Following the release of Report 622 earlier this month, which was highly critical of sales of consumer credit insurance, the Australian Securities and Investments Commission (ASIC) has released Consultation Paper 317 (CP 317). Under CP 317, ASIC proposes to prohibit unsolicited telephone sales of two types of insurance – direct life insurance and consumer credit insurance (also known as CCI insurance).

Although Commissioner Hayne recommended a ban on unsolicited phone calls for all insurance products, the legislation for this prohibition is forthcoming. We previously wrote about the proposed changes to the anti-hawking laws here. Interestingly, ASIC is considering using its modification power in s 992B of the Corporations Act 2001 (Cth) to ban the unsolicited telephone sales of direct life insurance and consumer credit insurance from March 2020, perhaps ahead of the proposed legislative change.

Consultation is now open and will close on 29 August 2019.

Why is ASIC proposing a ban?

ASIC is concerned about unsolicited telephone calls selling direct life insurance and consumer credit insurance. It found that these calls led to poor consumer outcomes because of the potential for pressure selling, inadequate explanation of exclusions, and conduct that was likely to reduce informed decision making. ASIC considers these products to be more complicated, and this is reflected in the fact that these products are subject to the higher RG 146 Tier 1 advice standard.

ASIC considers unsolicited sales of insurance occur when contact is initiated by a distributor to sell insurance and the consumer has not requested contact for that purpose. Regulatory Guide 38 provides guidance on the existing anti-hawking provisions and provides that unsolicited contact occurs if there has not been a ‘positive, clear and informed request from the consumer’. Commissioner Hayne recommended that the government legislate a definition of ‘unsolicited’ and that a solicited contact for one type of product should not allow the distributor to cross-sell a different type of product.

How will the ban work?

The ban will affect AFSL holders who distribute direct life insurance and consumer credit insurance under a general advice model. It will not affect sales distributed under a personal advice model. More stringent requirements already apply where an adviser takes into account a customer’s financial circumstances, situation and needs, including a duty to act in the client’s best interests.

The prohibition will amend the current anti-hawking provisions in s 992A of the Corporations Act 2001 (Cth) so that the exemptions will not be available for direct life insurance and consumer credit insurance. These exemptions currently allow a person to offer a financial product in the course of an unsolicited telephone call or contact if certain requirements are met.

Consumer credit insurance and direct life insurance can play an important role in managing risks. However, consumer credit insurance needs to be better designed to improve value for money. ASIC says in Report 622 that consumer credit insurance only returned 19 cents in claims for every dollar paid in premiums.  Similarly, direct life insurance performed poorly in relation to the accidental death insurance benefit. ASIC’s Report 587 says that the accidental death insurance only returned 16 cents in claims for every dollar paid in premium.

With less than a year until proposed implementation, insurers and distributors need to reconsider product design and distribution practices. Products should be designed with the end customer in mind, to cover the range of scenarios when cover is expected. The distribution process will also need to be closely examined and it may be necessary to train advisors to provide personal advice to customers.

What else is happening?

Following the Royal Commission, we are seeing a significant amount of regulatory activity in the insurance industry.

ASIC has raised concerns regarding car insurance investigations, started consultation on regulatory guidance for the Product Intervention Power and is proposing to implement significant changes to Internal Dispute Resolution (IDR). The Product Design and Distribution Obligations (PDDO) have also become law with an implementation date of 5 April 2021. Future areas of legislative intervention include regulation of claims handling, implementation of unfair contract terms provisions and a deferred sales model for add-on insurance products.

A holistic approach to addressing regulatory reform is therefore required, because the same processes may need to be changed to meet regulatory requirements. For example, complaints handling is affected by both the reforms to IDR and PDDO. Policy wordings are affected by both the PDDO and the proposed unfair contract terms legislation.

Our team is working with the insurance industry to navigate this regulatory change, which affects insurers, coverholders and brokers. Please get in touch with any of the authors for more information on how we can assist.