After months of delays due to COVID-19, the shake-up of insurance laws recommended by the Financial Services Royal Commission is set to occur next year. The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Bill) was introduced into Parliament on 12 November 2020. Parliament is looking at introducing all the measures together in one bill. The bill introduces 12 new measures, of which seven are targeted at the insurance industry.

What’s in store for the insurance industry?

We have been tracking the insurance regulatory reforms on our Insurance Regulatory Hub.

Draft exposure legislation for the reforms was released at the end of 2019 for public consultation. The consultation period concluded in January this year. The bill provides us with the outcome of the consultation process for the first time, as submissions are not yet publically available from the Treasury’s website. With the exception of the claims handling reforms, the bill appears to be very similar to the exposure draft for each reform.

Enforceable code provisions

Proposed commencement: Later of Royal Assent and 1 January 2021

Schedule 1 to the Bill amends the Corporations Act 2001 (Cth) (Corporations Act) and the National Consumer Credit Protection Act 2009 (Cth) (Credit Act) to strengthen codes of conduct in the financial services industry. The enhanced code regime will allow ASIC to designate enforceable code provisions in approved codes of conduct and establish a mandatory code of conduct framework. It is likely that ASIC will seek to designate certain provisions in the new 2020 General Insurance Code of Practice and current Life Insurance Code of Practice as enforceable code provisions.

Enforceable code provisions can be designated in both voluntary and mandatory codes, and will be agreed with the applicant and designated by ASIC through the code approval process. Provisions which could be designated as enforceable may include:

  • Cooling off periods (which already apply under s 1019B of the Corporations Act);
  • Providing information to consumers; and
  • Fees and charges.

A number of changes proposed by the Insurance Council of Australia have been adopted since the exposure draft was released. These include tightening the minimum criteria for an enforceable code provision. The test is now whether a breach of the provision is ‘likely to result in significant and direct detriment to the person’. Previously, the test was whether a breach ‘could result in significant detriment to the person’, which is much broader.

Avoidance of life insurance contracts

Proposed commencement: Later of Royal Assent and 1 January 2021

The Bill amends s 29 of the Insurance Contracts Act 1984 (Cth) to limit the circumstances in which an insurer can avoid a contract of life insurance. An insurer may only avoid the contract if the failure was not fraudulent, or the misrepresentation was not made fraudulently, and the insurer would not have been prepared to enter into the contract on any terms.

We appear to have come full circle with this provision, reverting to the pre-2014 position. Life insurers will no longer have the ability to avoid a contract if there is innocent misrepresentation unless they would not have entered into a contract on any terms, even if those terms are radically different. Without proper processes in place, it may be challenging for life insurers to show that the misrepresentation would have resulted in no policy being offered at all.

The amendment will apply to any life insurance contract that is entered into after the date of commencement.

Duty to take reasonable care not to make a misrepresentation

Proposed commencement: Later of Royal Assent and 1 January 2021, transition period available to 5 October 2021 for General Insurance

The Bill amends the Insurance Contracts Act 1984 (Cth) (ICA) to introduce the new duty of disclosure regime for ‘consumer insurance contracts’, being insurance obtained wholly or predominantly for personal, domestic or household purposes of the insured. The new definition is broader than the definition of ‘eligible contracts of insurance’ currently in the ICA. The amendments replace the current duty of disclosure with a duty to take reasonable care not to make a misrepresentation. The standard of care required from the customer can change depending on all relevant matters, including the type of insurance contract in question, any explanatory material provided, and how clearly the insurer communicated the questions and the importance of answering them correctly.

The new duty will take some time to get used to and it may be more difficult for insurers to prove that customers have not complied with it as it is based on a ‘reasonable’ standard of care. Furthermore, unlike the current regime, the new law also does not prescribe a particular form of notice to customers. Insurers will need to determine how they will communicate the importance of answering underwriting questions to their customers and the possible consequences of failing to do so. This could directly affect the standard of care.

To prepare, insurers will need to review the questions they currently ask during the underwriting process and the manner they are presented to the customer. The new law might mean insurers need to ask fewer and more targeted questions, and tweak their underwriting process.

Deferred sales model

Proposed commencement: At the same time as the new hawking prohibitions law (see below)

The Bill also amends the Australia Securities and Investments Commissioner Act 2001 (Cth) to implement an industry-wide deferred sales model for the sale of add-on insurance products. The deferred sales model prohibits the sale of add-on insurance products for at least four days after a customer has entered into a commitment to acquire the principal product or service. The amendments impose offences for any failure to comply with the new requirements.

The proposed model is substantially the same as the exposure draft legislation and includes an exception for comprehensive motor insurance. It will be interesting to see whether ASIC will proceed to use its product intervention power to implement the deferred sales model for caryard intermediaries now that the bill to implement the deferred sales model for add-on insurance products generally has been introduced in Parliament.

A key change from the exposure legislation is the insertion of a ‘timing of sale’ provision. An add-on insurance product is taken to be sold to a customer no later than the first time at which no further action from the customer is required, even if the sale does not occur until a later time.

Caps on vehicle dealer commissions

Proposed commencement: Later of Royal Assent and 1 January 2021

Schedule 4 of the Bill introduces a mechanism for ASIC to set, by legislative instrument, caps on commissions provided in connection with an add-on risk product. The mechanism apples to add-on risk products in connection with:

  • The sale or long term lease of a motor vehicle to the product recipient;
  • The provision of credit connected with the sale or long term lease of a motor vehicle to the product recipient; or
  • The provision of a warranty by the product recipient in connection with the sale or long term lease of a motor vehicle to another person by the product recipient.

The wording of the bill suggests that both insurance and non-insurance products will be affected.

The bill is substantially the same as the exposure draft. However, amendments have been made to the definition of ‘motor vehicle’. The revised definition is notably broader and now includes any motor powered vehicle for land transport, whether or not it is for use on a road. It also includes vehicles intended to be towed by such vehicles. The definition excludes vehicles not intended to be used on the road and of a kind used for persons with restricted mobility (such as electric wheelchairs and mobility scooters).

As the commission cap will be set by ASIC after the legislation commences, the value of the cap is not yet known. As a guide, consumer credit insurance is subject to a 20% cap under the National Credit Code.

Insurers and intermediaries should consider whether affected arrangements are suitable moving forward, and whether their sales models are viable under the new regime without amendment.

Hawking of financial products

Proposed commencement: Later of Royal Assent and 5 October 2021

Schedule 5 of the Bill introduces the new prohibition on hawking of financial products, removing current exemptions available under the Corporations Act. The new prohibition makes it an offence to offer a financial product for issue or sale, or request or invite the consumer to apply for such a financial product, if the consumer is a retail client and the offer, request or invitation is made in the course of, or because of, an unsolicited contact. The hawking prohibitions work hand in hand with the deferred sales model. If one applies, the other does not.

There have been some changes since the exposure draft was published. Interestingly, with the exception of the other than the personal advice exemption, all other exemptions have been removed. Instead, there is now an ability for other exemptions to be made later by regulation.

The revised bill provides clarity to insurers that not all contact which ‘creates an expectation of an immediate response’ will be captured. Instead, that wording has now been replaced with ‘real time interaction in the nature of a discussion or conversation’. This would seemingly make it clear that emails are unlikely to be unsolicited contact.

The consent requirements have also been updated. While the customer must still give the consent, and the consent must be a positive and voluntary act, the customer no longer needs to specifically request the insurer/intermediary to issue or sell the product. A customer can give consent to an insurer/intermediary to make the offer to sell the product. This removes one of the impractical hurdles to consent which was contained in the exposure draft.

Use of the terms ‘insurance’ and ‘insurer’

Proposed commencement: Later of Royal Assent and 1 January 2021

The proposed restrictions on the use of the words ‘insurance’ and ‘insurer’ is as expected. Products that are not insurance cannot be called insurance. Similarly, a business cannot use the word ‘insurer’ to describe their products or services if the product or service is not insurance.

Claims handling and settling services

Proposed commencement: Later of Royal Assent and 1 January 2021 (subject to a transition period until 1 July 2021 – see below)

As expected, the bill introduces a licensing requirement for claims handling and settling services. A person will require an Australian Financial Services Licence (AFSL), or be an authorised representative of an AFSL holder, in order to provide a claims handling and settling service. The exposure draft had contemplated that only persons providing claims handling or settling service on behalf of an insurer were to be affected. However, the bill has adopted a more expansive approach.

The bill introduces licensing requirements for ‘claimant intermediaries’, which is a person who carries on a business of representing persons insured under insurance products in pursuing claims under those products in exchange for a benefit (whether monetary or otherwise). This is a significant change in approach, particularly since claimant intermediaries were not the subject of scrutiny during the Royal Commission. It potentially brings claims advocates and brokers who act for insureds within the realm of the proposed regulation, unless ASIC grants an exemption under the regulation. Claimant intermediaries acting for retail clients will also be required to provide a Financial Services Guide.

Given the significant attention given to this bill during consultation process, it is not surprising there are also a number of other proposed changes. These include:

  • Clarifying the definition of ‘insurance claims manager’ so that it only applies where claims handling or settling service is the primary part of the business;
  • Loss assessors and other service providers to insurers (eg. investigators and tradespeople) are no longer required to hold an AFSL or be an authorised representative of an AFSL holder, as long as they do not have authority to reject all or part of a claim; and
  • Providing that cross-endorsement under s 916C does not apply if the only financial services provided by the person as authorised representative are claims handling and settling services.

The ‘Statement of Cash Settlement Options’ has been replaced with a ‘Cash Settlement Fact Sheet’ (CSFS). The bill clarifies that the CSFS is only required where cash settlement is not the only option to settle a claim. The content requirements of the CSFS have also been bolstered to require a breakdown of each component of the cash settlement, and include details about the rights of review.

The proposed legislation also puts in place a transition period. A person who is required to be licensed under the new law to provide claims handling and settling services must lodge an AFSL application or variation by 30 June 2021. They are then able to continue providing claims handling and settling services unlicensed until ASIC makes a decision on the application or 31 December 2021 (this date may be extended by up to six months to 30 June 2022). This gives ASIC up to 18 months to process all the applications from 1 January 2021.

Other regulatory enforcement measures

The bill also introduces cross industry enforcement measures. This includes a revamp of the breach reporting regime for AFSL holders under section 912D of the Corporations Act which commences from 1 October 2021.

Schedule 11 to the Bill amends the Corporations Act to clarify and strengthen the breach reporting regime for financial services licensees. They key features of the amendments include:

  • Expanding the kinds of situations that need to be reported by licensees to ASIC;
  • Requiring licensees to lodge breach reports with ASIC; and
  • Requiring ASIC to publish data about breach reports on its website.

What’s next?

Most insurers and intermediaries have been working through the implications of the regulatory change based on the exposure draft legislation and engagement with regulators. However, the release of the bill provides some more certainty as to the key dates and outcome of the consultation.

The bill is yet to pass the houses of Parliament, so there may still yet be changes to come. Be sure to subscribe to our blog to receive the latest updates (see link on the right).

Feel free to get in touch with the authors if you have any questions.