is possible to combine the FSG and PDS with the policy wording – effectively creating a one-stop shop for your disclosure document. This can help to ensure there are no problems when the document is delivered because it is one document rather than 2 or 3.

Whether you are using a digital channel for the sale of the insurance or it is a face-to-face sale, it is convenient to have one single document that covers all the required disclosures. Check whether you qualify for the use of a combined FSG and PDS.

If you are a representative of the insurer (for example an authorised representative of the insurer or agent of the insurer) you can combine your FSG with the insurer’s PDS.

Definitions

In order to meet the ‘clear, concise, and effective disclosure’ obligation, most PDSs include defined terms. There are, however, no specific obligations that apply to defined terms. The question of how to balance the flow of reading and consumer understanding with the need to define certain terms in a manner that will make it clear that they are defined, is a tricky one.

As a general principle, words and phrases in a PDS possess their natural and ordinary meaning unless the word or phrase has acquired a special meaning through a definition. Identify defined terms by differentiating them from other words in the document (for example, bolding, italicising or capitalising defined terms). Definitions can be included in a specific ‘Glossary’ or ‘Defined Terms’ section at the beginning or end of a PDS, or terms can be defined as they come up in the document.

Tip: Make sure all defined terms are used in the PDS to avoid confusion and add a warning at the start of the PDS that some terms have been given a special meaning.

Electronic Delivery

A PDS can be provided electronically, provided it is given to a client in a manner that allows them to view the PDS and save it. Normally this means sending the PDS as a PDF attachment or emailing a hyperlink to view the document. However, technology could also be used to innovate insurance products, such as making PDFs interactive or personalising PDS documents as part of an online digital platform.

Tip: Make sure the PDS can be downloaded and saved, regardless of how it is provided.

With technology solutions it is possible to innovate and simplify. Beyond using plain English to make the PDS more understandable and more accessible, you should seize the opportunity offered by the new design and distribution obligations (commencing on 5 October 2021) to:

• Modify the design of your products;
• Re-draft the documentation accordingly; and
• Consider how you can innovate so that a product is unique in the market.

By being the first to seize new opportunities and improve your products (while still meeting your compliance obligations), you will be able to position your business as an industry leader.

By Julie Hartley and Lydia Carstensen

The post Insurance PDS Obligations – ticking the box and thinking outside it appeared first on AdviserVoice.

Lydia Carstensen

New Internal Dispute Resolution requirements (RG 271) – what are the key take outs and considerations for insurers?

ASIC released its new Regulatory Guide (RG 271) on complaints handling and dispute resolution standards and requirements, on 30 June 2020. The new RG 271 guide will replace the existing RG 165 guidance and will take effect for complaints received on or after 5 October 2021. In the meantime the current guidance will prevail as financial services firms work to implement system, procedural and resource changes to meet the revised dispute framework. It is expected that ASIC will consult further on the IDR data collection and reporting requirements of the new complaints regime in the last quarter of 2020.

The revised guide is intended to deliver improved outcomes for consumers by ensuring that complaints are resolved in a fair, timely and effective manner and reducing the need to escalate complaints to external dispute resolution. The new guidance attempts to balance the needs of complainants and financial services firms by ensuring that the standards are both achievable and practical.

That is not to say that financial services firms can take the IDR obligations lightly. Certain key standards and guidance in the guide are enforceable provisions, and these demonstrate that ASIC intends to hold financial services firms accountable where they fail to deal with complaints in an appropriate manner or where they deliver poor consumer-outcomes. Failing to meet the RG 271 obligations may even be considered a breach of the Australian Financial Services Licence condition to comply with all applicable financial service laws and regulations.

The new regulatory guide (RG 271) includes the following key changes:

Broader definition of complaints

A complaint is defined as an expression of dissatisfaction made to or about an organisation, in relation to its products, services, staff or the handling of a complaint. RG 271 contains guidance in relation to social media posts as expressions of dissatisfaction will help financial firms determine what is in the definitional scope. In the social media setting a comment is deemed to be a “complaint” if the comment is posted on an account or media channel owned by the financial firm, where the author of the post is identifiable and contactable.

Reduced maximum timeframes for responding to complaints

The maximum timeframe to respond to standard complaints will be no later than 30 calendar days after receiving the complaint (a reduction from the existing 45 days). These changes are designed to improve customer outcomes by reducing complaint handling delays by providing fair, timely and efficient resolution of complaints for customers.

In addition ASIC expects firms to provide an acknowledgement of a complaint verbally or in writing (email, post or social media channels) within 24 hours or one business day of receiving it, or as soon as practicable (this is not an enforceable requirement).

Exceptions to the maximum timeframe
The circumstances where firms are not required to provide a response within the maximum IDR timeframes are:

• Where there is no “reasonable opportunity” to provide the IDR response;
• Due to the complexity of the complaint; and/or
• If there are circumstances beyond the firm’s control that are causing the delays.

In these instances the firm must provide the complainant with an “IDR delay notification” before the maximum timeframe expires.

New resourcing requirements

There is an obligation for firms to ensure that there is adequate resourcing in place to ensure that the IDR process operates fairly, effectively and efficiently within the prescribed maximum timeframes. There is an added requirement for firms to regularly review ongoing resourcing requirements and to ensure that staff resourcing takes into account any spikes in complaint volumes. This means you may need to consider providing training to all staff members (so that any staff member can action complaints) or provide detailed policies and procedures.

Provides guidance on the identification and management of systemic issues

Complaints serve as a key risk indicator for systemic issues warranting early identification and resolution, to not only avert matters from being escalated to AFCA, but to also avoid further harm /detriment to more customers.

Boards have the responsibility to set clear accountabilities for complaint handling functions as well as the identification and management of system issues, including robust systems to enable systemic issues to be investigated, followed up and reported on. Reports provided to board and executive committee must include metrics and analysis of consumer complaints and include systemic issues identified.

All staff should understand their roles and responsibilities in relation to the IDR process.

Minimum requirements for written IDR responses

A written IDR response to the complainant confirming the final IDR outcome must include enough detail for the complainant to understand the basis of the decision and to be fully informed when deciding whether to escalate the matter to AFCA or another forum.

The written response will need to include the following:

• Final outcome of the complaint, including details of any actions taken to resolve the complaint;
• Reasons for the outcome, if the complaint was rejected in part or in full, including details of findings and the basis of the decision; and
• Complainant’s right to take the matter to AFCA and the contact details for AFCA.

A written IDR response must always be provided if the complaint is about;

• Hardship;
• A declined insurance claim or the value of an insurance claim; or
• The complainant requests a written response.

Fostering a proactive complaint handling culture

Firms are encouraged to adopt an organisation-wide approach to complaint management and to promote a culture that values complaints and is highly receptive to customer feedback. A complaint should be viewed as an opportunity, not a negative. It is expected that Board members, chief officers and senior management take an active interest in the proactive management of complaints, and will have specific responsibilities, to include:

• Oversight of the IDR process;
• Ensure that adequate resources, training and upskilling is provided to staff managing complaints;
• Champion the complaint management policy across the organisation;
• Ensure that there are effective systems and reporting procedures to enable the timeliness and effectiveness of complaint management and monitoring practices; and
• Establish clear roles and responsibilities for the management of complaints.

Beyond the Boardroom
Firms are also expected to ensure that their people demonstrate the right values, behaviours and attitudes towards complaints. This will underpin a philosophical approach to complaint handling that goes beyond adherence to a set of guidelines, checklists or timeframes. It’s about delivering respectful, user friendly and transparent practices that support the early resolution of complaints and reduce the need to escalate to external dispute resolution, and creating an environment and culture where it is safe for staff to escalate potential systemic issues before they turn into seismic issues will be essential.

The new IDR framework will further serve to elevate the importance of complaints in shaping the firm’s response mechanism as the impetus for continuous improvement, with complaint trends identified and root causes well understood. Firms have the opportunity to further harness customer insights derived from complaint data and analysis to tackle long standing pain points and customer irritants and drive continuous improvement, help shape product design, and improve service delivery across the value change.

Effective complaints management practices can help power continuous improvement and innovation.

Adopting changes to meet IDR requirements

Financial firms have between now and October 2021 to implement a range of measures in preparation for the new complaint handling requirements under RG 271. This will include the need to establish clear lines of accountability and reporting (if not already in place), develop processes and systems and upskill staff to deal with complaints in a fair, effective way.

For many financial firms the changes to the timeframes will require making some improvements to business processes, addressing process weaknesses to ensure that complaints can be resolved promptly and efficiently and strengthening governance around the capture, tracking, analysis and reporting of complaint data.

In addition, financial firms will need to bolster resources for their IDR functions to ensure that ongoing commitments to the revised maximum IDR timeframes can be met. Firms should also use the time to review and update complaint correspondence and templates to ensure that they satisfy the new requirements and enhance the quality of written communication and IDR responses. They should also review their complaints register to tackle customer irritants at the source.

The revised IDR guidance is the key to delivering better outcomes for consumers and reducing the need to escalate complaints to external dispute resolution. It’s now up to firms to embrace these reforms in order to deliver improved outcomes for their customers and leverage the insights gained to power continuous improvement opportunities.

What’s next?

ASIC intends to shortly commence its second phase of targeted consultation on IDR data collection and reporting. This consultation will build on the feedback that industry and consumer stakeholders provided in response to Consultation Paper 311 Internal dispute resolution: Update to RG 165.

By Lydia Carstensen and Raj Kanhai

The post Changes to Internal Dispute Resolution (IDR) procedures – what it means for you appeared first on AdviserVoice.

If you purchase a business with a history of non-compliance, ASIC may hold you accountable for regulatory non-compliance.

Exposure to historical non-compliance can be fatal for purchasers but many don’t include it in their due diligence. ASIC is on the warpath and you can be liable even if you weren’t operating the business at the time of the non-compliance.

So before you purchase a business that holds an Australian Financial Services Licence or Australian Credit Licence you need to make sure the compliance records and policies are up to standard.

What is due diligence good for?

Due diligence is crucial to any transaction. As a buyer, it gives you comfort that:

• The value of the business is appropriate;
• You have the appetite for the risks associated with the business; and
• The share sale agreement addresses these risks and exposures in exchange for due consideration.

If you don’t perform due diligence you won’t know what potential exposures you have in the business you’re purchasing.

What are the risks of historical non-compliance?

If you purchase a business with a history of non-compliance, ASIC may hold you accountable for regulatory non-compliance. This is possible even if the acts or omissions that led to non-compliance took place under the previous owner.

If ASIC finds the business guilty of non-compliance, they can impose a range of remedies including:

• Additional licence conditions;
• Requiring you to undertake a client remediation program;
• Publishing a ‘name and shame’ media release. This may tarnish the business’ reputation and cause clients to panic;
• Suspending the licence. During this time the business and its representatives cannot provide financial services or generate income;
• Cancelling the licence; or
• Imposing civil penalties for corporates and financial service licensees for breaching their licence conditions.

Even if the licence isn’t cancelled, you could face significant financial strain or insolvency. This could be caused by:

• Paying the purchase price;
• Incurring additional legal and compliance costs to defend and remediate non-compliance;
• Representatives deciding to transfer to another licensee with a better compliance record and reputation. Operating with a reduced number of representatives may severely impact the business’ ability to generate revenue; and
• Reputational damage and business disruption that stagnates the business.

There is also no guarantee the non-compliance is purely historical – it might be an ongoing issue that needs to be addressed at significant cost.

You can protect yourself in the share sale contract by including specific indemnities, for example. But if these protections haven’t been drafted appropriately, the cost of defending the business may be prohibitive and impossible for you to recover from the seller.

Minimise your compliance risk

As a buyer, once you’ve completed your financial due diligence, there are 4 steps you should take to minimise your compliance risk:

Step 1: Undertake compliance due diligence

• Ask for details of any ASIC investigations or surveillances in the last 5 years.
• Ask for audit reports for each representative over the last 5 years.

Red flag: The business doesn’t regularly audit their representatives.

• Request details of any client compensation paid over the last 5 years.
• Review the business’ breach register.

Red flag: The business doesn’t have a breach register.

• Review the business’ key policies and procedures.
• Conduct sample testing to check the quality of the business’ record-keeping practices.

If you find any issues you can require the seller to update their compliance framework and address specific issues (like client compensation) prior to purchase.

Step 2: Protect yourself contractually

When drafting the contract, include:

• Warranties that you can rely on and indemnities you can enforce.

TIP: Draft specific indemnities for any particular issues identified during your compliance due diligence that aren’t deal breakers.

• A remediation clause that covers any costs including fines, client compensation and legal expenses. Also include requirements for the seller to produce records and information and promise to work collaboratively and in good faith to negotiate and achieve the most favourable outcome possible for you.
• Guarantees that can be enforced against the seller on a corporate and individual level. Obviously, these will only be as strong as the financial resources of the party giving them.

TIP: Ask for guarantees from owner directors.

• Structuring the purchase price payment so that part of the purchase price is held in escrow for a set period of time. If compliance issues arise during that time this amount can be used to address the issue. Once the escrow period has lapsed, the amount can be paid to the seller. The length of the escrow period is a commercial point of negotiation between the parties. The longest we’ve seen them run for is 2 to 3 years.

TIP: This arrangement works best if the exposure you’re protecting against has a set ceiling. If not, indemnities are optimal contractual protection.

Step 3: Be vigilant when running the business

• If your due diligence has identified gaps in compliance, you should address these immediately. Your compliance framework should be sufficient to prevent recurrence.
• Consider engaging an external compliance consultant to help you determine the extent of a compliance issue and how best to fix it.
• If clients need to be compensated for historical compliance breaches, you should expedite this program and notify the seller as early as possible.

Step 4: Review the representatives of the business

• If you’re retaining representatives, you should review their individual compliance history. You may need to terminate a representative if they have a poor compliance history or require the seller to do so as a condition precedent.
• You may need some employees or representatives to stay on after the purchase to assist with remediation or oversee improvements to the compliance framework. You will need to identify them and make sure they aren’t planning to terminate their employment or authorisation upon sale as this may impact your valuation of the business.

By Simon Carrodus, Katie Johnston and Lydia Carstensen

The post History repeats – The risks of inadequate due diligence appeared first on AdviserVoice.

Lydia Carstensen

Binder agreements are regularly entered into by insurance agents or brokers who are seeking to offer insurance on behalf of the insurer.

A party that holds a binder will perform certain functions for and on behalf of the insurer including issuing policies and handling administration including variations, endorsements, cancellations, and claims.

Beyond the operational considerations of rating the risk, pricing premiums, issuing the policies and handling claims, there may be traps for the unwary. So what are our top five commercial tips for negotiating binder agreements?

1.   Servicing rights, client data and intellectual property

Where you are servicing clients under a binder, the binder agreement needs to be clear about who owns the client servicing rights. Specifically:

• Who owns the goodwill in the client portfolio;
• Who can service the clients during the term of the agreement; and
• (Most importantly) what happens with the clients when the binder agreement terminates or expires.

If this is left unclear or ambiguous, the insurer may attempt to keep the clients and seek to invite renewal from the client portfolio even though you have brought them into the relationship (and the goodwill in the client base should remain with you). Imposing reasonable commercial constraints which prevent the insurer from directly contacting the clients is important.

You also need to ensure that you have permission to use the client’s personal information and any other data which allows you to provide services to them. It’s important to make sure that:

• You’re able to use personal information in accordance with the privacy laws while acting under binder; and
• When the binder terminates, you are able to continue to use personal information you have collected, if you have ownership of the client servicing rights.

If you are developing or creating intellectual property under the binder agreement (e.g. you have drafted the policy wording), you have developed trade marks (registered or unregistered), or you have invested in customer transaction portals or risk management initiatives which are unique, the binder terms should:

• Protect your intellectual property rights; and
• Be clear on how your intellectual property can be used by the other party (during the term or after).

2.   Profit share

Many binder agreements have a ‘profit share’ component. Ensure that you understand the profit share commission under the binder and that you have access to all of the information you need to confirm your profit share. This is an area where there are often disputes about what has been agreed and it is worth having a lawyer review the drafting of the profit share calculation to make sure it accords with your commercial understanding.

The binder agreement needs to:

• Detail accurately how the profit share will be calculated;
• Include dispute resolution clauses and protections specifically tailored for the profit share arrangement (including the use of an insurance expert for profit share disputes); and
• Oblige the insurer to share information such as loss ratios and other actuarial assessments that go towards the calculation of the profit share.

3.   Scope of the authority

The scope of the authority under the binder must be appropriate for the services that the binder holder will provide.

Ensure you know what your rights are in relation to:

• Communicating with clients;
• Using the insurer’s branding and trademarks;
• Communicating with the regulator and supplying information to the regulator including mandatory data breach reporting;
• Individuals who are authorised to make underwriting decisions and settle claims; and
• Sub-delegating the binder or appointing sub-agents to carry out tasks under the binder.

Generally it is the insurer’s obligation to make sure a binder holder acts within the scope of their authority so there is incentive for both parties to make the scope clear, precise, and covers all of the necessary services.

4.   Representations and warranties

When entering into any agreement, you will have to rely on the other party’s representations, which is why these are expressly included in the relevant contract.

At a minimum, each party should be required to make representations and warranties that:

• They have the appropriate Australian financial services licence authorisations to provide the services (this will be particularly important when claims handling becomes a regulated financial service);
• They have the power to carry on their business as contemplated for the performance of the obligations under the binder;
• They are not aware of any previous or future investigation or disciplinary activity by any regulatory body; and
• Entry into the agreement will not conflict with any law, regulation or other document, instrument or agreement.

5.   Termination

Do some groundwork at the beginning of the relationship to make sure that when things end, there is an orderly end to the relationship which minimises the impact on clients and your business.

You should consider:

• When will the binder terminate? What conditions trigger early termination? Make sure you have the ability to exit the binder quickly if you need to for defaults involving the insurer. For example, if the insurer breaches the law, or their actions may result in serious reputational damage (though there may need to be a delay to give the insurer a chance to rectify any breach);
• What are the timeframes for giving notice for termination? Realistically, how long would you need to find another underwriter and how much notice must be given for termination without cause?
• Are there changes to the terms which can be made unilaterally by the insurer and might ‘constructively’ terminate the relationship? For example, changes to approved premium rates and policy terms and conditions made by the insurer. How quickly can you terminate when that happens?
• Will the binder terminate upon change of control of a party, or upon the resignation of a Key Employee (underwriter/director) of the binder holder? If so you may need to build clauses into other agreements (such as employment contracts) to ensure you don’t trigger termination of the binder inadvertently.

Once the binder has been terminated:

• Is your appointment automatically revoked?
• Who retains the rights to service the clients?
• Who is responsible for ensuring clients continue to be serviced (e.g. variations/cancellations)?
• Is there a transition period until the expiry of the insurance policies?

The easiest way to manage these issues is to ensure that a ‘run off period’ is built into the contract, to allow the binder holder to continue acting under the binder until the policies expire. This avoids the risk that the clients will be left exposed. However any run off period must take into account things like the insurer or the binder holder losing their authorisations or other events like insolvency that may impact the ability to continue servicing clients.

By Lydia Carstensen

The post In a bind? Traps in binder agreements 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.

Jaime Lumsden Kelly

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

After two separate consultation papers, Treasury has recently released:

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

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

What aspects of the changes are now known?

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

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

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

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

Anti-hawking

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

Exemptions

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

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

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

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

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

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

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

Where do the Design and Distribution Obligations fit in?

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

The Fold’s view:

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

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

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

Finity’s view:

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

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

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

By Jaime Lumsden, Lydia Carstensen and Raj Kanhai

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

Lydia Carstensen

In our final article in this series on insurance alternatives, we outline the ultimate peer-to-peer insurance alternative – discretionary mutuals.

What is a discretionary mutual?

A discretionary mutual is a structure that offers discretionary risk protection to its members.

Discretionary protection is similar to insurance because both offer protection against a certain event or risk (for example, damage to crops from hail). However, the key difference is:

• Under an insurance policy, the protected person (the insured) has the contractual right to have their claim paid (if the claim meets all the policy terms and conditions);
• Under a discretionary risk product, the protected person has the right to have their claim considered and for a decision to be made about paying the claim (the exercise of discretion).

By the people, for the people

Discretionary mutuals are usually set up by industry or professional groups, or by businesses or corporate groups, to cover common or similar property and liability risks. This is because:

• Discretion to pay claims is often exercised by people with industry experience, who may be sympathetic to the person making a claim;
• Discretionary risk products can be tailored by the mutual to provide industry-specific coverage quickly and easily, and may provide more extensive benefits than would be available from the traditional insurance market;
• Mutuals are often able to influence the risk management behaviour of their members in a positive way; and
• Depending on the membership size, the board may be able to consult the mutual members before they make a decision or have members sit on the board.

Increasingly, mutuals are being used for ‘hard to place’ risks or uninsurable risks, or to improve the buying power of particular groups such as:

• Industry participants who are not able to obtain insurance for their risks (for example, farmers in the agricultural industry);
• Buying groups who are being charged high premiums but can demonstrate a low loss ratio and good claims history;
• Buying groups with the technology to assess their risk and develop innovative and responsive products (which the traditional insurance market may be slow to embrace);
• Buying groups who are eager to manage their liability on a community basis and support their participants; or
• Government or large corporate groups who want a high level of control over their protection and the ability to customise their program by increasing discretionary layers and decreasing insurance and changing this from year to year to take advantage of the insurance cycle.

As an insurance alternative

Discretionary mutuals can be a good alternative because:

• Discretionary mutuals are generally simpler and less expensive to set up and capitalise, and have a lower tax burden than an insurance company or captive;
• The discretionary power means that the mutual can manage their exposures in terms of structuring the program to maximise their buying power for excess of loss and stop loss/reinsurance;
• There are tax advantages because GST is payable but income tax and insurance taxes like stamp duty are not; and
• Mutuals can raise equity by issuing Mutual Capital Instruments (which are similar to shares) to investors.

This model is also popular because it is more flexible and allows for innovation:

• The mutual doesn’t have to be fully-funded: claims can be partly paid, or even completely denied, due to lack of funds.
• The mutual can arrange alternative payment methods: for example, Latevo Farmers Mutual, a mutual covering multi-peril crop risks for Australian farmers, allows contributions to be paid partly in cash and partly by way of grain contracts.
• A discretionary mutual can utilise a number of other innovative solutions, eg the discretionary mutual may have a parametric trigger and payment structure providing a truly bespoke product for its members.

Discretionary mutuals offer a regulated financial product and the product issuer must have a ‘miscellaneous financial risk product’ authorisation on their Australian Financial Services Licence. It is possible to employ a professional mutual manager who has the expertise and skills to manage the mutual for the buying group and the appropriate licence authorisation.

A discretionary mutual must have a Product Disclosure Statement for members even if they are wholesale clients. There are different structures for the mutual – companies limited by guarantee and trusts are the most common. A feasibility study is important prior to establishment because this is a long-term solution for buying groups and needs to operate for 5 to 10 years for the true benefit to be experienced by the group. Establishment costs can be substantial but maintenance of compliance requirements is substantially less after the first year.

Download The Fold’s white paper on Discretionary Mutuals.

By Lydia Carstensen

———

Read part 1: The rise of insurance alternatives (Part 1: An overview)
Read part 2: Insurance alternatives (Part 2: parametric insurance)
Read part 3: Insurance alternatives (Part 3: Aggregate deductible funds)

The post Insurance alternatives (Part 4: Discretionary mutuals) appeared first on AdviserVoice.