Jayson Forrest is the managing editor of Money & Life Magazine.
A review of the Royal Commission’s recommendations into Misconduct in the Banking, Superannuation and Financial Services Industry examines Insurance, with a focus on how these recommendations specifically impact licensees and planners.
This article is the third part of a series of articles that examines some of the Royal Commission’s key recommendations made by Commissioner Kenneth Hayne that may affect the provision of financial advice. These key recommendations have been broken up into six sections:
External Dispute Resolution and Consumer Compensation
Codes of Practice, Regulators and Culture
Additional Government measures
Part 1 examined Section 1 – Financial Advice and Part 2 looked at Section 2 – Superannuation. This article will examine Section 3 – Insurance. The FPA’s full response to all six sections of the Royal Commission’s Final Report can be accessed here.
Part 3: Insurance
Recommendation 4.1 – No hawking of insurance
Consistently with Recommendation 3.4, which prohibits the hawking of superannuation products, hawking of insurance products should be prohibited.
FPA comment: The FPA has continuously expressed concerned about the potential for consumer detriment in less regulated channels used for selling insurance products to consumers by sales representatives.
The FPA supports changes to the regulations to ensure these consumers are appropriately protected and are being offered cover that is fit for purpose. In addition, the FPA would support regulations that clearly separate product sales and advice, and mandate disclosures which make it clear when a consumer is being sold a product and if the sales representative will be remunerated via a commission or incentive payment for the sale of that product.
As this recommendation is intended to prohibit the unsolicited spruiking and selling of insurance products, it should not impact the provision of financial advice. It is suggested that members ensure they include a clear scope of the advice to be provided in the client engagement letter.
Recommendation 4.5 – Duty to take reasonable care not to make a misrepresentation to an insurer
Part IV of the Insurance Contracts Act should be amended, for consumer insurance contracts, to replace the duty of disclosure with a duty to take reasonable care not to make a misrepresentation to an insurer (and to make any necessary consequential amendments to the remedial provisions contained in Division 3).
FPA comment: The purpose of Recommendation 4.5 is to flip the responsibility of pre-contract disclosures from the consumer onto the insurer for ‘consumer insurance contracts’.
Commissioner Hayne’s recommendation of a duty to take reasonable care not to make a misrepresentation to an insurer places the burden on an insurer to elicit the information that it needs in order to assess whether it will insure a risk and at what price. The duty does not require an individual to surmise, or guess, what information might be important to an insurer.
The FPA supports Recommendation 4.5, as this will deliver positive benefits for consumers and their planners during the purchase and claims process.
Recommendation 4.6 – Avoidance of life insurance contracts
Section 29(3) of the Insurance Contracts Act should be amended so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms.
FPA comment: Commissioner Hayne was concerned that amendments to s29 of the Insurance Contracts Act made in 2013 had resulted in an ‘avoidance’ regime that is unfairly weighted in favour of insurers. Specifically, that the removal of the words ‘on any terms’ meant that currently an insurer is not required to demonstrate that it would not have entered into a policy on alternative terms had the non-disclosure or misrepresentation not occurred.
The intent of this recommendation is to ensure that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms.
The FPA supports Recommendation 4.6, as it will deliver significant benefits for consumers.
Recommendation 4.8 – Removal of claims handling exemption
The handling and settlement of insurance claims, or potential insurance claims, should no longer be excluded from the definition of ‘financial service’.
FPA comment: The FPA supports applying section 912A of the Corporations Act to all aspects of the provision of life risk insurance, including the handling and settlement of insurance claims, as it would offer significant protection benefits and consistency for consumers.
Recommendation 4.9 – Enforceable code provisions
As referred to in Recommendation 1.15, the law should be amended to provide for enforceable provisions of industry codes and for the establishment and imposition of mandatory industry codes.
In respect of the Life Insurance Code of Practice, the Insurance in Superannuation Voluntary Code and the General Insurance Code of Practice, the Financial Services Council, the Insurance Council of Australia and ASIC should take all necessary steps, by 30 June 2021, to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder, designated as ‘enforceable code provisions’.
FPA comment: The FPA supports the application of Codes of Conduct, which set higher and industry specific obligations than the requirements in the law, are enforceable and enforced, and require a binding commitment on the signatories to the Code to comply with the codified standards.
As codes are updated or approved by ASIC, members will need to ensure they comply with the ‘enforceable code provisions’ of codes which they are covered by and be aware of the accountability provisions of these codes. As detailed in Recommendation 1.15, ‘enforceable code provisions’ are provisions in respect of which a contravention will constitute a breach of the law.
Recommendation 4.10 – Extension of the sanctions power
The Financial Services Council and the Insurance Council of Australia should amend section 13.10 of the Life Insurance Code of Practice and section 13.11 of the General Insurance Code of Practice to empower (as the case requires) the Life Code Compliance Committee or the Code Governance Committee to impose sanctions on a subscriber that has breached the applicable Code.
FPA comment: The FPA supports where a regulator has identified regulatory breaches of a life risk provider’s operations, that these should be required to be reported to the Life Code Compliance Committee (LCCC) by the subscribing life company for consideration of additional sanctions, including removal from the Code and the FSC.
As codes are updated or approved by ASIC, members will need to ensure they comply with the ‘enforceable code provisions’ of codes which they are covered by and be aware of the accountability provisions of these codes.
Recommendation 4.13 – Universal terms review
Treasury, in consultation with industry, should determine the practicability, and likely pricing effects, of legislating universal key definitions, terms and exclusions for default MySuper group life policies.
FPA comment: This recommendation aims to standardise, or at least standardise in key respects, key definitions of life insurance terms within MySuper, as subtle differences in definitions, terms and exclusions from one policy to another can make the task of comparing policies particularly challenging.
Changes will almost certainly affect the cost of insurance premiums, and will affect how much superannuation the member will have at retirement. Hence, the adoption of standardised terms should be carefully considered, and the consequences of change identified before they are implemented.
Please note: Due to space restrictions, this article only outlines the key recommendations from the Final Report that specifically impact licensees and planners in relation to Insurance. To read the FPA’s full response to the Royal Commission’s Final Report into ‘Misconduct in the Banking, Superannuation and Financial Services Industry’, go here.