Our latest insurance update from the Asia Pacific region includes articles from Australia, China and Singapore. Key legal issues covered in this edition highlight some of the emerging themes that we have identified as global insurance risks including: standards and conduct of financial advisors; increasing market liberalisation; conduct risk; and simplification and transparency in the distribution chain.
ASIC enforcement actions: is an increase in penalties on the cards?
The Australian Securities and Investments Commission (ASIC) recently released its quarterly enforcement report detailing enforcement outcomes in the second half of 2014. The report addresses the range of criminal and civil action taken by the regulator, and highlights action taken against companies and directors resulting in criminal charges which were most significant during the period.
In addition, significant civil penalties were also handed down to financial services licencees and there are a number of issues worth highlighting to those operating in the financial services sector.
Expect the magnitude of penalties to increase
The courts have imposed significant civil penalties in response to proceedings commenced by ASIC. In particular, a A$1.2 million penalty was imposed on Newcrest Mining Limited (Newcrest) for contravening its continuous disclosure obligations by briefing analysts on price-sensitive information ahead of disclosure to the market.
This penalty is one of the largest monetary penalties imposed in an ASIC civil penalty case. Nonetheless, Justice Middleton commented that the current level of penalties (capped at A$1 million for each contravention) may not be a sufficient deterrent for large organisations. Consistent with Justice Middleton’s comments, the Financial System Inquiry (FSI) also recommended that the penalties for breaches should be substantially increased to act as a credible deterrent.
It is apparent that ASIC is keen to amplify the fear of prosecution by way of increasing penalties. With the backing of the courts and the FSI, the Treasury is expected to give genuine consideration to increasing the penalties beyond the A$1 million limit for each contravention.
ASIC is not satisfied with the level of supervision of representatives in the retail space
ASIC stresses that AFS licensees must have appropriate resources and procedures in place when providing financial services to retail clients. In a recent media release, ASIC reported that it imposed conditions on the life insurance advisory firm, Guardian Advice, after it found that Guardian Advice failed to comply with its general obligations as an AFS licensee, including failing to properly supervise its authorised representatives. The condition was that Guardian Advice must appoint an ASIC-approved independent consultant to review its compliance over the next two years. While no penalties were enforced, the imposition of an ASIC-approved auditor is extremely costly and invasive.
The FSI’s concerns over the quality of advice in Australia has been well publicised. The issue for ASIC is not just one of advice, however, but one of supervision and control of agents and representatives. ASIC is expected to take an even more active role in undertaking surveillance in respect of these arrangements in the coming year and we anticipate an increase in enforcement action where systems and procedures are not considered adequate.
Marketing and sales processes must not be false and misleading
GE Capital Finance Australia (GE Capital) was fined A$1.5 million for making false or misleading representations to more than 700,000 of its credit card customers. The court found that GE Capital told its credit card customers that to activate their credit card, or to apply for or obtain an increased credit limit, the customer also had to consent to receiving invitations to apply for credit limit increases. These statements were false or misleading because GE Capital did not require consent for credit cards to be activated or for credit limits to be applied for or increased. GE Capital was ordered to pay A$50,000 to ASIC for legal costs and to advise cardholders of the decision.
Care should be taken to ensure that marketing strategies do not involve compelling consumers to do something that is not in fact required for the purposes of cross-selling, upselling or promoting new products. ASIC will impose penalties on companies, in particular large organisations, that engage in false or misleading behaviour and organisations can expect those penalties to be severe where such conduct is systematic.
Further expansion of overseas investment by insurance funds
Following the expansion of the scope of overseas investment by Chinese insurance funds in 2012, as at the end of 2014, the amount of overseas investment by insurance funds had reached around US$23.9 billion. The China Insurance Regulatory Commission (CIRC) announced further expansion of the scope of overseas investment in its Circular on Adjustment of Policies on Overseas Investment by Insurance Funds, which seeks to promote more diversified asset allocation by insurers.
Under the new rules, insurance funds can invest in stocks listed on the Hong Kong Growth Enterprise Market in addition to the main Hong Kong Stock Exchange. Furthermore, the ratings of fixed income products (such as bonds) which insurance funds can invest in have been lowered from BBB to level BBB-. The previous restriction on the investment jurisdiction of Hong Kong based trusts which are established by domestic insurers has also been lifted. Now, similar to other overseas trusts, when managing insurance funds within their group, Hong Kong based trusts can also invest in the financial markets of 45 countries or regions. As insurance funds are now exposed to wider risks, CIRC requires those insurers investing overseas to establish internal risk mechanisms under which at least two people must be responsible for overseas investment.
Follow-up to Financial Advisory Industry Review - Notices on the Distribution of Direct Purchase Insurance Products
The Monetary Authority of Singapore (MAS), on March 30, 2015 issued Notices under the Insurance Act and the Financial Advisers Act covering the Distribution of Direct Purchase Insurance Products: MAS Notice 321and FAA-Notice 19 (the Notices). This set of Notices is a follow-up to one of five key thrusts of the Financial Advisory Industry Review (FAIR) detailed within the October 2014 Consultation Paper on Lowering distribution costs by enhancing market efficiency.
The Notices will impact all direct life insurers (except those with defined market segments) catering to the retail consumer market which will be required to offer life insurance products (now termed ‘Direct Purchase Insurance’ or ‘DPI’ products) that are to be priced without distribution expenses (i.e. no commissions).
In line with the October 2014 proposal, all DPI products (which includes term life insurance products (with and without additional critical illness cover) and whole life participating insurance products (with and without additional critical illness cover)) will have standardised features (detailed in MAS Notice 321). These include benefits, premium, payment term, policy term, renewability, (minimum and maximum) entry age, (minimum and maximum) sum assured etc., and can only be purchased by a policyholder who is also the insured person.
From a consumer perspective, these standardised features are intended to make products easier to understand and enable sales of such DPI products (which will be identified by the prefix ‘Direct’ within its name) without financial advice.
FAA-Notice 19 sets out the requirements for the distribution of DPI products. They include:
- DPI products should only be distributed by financial advisers through their representatives, customer services personnel or through their website.
- Safeguards that should be implemented. This will take the form of tools and calculators for calculation of coverage and premiums and information relating to the product as well as the obligation to highlight specific information such as disclaimers or exclusions and generally ensuring that the features or terms and conditions of the DPI product are not misunderstood by the retail consumer.
- The provision of product information such as the product summary, benefit illustration, and product highlights document as well as fact-sheet and checklist that meet the Life Insurance Association of Singapore (LIA) standards.
- The implementation of internal policies and processes covering the responsibilities regarding such distribution, the required training and continuing controls and procedures to ensure proper conduct of those distributing DPI products.
- The roles and responsibilities of those distributing DPI products to ensure that they meet the general standards relating to product information disclosure.
A list of all life insurance companies offering DPI products is available on LIA’s website. It is unlikely that there will be significant changes to the current approach that life insurance companies already adopt insofar as the requirements for the distribution of DPI products (e.g. product disclosure and provision of product information) are concerned. The focus for direct life insurance companies offering DPI products will likely be on the pricing assumptions for such products, given that MAS approvals will be required if there is any re-pricing and/or deviated pricing assumptions compared to existing products with the closest corresponding features as a DPI product.