ASIC’s review of direct life insurance – the results are in

Ann-Marie_ColemanLate last week, ASIC released Report 587 on the sale of direct life insurance, revealing that its has found that sales practices and product design are leading to poor consumer outcomes. Direct life insurance products are sold within a general advice or no advice model.

Throughout 2017-18 ASIC has conducted a multi-stage review of the sale of direct life insurance, including term life, accidental death, trauma, total and permanent disability and income protection insurance. The release of Report 587 follows action taken by ASIC earlier this year against ClearView Life Assurance Limited that resulted in customer refunds (see our previous blog entry).

ASIC’s review found that consumers are cancelling their life insurance policies sold direct in very high numbers, with:

  • one in five policies cancelled in the cooling-off period;
  • one if four policies (that remained in force beyond the cooling off period) cancelled within 12 months; and
  • three in five policies cancelled within three years.

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New EDR scheme established for financial services complaints

Ann-Marie_ColemanThe Government has passed legislation which introduces a new external dispute resolution (EDR) scheme, known as the Australian Financial Complaints Authority (AFCA), to resolve disputes relating to financial services complaints. The establishment of AFCA means there will be a single scheme for all financial services and superannuation complaints. Currently there are three separate schemes: the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal.

AFCA will have higher monetary limits and compensation caps than the existing schemes. In addition, there will be an enhanced internal dispute resolution (IDR) framework to report IDR activities to AFCA in accordance with ASIC requirements.

AFCA will start accepting complaints no later than 1 November 2018. The operator of the scheme will be authorised by the Minister, and the scheme will be subject to ongoing oversight by ASIC. Members of FOS and CIO must continue to hold their EDR membership in the lead up to AFCA.

Further information can be found here.

Draft legislation proposes design and distribution obligations for financial products

Ann-Marie_ColemanLate last year, the Government released an exposure draft of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2017 (Bill). The Bill seeks to introduce:

  • design and distribution obligations for financial products to ensure such products are targeted at the right people; and
  • a temporary product intervention power for ASIC when there is a risk of significant consumer detriment.

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ASIC review into direct life insurance results in customer refunds

ASIC has announced that ClearView Life Assurance Limited (Clearview) will refund 16,000 customers a total of approximately $1.5 million. This follows an ASIC review of Clearview’s life insurance sales practices.

The review focused on sales to consumers residing in high Indigenous populated areas who were unlikely to have English as their first language. The sales were made directly to consumers, without personal financial advice. The review found that sales staff:

  • made misleading statements about the cover, the premiums and the effect of the customer’s pre-existing medical conditions;
  • did not clearly obtain the customer’s consent to purchase the cover before processing premium payments; and
  • used unfair and high pressure sales practices.

In response to ASIC’s concerns, Clearview will:

  • refund full premiums, all bank fees and interest to customers with high initial lapse rates and refund 50% of premiums and interest to customers with high ongoing lapse rates;
  • offer a sales call review to other eligible customers and remediate if there is evidence of poor conduct;
  • engage EY (as an independent expert) to provide independent assurance over the remediation program; and
  • cease selling life insurance directly to consumers (i.e. without personal financial advice).

This announcement follows a continued focus by ASIC into the life insurance industry. ASIC has noted that it is conducting an industry review of direct life insurance to identify any concerns with sales practices or product design that may be driving poor consumer outcomes. ASIC will publish the findings of their review in mid-2018.

Further information can be found here

ASIC seeks further powers to provide directions to licensees

Ann-Marie_ColemanThe ASIC Enforcement Review Taskforce (Taskforce) is seeking to expand ASIC’s powers to give directions to financial services and credit licensees (licensees). This follows on from the Taskforce’s earlier recommendation that ASIC’s banning powers be enhanced (see our previous update for more information – available here).

The key recommendations from the Taskforce are as follows:

  1. Where necessary to address or prevent compliance failures, ASIC should have the power to direct licensees regarding the conduct of their business (Directions Power). The legislation would set out the types of directions that ASIC can make.
  2. The Directions Power should be triggered where a licensee has, or will, contravene their licensing requirements (including relevant laws).
  3. ASIC should be able to apply to a court to enforce the direction and take administrative action if the licensee does not comply with the direction.

The Taskforce proposes that an appropriate process for the exercise of the Directions Power would be:

  • ASIC provides a notice to the licensee setting out the intention to make a direction, reasons and a reasonable time period for the licensee to respond;
  • If any response from the licensee does not adequately address ASIC’s concerns, ASIC may then make the direction; and
  • When making the direction, ASIC will set out the reasons and a time frame for complying.

These changes have been proposed as the Taskforce considers that there are shortcomings with respect to ASIC’s existing powers to require licensee’s to adopt internal systems or restrict their activities, including that the time it takes to impose additional conditions can leave financial customers at risk. Currently, ASIC may only make changes to the licence after giving the licensee the opportunity to appear at a private hearing before ASIC and make submissions. ASIC’s current powers also include the ability to apply for an injunction or negotiate an enforceable undertaking with the licensee.

The Taskforce has released a consultation paper on its recommendations and submissions will close on 20 November 2017.

Further information can be found here.

ASIC seeking to enhance banning power

Ann-Marie_ColemanThe ASIC Enforcement Review Taskforce (Taskforce) is seeking to enhance ASIC’s banning powers, to ensure ASIC can take action to ban senior managers from managing financial services business.

The Taskforce has made two key recommendations to increase the banning powers.

1. Whilst ASIC currently has the power to ban a person from providing financial services, the Taskforce has recommended the powers be broadened to allow ASIC to ban a person from:

  • Performing a specific function in a financial services business, including being a senior manager or controller of a financial services business; and/or
  • Performing any function in a financial services business.

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ASIC consults on add-on insurance reforms

ASIC is seeking feedback on proposals to reform the sale of add-on insurance through car dealerships.

Consultation Paper 294 sets out ASIC’s approach and proposed reforms in detail. The reforms would see the introduction of:

  1. A deferred sales model

ASIC proposes to introduce a deferred sales model which would insert a pause in the sales process for add-on insurance products. The proposal is that a period of between 4 to 30 days must elapse before dealers could sell an add-on insurance product to a customer. ASIC has suggested 3 points in time from which the deferral period could commence:

a. When the customer communication is provided;

b. When the agreement to purchase the vehicle and/or arrange financing is finalised and the customer communication has been provided; or

c. When the vehicle has been delivered to the customer and the customer communication has been provided.

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Enforcement report confirms ASIC’s focus for remainder of 2017

Ann-Marie_ColemanOn 22 August 2017, ASIC released a report regarding its enforcement outcomes from the first half of 2017. The report also flags what the focus of ASIC’s enforcement activity will be over the next six months (1 July to 31 December 2017). Consumer credit continues to be a key focus for ASIC, as do obligations of Australian financial services (AFS) licensees.

In the first half of 2017 the majority (59%) of ASIC enforcement in relation to financial services related to credit and 8% of ASIC’s enforcement relating to financial services was connected with dishonest conduct and misleading statements.

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CCI sales process to be overhauled

Ann-Marie_ColemanASIC has recently announced the establishment of a Consumer Credit Insurance (CCI) Working Group, who have been tasked with improving outcomes for CCI customers.

The CCI Working Group will progress a range of reforms. A key reform will be the introduction of a deferred-sales model for CCI sold with credit cards over the phone and in branches. This means that banks will be prohibited from selling a CCI policy until at least four days after the customer has applied for their credit card. The intention of this reform is to reduce the risk that the customer will feel pressured to purchase the CCI policy or purchase a CCI policy that does not meet their needs. The deferred-sales model will not apply to CCI sold online or with homes loans and personal loans (though other measures will be introduced to ensure good consumer outcomes in these areas).

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Policy interpretation comes down to the “natural and ordinary meaning”

A recent judgment from the Victorian Supreme Court’s Insurance List, Guastalegname v Australian Associated Motor Insurers Ltd [2017] VSC 420, provides a succinct summary (and helpful refresher) of the principles to be applied when interpreting a policy of insurance.

The case concerned the interpretation of a soil movement exclusion in a Home Building Insurance policy providing cover for a range of insured events including storm. A storm caused heave of the clay soil beneath the foundation slab of a building. This resulted in lifting of the home’s slab, walls and roof frame, which in turn resulted in cracking and other consequential damage.

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