Welcome to Part 5 of Insurance After Hayne, a six part series on our Insurance Law Tomorrow blog focusing on the implications for insurers following the release of the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry.
In this week’s article, we explore Commissioner Hayne’s recommendations on claims handling, industry codes and cooperation with the Australian Financial Complaints Authority (AFCA), which replaced the Financial Ombudsman Service on 1 November 2018.
Removal of the claims handling exemption
It appears that the Commissioner’s recommendation to remove the claims handling exemption is being treated as a high priority by the Treasury. Since the Royal Commission Final Report was released, Treasury has commenced consultation on only two topics, with the claims handling exemption being one of them. Under regulation 7.1.33 of the Corporations Regulations 2001 (Cth), claims handling currently includes the following activities:
- policy interpretation;
- negotiations of settlement amounts;
- estimates of loss, damage, value or appropriate repair;
- recommendations on mitigation of loss; and
- claims strategy.
The recommendation to remove the claims handling exemption is causing concern in the insurance industry because it would bring claims handling within the Australian Financial Services Licence (AFSL) regime. Fuelling this concern is that many requirements which apply to AFSL holders are not relevant to claims handling activities. Examples of these include conflicted remuneration obligations and providing a statement of advice when providing personal advice to retail clients. Furthermore, the Australian Securities and Investments Commission (ASIC) is currently taking 6 to 9 months to assess licence applications. Another concern is that claims staff will be subject to certain competency standards and need to be re-trained.
However, a Treasury consultation paper released on 1 March 2019 suggests that the government proposes a more balanced approach and is currently seeking the industry’s input. Consultation is open until 29 March 2019. Treasury’s approach is “two-pronged”:
- removal of the exemption in regulation 7.1.33, possibly only in relation to retail products; and
- use of existing legislative powers to define the activity of handling or settling an insurance claim as a separate ‘financial service’ for the purposes of the Corporations Act 2001 (Cth).
Treasury proposes that the new definition will cover all conduct of the insurer and its representatives in relation to claims handling including:
- making a decision about a claim, investigating claims and interpreting policy provisions;
- conducting negotiations in respect of settlement amounts;
- preparing estimates of loss or damage, or likely repair costs; and
- making recommendations about mitigation of loss.
The second part aspect of the “two-pronged” approach is important because it will enable specific licensing requirements to be applied to claims handling as an activity, rather than applying all the AFSL obligations. Treasury proposes that the general obligations under s 912A of the Corporations Act 2001 (Cth) should apply, to ensure that AFSL holders:
- act efficiently, honestly and fairly;
- have adequate measures in place to address conflicts of interests; and
- adequately supervise of claims handling conduct by their representatives.
Together with the passage of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 on 18 February 2019, the removal of the claims handling exemption will enable ASIC to seek civil and criminal penalties for failures to comply with the AFSL holder obligations in relation to claims handling.
The Treasury consultation paper also addresses some of the concerns in relation to competency requirements. It acknowledges that imposing training requirements in relation to providing advice like those currently imposed on AFSL holders could be particularly onerous on claims managers, who have ‘narrower roles compared to financial advisers’. However, the paper is not definitive on whether Treasury intends to introduce a competency standard on claims staff.
Once the claims handling exemption is removed, Treasury may also require:
- existing AFSL holders to vary their licences to obtain the necessary authorisations;
- appointment or variation of authorised representative arrangements; and
- new applications for organisations that are not currently licenced, such as some third party administrators.
Treasury intends the new financial service of ‘claims handling’ to affect:
- insurers, related body corporates and employees who handle claims on behalf of the insurer;
- claims handling service providers including investigators, loss adjustors, loss assessors and claims management services; and
- other services that ASIC declares in the future.
ASIC is consulting on the extent to which trustees of superannuation funds who handle claims should be regulated, noting that they generally do not act on an insurer’s behalf.
Insurers and administrators involved in claims handling should monitor this space and prepare for the changes. Although it will add an extra layer of compliance, it presents an opportunity to reshape claims processes, a critical component of the insurance transaction because claims are when insurers deliver on their promises. By improving the claims experience for customers, insurers are more likely to retain their business in the future.
Enforceable Code Provisions
The Commissioner has also recommended the introduction of mandatory industry codes and for certain provisions of industry codes to be made enforceable by 30 June 2021.
The General Insurance Code of Practice (GICOP) is a voluntary code that has been adopted by 47 insurers in the general insurance industry. If made mandatory, all general insurers will be required to comply with it. The Commissioner expects insurers and ASIC to identify provisions in the GICOP which govern the contract made between the insurer and the customer, and for those provisions to be made enforceable by statute. A breach of those provisions will enable the customer to seek remedy through internal dispute resolution (IDR) and external dispute resolution (EDR) schemes. Interestingly, the Commissioner has suggested that if a customer uses an EDR scheme, this will be treated as an election not to pursue court action unless good cause is shown to the contrary.
Furthermore, the Commissioner has recommended extending the sanctions power of the Code Governance Committee of the GICOP so that it can impose sanctions on a subscriber who has breached the applicable Code. Currently, the Code Governance Committee can only impose sanctions if the breach is not remedied by the insurer under section 13.11.
These recommendations show that industry self-regulation has come a long way. The first GICOP was launched in 1994. The implementation of statutory enforcement of GICOP provisions, and expansion to the sanctions power, will cement the importance of the GICOP to the industry. The proposals are a timely reminder for insurers to review their compliance with the GICOP.
Cooperation with AFCA
AFSL holders are required to subscribe to an EDR scheme that has been approved by ASIC. Since 1 November 2018, the ASIC approved EDR scheme for banking, insurance, superannuation and financial advice is AFCA.
The Commissioner has recommended the insertion of conduct obligations into the Corporations Act 2001 (Cth) to require AFSL holders to cooperate with AFCA in its resolution of disputes, including making available to AFCA all relevant documents and records relating to the issues in dispute. This amendment will affect not only insurers but all AFSL holders.
The government has also agreed to implement a compensation scheme of last resort (CSLR), which will be industry-funded. The purpose of the CSLR is to pay compensation owed to consumers and small businesses that receive a court or tribunal decision in their favour, or a determination from AFCA, but are unable to receive compensation from the financial firm because it has, for example, become insolvent. It is proposed that the CSLR will be part of AFCA.
An additional development which goes beyond the Royal Commission’s recommendations is extension of AFCA’s remit to include ‘legacy disputes’. This measure is proposed in the Government Response to the Final Report.The government has directed AFCA to consider disputes relating to matters dating back to 1 January 2008, the period looked at by the Royal Commission, if the dispute falls within AFCA’s thresholds. Currently, complaints must be made to AFCA within six years from awareness of the loss or, where the complaint has been through an IDR process, within two years. AFCA has announced that this expanded remit will operate from 1 July 2019 to 30 June 2020, following approval by ASIC of the necessary changes to the AFCA Rules. AFCA’s Chief Ombudsman and Chief Executive Officer, David Locke, says that the expansion of AFCA’s remit will ‘provide access to justice and redress to many thousands of Australian consumers’.
The three Cs will require insurers to make some changes to the way they currently operate. In relation to claims handling, this may require changes to processes and policies to adhere to the expanded AFSL obligations. Licensing, authorisation and training requirements may also await those servicing the insurance industry. The introduction of mandatory codes of practice and enforceable code provisions will likely prompt insurers to review their current compliance with the GICOP. With the expansion of the Code Governance Committee’s sanctions power, and ASIC’s heightened supervision, the consequences of non-compliance are significantly increased. Furthermore, the extension of AFCA’s remit from 1 July 2019 will require insurers to respond to disputes relating to matters over a decade ago.
While these proposals will no doubt increase compliance costs for organisations operating in the general insurance industry, they are designed to ultimately improve consumer outcomes, which can lead to positive engagement between customers and insurers. This is better for the industry as consumers will have a better understanding and perception of insurance. Australia currently has high levels of underinsurance which can lead to serious consequences for individuals and significant cost to government.
Stay tuned for Part 6 of Insurance After Hayne which will be released next week.
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