“The life insurance industry is a significant part of the financial services sector in Australia. It has a noble purpose in providing financial protection to policyholders in times of need and financial distress. Despite this, there are sections of the industry that can and must do better in delivering the protection they promise whilst remaining financially viable long into the future.”
— Mr Steven Irons, MP Chair of Parliamentary Joint Committee on Corporations and Financial Services Life Insurance Industry
For an industry already reeling from the implementation of the Life Insurance Framework, and anticipating worse from the Royal Commission, being told by the Parliamentary Joint Committee on Corporations and Financial Services (Life Insurance Industry) that they “must do better” is both depressing and disheartening. It becomes less so when you notice the Committee’s focus on the role and influence of product issuers and their attempt to move beyond remuneration arrangements and address systemic issues.
At a high level, the committee’s report focussed on:
- effective consumer protections and industry codes of practice;
- the transparency of remuneration, commissions, payments and fees;
- the provision of advice in the best interests of consumers;
- group life insurance arrangements that do not disadvantage certain groups of consumers;
- appropriate access to personal medical and genetic information; and
- fair claims handling practices.
We recommend that you read the report and consider how the recommendations, if implemented, will impact you and your business. If you have any specific questions, email firstname.lastname@example.org and we’ll do our best to provide you with clarity.
This article will focus on three main aspects of the Report – Consumer Protections, Industry Codes and Approved Product Lists. Along the way, we’ll cover ASIC’s role in this brave new world and a range of other aspects that affect advice businesses. Rest assured that we’ll circle back to the other issues in subsequent posts.
- The end of ‘substantially weaker’ consumer protection.
The Financial Services Regime was intended to usher into existence a single licensing, conduct and disclosure regime.
Unfortunately, it was not entirely successful.
“(1) A contract of insurance to which this Act applies is not capable of being made the subject of relief under-
(a) any other Act;
(b) a State Act; or
(c) an Act or Ordinance of a Territory, that provides for relief in respect of harsh, oppressive, unconscionable, unjust, unfair or inequitable contracts.”
— Insurance Contracts Act 1984 No. 80 of 1984 – SECT 15
Traditionally, Section 15 of the Insurance Contracts Act and the Insurer’s duty of ‘utmost good faith’ have protected Insurers against claims of unfairness, harsh or oppressive conduct, unjust, unfair and inequitable terms, unconscionable conduct and misleading or deceptive conduct.
In anticipation of the Royal Commission, and in response to whistleblowers like Dr Koh and Alison Moore, the Committee categorically rejected this fiction and recommended that the Banking Executives Accountability Regime be extended to include life insurance and Insurers.
“However, persistent misconduct by today’s corporate life insurance industry demonstrates that the rationale for Section 15 of the Insurance Contracts Act is no longer credible. It is simply no longer reasonable to exempt the life insurance industry from the application of consumer protections.”
ASIC may be pivoting to care, but the Committee want BEAR to include conduct matters and the Committee wants ASIC to police misconduct.
In fact, ASIC substantially benefit from the Committee’s recommendations.
The Committee has recommended that ASIC’s product intervention powers should be further extended to include insurance products and ASIC should be able to make orders about remuneration.
They’ve also recommended that ASIC be empowered to oversee the claims management process.
Remember that ASIC also have to conduct “a systematic review and risk assessment of all payments and benefits flowing between participants in each sector of the life insurance industry—direct, group, and retail—and inform the government of any regulatory gaps”.
Those of you that read “Rivers of Gold” might be relieved that Recommendation 5.3 requires ASIC and APRA to review the “current and historical payments” made by Insurers to Trustees.
“The committee is not swayed by arguments from the life insurance industry that the industry needs special provisions due to the nature of risk involved in the industry, or the potentially high value of transactions. Instead, the committee considers that such points are an argument for stronger, not weaker, consumer protections because when the life insurance industry is not accountable for its share of the contracted risk, the consumer ends up being fleeced and left carrying all the risk.”
Be alert and (a little) alarmed
In addition to the new regulatory focus listed above, there are two other recommendations require your careful consideration
- The committee recommends (3.6) that the penalty amounts under ASIC- administered legislation, including the life insurance industry, should be set at three times the benefits obtained for every party to the transaction, including advisers, licensees and insurers.
- The committee recommends (3.7) that ASIC conduct random audits of 20 percent of the life insurance adviser population over a three year period. Where misconduct is identified, appropriate entries should be recorded on the financial advisers register, and statistics on licensees and insurers should be published, so the public can be informed. Advisers that have been reviewed must also publish the outcome on their website in a highly visible location. If necessary ASIC should be provided with additional funding to allow these random audits to occur.
“creating a sufficient deterrent for misconduct in the financial services sector requires both significant penalties and a reasonable prospect of being caught. 3.108”
— Greg Medcraft, ASIC quoted at 3.108
2. A ‘somewhat tardy response to a pressing issue’
“.. the Code does not meet best practice standards and does little, if anything, to restore confidence in the industry.”
— Financial Rights Legal Centre, Submission 17, p. 8
Download the AIST Code of Practice
In an industry riven by conflicts it defies both reason and experience to suggest that ‘industry self-regulation’ would “deter misconduct and address the poor practices that have become all too prevalent in the life insurance industry.” (4.48)
Instead, the Committee recommended a ‘co-regulatory approach’ that empowers ASIC to undertake enforcement action and respond to ‘systemic or systematic breaches of codes of practice’.
If you were concerned that the FSC had succeeded in presenting the ills of the industry as the results of ‘bad apples’ or advisers, consider how the Committee has suggested they deal with denials of claim. We’ll deal with claims in more detail later, but you should note that the Committee recommended that
“the Financial Services Council’s Life Insurance Code of Practice include explicit commitments that:
- where a pre-existing condition is to be used by an insurer as the basis for denying a claim or avoiding a contract a direct medical connection between the prognosis of a pre-existing diagnosed condition and the claim must be established; and
- the statistical and actuarial evidence and any other material used to establish a pre-existing condition, as well as a written summary of the evidence in simple and plain language, be provided by the life insurer to the consumer/policyholder on request.
The Committee spent considerable time grappling with mental health issues and their treatment by Insurers.
We anticipate this will be a burgeoning area for insurers.
3. Codified Conflicts and Approved Product Lists (APL)
“The committee is therefore recommending that the life insurance industry should have, as a matter of urgency, a balance of affiliated and non-affiliated products on their APLs, and if affiliated products are recommended, the affiliation should be disclosed, and the customer should be offered a comparison with non-affiliated products. Beyond this, the committee further recommends that the industry transition to open APLs. ”
The Approved Product List is, nothing more than, a risk management device intended to assist advisers identify ‘appropriate’ financial products to be recommended for retail clients.
In theory, the APL provides parameters for advisers by identifying products, and classes of products, that the Licensee has assessed as consistent with their risk profile, sustainable and potentially suitable.
The maintenance of an APL, which is essentially a curated list of researched and verified products, delivers efficiencies to the adviser, and their clients, by excluding products and providers that are unsustainable or unsuitable.
In practice, however, the APL has been used as an excuse for inappropriate and conflicted recommendations, a tool for maximising group-product sales and a substitute for considered and un-conflicted advice. More perniciously, some licensees have used their APL for revenue generation, charging product issuers substantial fees for inclusion on the APL.
Product Issuers have often paid, despite their reservations, knowing that their products will neither be considered nor recommended by advisers if their products are not contained on the Licensee’s APL.
Shortly after the commencement of FOFA, an Insurance Executive asked me how being asked to pay six-figures to be included on a Licensee’s APL was consistent with FOFA. A bank-owned Licensee had offered him the opportunity to be one of four Insurers (three external) included on their APL. The Executive was troubled by the demand and asked what ASIC was doing to stop these practices. I explained that ASIC could not act unless they were aware of the situation. In the end, he didn’t contact ASIC but simply made a commercial decision to secure distribution by paying the required amount.
The Committee seems to appreciate how severely practice has deviated from theory and tries to reconcile them.
Their recommendations may be made with the best of intentions, but I suspect that Licensees may struggle to create an APL that, effectively, balances affiliated and non-affiliated products.
Requiring advisers to provide retail clients with ‘comparisons with non-affiliated products’ is an impractical recommendation likely to impose significant costs and additional compliance requirements. Worse still, it is a recommendation that fails to address either the commercial and regulatory reasons for an APL or the challenges of vertical-integration.
Most depressingly, the Committee ignores the limitations of disclosure to suggest that, if group products are recommended, the association should be disclosed and the customer given a comparison with non-affiliated products. These operational concerns aside, there is little doubt that BT’s confident appearance before the Committee advocating narrow APLs caused the Committee to reject BT’s view and suggest more rigorous management of APLs. Nor was the Committee “persuaded that the ability to occasionally select an off-APL product is sufficient to counter-balance the hazards of continuing to maintain such a narrow APL.”
Committee recommendations don’t always find themselves reflected in either legislation or regulation, but it would be unwise to expect that the balance of the Committee’s recommendations don’t.
In anticipation of increased regulation, we suggest that you
- Review your Product Selection Protocols and the methodology underpinning the construction of your APL;
- Consider whether your APL adequately balances consumer and commercial needs;
- Review your remuneration arrangements and your ‘best interest’ training and policies; and
- Amend your claims management policies to ensure you’re providing adequate support and assistance to your clients.