Welcome to Part 1 of “Insurance after Hayne”, a special series on our Insurance Law Tomorrow blog focusing on the implications for general and life insurers following the release of the Royal Commission’s final report. Each week, we will be sharing our thoughts on Commissioner Hayne’s recommendations through the lens of our insurance regulatory team.
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This week, we bring to you the big picture and attempt to cut through some of the sensationalism presented by some media and industry commentators.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services has resulted in 15 recommendations specific to the insurance industry and 76 recommendations in total across the banking, superannuation and financial services industries.
For general and life insurers, here is what we think are the main points to note:
1. Changes to design and distribution
The Commissioner has recommended a prohibition on hawking of insurance products, implementing a deferred sales model for add-on insurance. He has also recommended short and long term reforms to commission arrangements, which has the potential to significantly impact the insurance and broking markets.
Although it is already being considered by Treasury, the Commissioner supports the implementation of the unfair contract terms regime to insurance contracts. In relation to group life policies, the Commissioner has recommended amendments to prudential standards to ensure arrangements and policies are in the best interests of members
2. Ask questions and tell no lies
The current duty of disclosure regime in the Insurance Contracts Act 1984 (Cth) (ICA) requires customers to disclose prior to entry to the contract certain matters that they know, or a reasonable person could be expected to know, that are relevant to an insurer’s decision to insure the risk.
For consumer insurance contracts, the Commissioner has recommended that the duty be replaced by a duty not to make a misrepresentation to an insurer for consumer insurance contracts. Insurers will have to ask questions and cannot rely on the general duty to disclose, effectively expanding the scope of the current regime in section 21A of the ICA.
3. Spotlight on pay, governance and culture
A significant component of the public hearings considered culture, governance and remuneration practices in financial services entities. At the heart of the Commissioner’s findings was that organisational structures had allowed, and incentivised, the pursuit of profit at the expense of proper conduct. Executive remuneration, the failure to identify non-financial risks, and a sales mentality had created a culture which allowed customers interests to be disregarded and individual and corporate self-interest to prevail. His recommendations will require sweeping reviews to be conducted by financial services entities, including insurers, to modify their risk management frameworks and assess and continually improve their culture.
4. The Three Cs: Claims, Codes and Complaints
Under the recommendations, claims handling will be regulated as a financial service meaning that insurers and third party claims administrators will become subject to the general obligation to provide services ‘efficiently, honestly and fairly’ (which itself is soon to become an enforceable provision of the Corporations Act). Further, certain provisions of industry codes will become enforceable by ASIC if breached, effectively turning what was industry self-regulation into law. AFSL holders will also be required to cooperate with the Australian Financial Complaints Authority (AFCA) when resolving complaints by making available all relevant documents and records.
Although not expressly recommended by the Royal Commission, the government has extended the jurisdiction of the Australian Financial Complaints Authority (AFCA) to accept complaints dating back to 1 January 2008.
5. The BEAR is coming
The Banking Executive Accountability Regime, which ominously spells out BEAR, commenced on 1 July 2018 for banks. However, the Commissioner has recommended that it should also be extended to insurers. The BEAR creates a class of accountable persons including directors and senior executives of the organisation, who have to take reasonable steps in conducting their responsibilities to prevent matters from arising that would affect the organisation’s prudential standing or reputation; and exposes those individuals to greater regulatory obligations and liability.
The majority of recommendations were foreseeable and many were already subject to proposed reform announced by Treasury following the Financial System Inquiry in 2014. So the Final Report is not heralding a completely new era of conduct regulation as some may have feared; although it will clearly lead to new and more onerous regulation of governance and risk management arrangements by APRA, and has already created a dramatic change in the enforcement strategy of ASIC.
While the government has said it is committed to implementing all the recommendations in the Royal Commission’s Final Report, this will take time and will require changes to the law. However, as there is bipartisan support for all recommendations, general and life insurers should be proactive in addressing the underlying issues raised in the Royal Commission’s Final Report.
Over the coming weeks we will begin a deep-dive into the above areas and analyse the real implications for the insurance sector.
In the meantime, the team at Norton Rose Fulbright can help you with devising and implementing your organisation’s response to the Royal Commission’s Final Report.
To view the full list of recommendations in the Final Report, click here.
Stay tuned for Part 2 of Insurance after Hayne which will be released next week.