The Australian Securities and Investments Commission (ASIC) is seeking feedback on a draft product intervention order in relation to add-on motor vehicle financial risk products. The release of the revised draft intervention order follows ASIC’s public consultation process in October 2019. The objective of the intervention order is to reduce the mis-selling of insurance products during the car purchase or hire process and to improve consumer outcomes. ASIC has undertaken a number of investigations into the sale of insurance by caryard intermediaries and it has been an area of active surveillance for some time.
The proposed instrument will enable ASIC to introduce the deferred sales model for caryard intermediaries using ASIC’s existing powers before Parliament passes Treasury’s proposed new laws to implement a deferred sales model for add-on insurance products generally.
The affected products are called ‘add-on motor vehicle financial risk products’ and include the following:
- Assistance insurance product
- Consumer credit insurance product
- Guaranteed asset protection insurance product
- Mechanical breakdown insurance product
- Warranty product
- Purchase price protection insurance product
- Tyre and rim insurance product.
Warranty products that are not insurance have now been included in the list of affected products. Notably, comprehensive motor insurance continues to be exempt and loan or lease termination insurance is now exempt.
What is ASIC proposing?
Under the proposed order, an intermediary must not arrange ‘motor vehicle financial risk products’ in connection with a purchase of a motor vehicle, motor vehicle loan or motor vehicle lease. A product issuer is also prohibited from issuing the policy if the intermediary has contravened the order.
It is proposed the prohibitions will not apply:
- In the first 3 months after the order takes effect, if the intermediary complies with the giving of information to ASIC set out in the order (ASIC Data Requirement); and
- After six months after the order takes effect, if the intermediary complies with both the ASIC Data Requirement and also the Deferred Sales Model set out in the order.
Specific prohibitions apply to mechanical risk products (Mechanical Risk Product Conditions).
- Where there is no fee charged for the product;
- Where the arranging or issuing occurs after personal advice has been provided to the client by an AFS licensee; or
- In relation to extensions in term of a motor vehicle loan or motor vehicle lease and the client acquired the same product when the loan or lease was originally entered into.
The ASIC Data Requirement
Under the ASIC Data Requirement in the order, a product issuer must, if requested by ASIC, give a written statement to ASIC every 6 months containing information about the product. The prescribed information includes details about premiums, coverage, cancellation rates, claims information, details of consumers and vehicles covered, commissions, and distribution channels.
In relation to warranty products, if the product issuer has outsourced administration of the product to a warranty administrator, then the outsourcing agreement must contain a requirement for the administrator to give such a written statement to ASIC.
On the fourth day…I got insurance
The Deferred Sales Model, which is proposed to start six months after the commencement of the order, requires the intermediary to make an ‘online consumer roadmap’ available to the retail client after they have entered into a contract to purchase or lease a motor vehicle, or applied for a motor vehicle loan or motor vehicle lease.
An ‘online consumer roadmap’ is an online portal where the client can see the insurance choices without any particular recommendation, and choose to apply, acquire, decline or request further information about a product. The order describes in detail ASIC’s requirements for the online consumer roadmap, including a requirement to make certain disclosures and link to ASIC’s MoneySmart website.
A ‘deferral period’ commences when the roadmap is provided to the client and ends at the start of the fourth day after the roadmap is provided. An intermediary must not initiate contact with a retail client about an add-on motor vehicle financial risk product during the deferral period.
If the client expresses an intention to apply for or acquire the add-on motor vehicle financial risk product using the facility in the online consumer roadmap before the end of the deferral period, the prohibition on the intermediary from engaging in ‘arranging conduct’ will not apply.
Mechanical Risk Product Conditions
Additional conditions are proposed for mechanical risk products, being a mechanical breakdown insurance product or warranty product. It will become a condition that, before the intermediary engages in ‘arranging conduct’ for these products:
- The manufacturer warranty must have expired or have less than 12 months/10,000km/20 per cent of the kilometres driven limit cover remaining; and
- The terms of the mechanical risk product must meet certain conditions, including not having any overlap with any statutory or manufacturer warranty and an ability to cancel the product at any time and receive a pro-rata refund.
How will the deferral period work in practice?
In our view, the proposed product intervention order shows that ASIC is taking a proactive approach to caryard insurance sales. The proposed order goes beyond Treasury’s proposal to introduce a deferred sales model for add-on insurance products generally by including a data reporting requirement, specific prohibitions for mechanical risk insurance products, and prescribing an online consumer roadmap. It is questionable whether the prohibitions and conditions potentially hamper the ability for intermediaries to properly inform car hire and purchase consumers about their insurance options. Insurance products can play an important role as part of an overall risk management strategy for valuable assets.
As currently proposed, the changes are likely to require caryard intermediaries and their insurance partners to work closely to develop an appropriate online consumer roadmap and ensure they can meet ASIC’s data reporting requirements. Intermediaries will also need to train their staff to ensure they comply with the new requirements.
It also remains to be seen whether ASIC will provide an alternative to an online consumer roadmap where the consumer indicates to the intermediary they are not comfortable using an online portal. Furthermore, in implementing the order, intermediaries and insurers should also be mindful it does not replace but works in addition to the current and proposed prohibitions on hawking insurance.
The proposed order will commence three months after the date it is registered on the Federal Register of Legislation. The deferred sales model does not commence for six months after the commencement of the order. This is a welcome improvement as there was no transition period in the previous draft of the order.
Feedback can be sent to ASIC by Wednesday 19 August 2020. For more information, please feel free to contact the authors.