Report Overview | ASIC REP 622 Consumer credit insurance: Poor value products and harmful sales practices
- Poor consumer outcomes: ASIC reviewed the sale of CCI by 11 of Australia's biggest banks and lenders, for the period 2011 to 2018 and found that CCI sales practices and product design are still delivering poor outcomes for consumers
- Court action against some entities: ASIC Commissioner Sean Hughes said that an 'inevitable consequence' of the issues identified, 'will involve ASIC taking significant enforcement action against some of the entities named' in the report. ASIC did not specify beyond this the banks/lenders it plans to take action against
- ASIC plans to consult on using its product intervention powers to ban the practice of selling CCI insurance through unsolicited phone calls
- The report also confirms the standards ASIC expects of lenders who sell CCI and insurers who design the products and handle claims. ASIC says that it expects lenders and insurers to meet these standards or cease selling CCI until they do. ASIC adds that it expects new products to meet the standards before being sold
The Australian Securities and Investment Commission's (ASIC's) review of the sale of consumer credit insurance (CCI) by 11 major banks and other lenders has found that the design and sale of CCI has consistently failed consumers. A high level overview of some of the key findings in the review, ASIC's planned actions in response to the issues identified, and its expectations of lenders/insurers is below.
About the Review
In December 2017, ASIC commenced a review of the design and sale of CCI. ASIC required 11 lenders to undertake an independent review of their CCI sales practices and collected detailed data about the way the products performed for consumers.
The lenders in ASIC's review are: Australia and New Zealand Banking Group Limited; Australian Central Credit Union Ltd; Bank of Queensland Limited; Bendigo and Adelaide Bank Limited; Citigroup Pty Limited; Commonwealth Bank of Australia - Retail Banking Services and Bankwest; Credit Union Australia Limited; Latitude Finance Australia and Latitude Personal Finance Pty Ltd; National Australia Bank Limited; Suncorp-Metway Limited; Westpac Banking Corporation.
Some Key Findings
- CCI is extremely poor value for money: For CCI sold with credit cards, consumers received only 11 cents in claims for every dollar paid in premiums. Across all CCI products sold by lenders, only 19 cents was recovered in claims for every premium dollar which consumers paid
- CCI sales practices caused consumers harm: ASIC identified a number of concerns about the way in which consumers were sold CCI. These include: a) that consumers were sold CCI when they were ineligible to claim under their policy; b) telephone sales staff used high-pressure selling and other unfair sales practices when selling CCI; c) consumers were incorrectly charged for CCI, including being charged ongoing CCI premiums even though they no longer had a loan; and d) many lenders did not have consumer focused processes in place to assist consumers in hardship who had a CCI policy to lodge a claim
- Lenders are exiting the CCI market: During ASIC's work on CCI, 7 of 8 lenders have stopped selling CCI with credit cards, 5 of 9 lenders have stopped sales with personal loans, and 4 of 9 lenders have stopped sales with home loans
Commenting on the report findings, ASIC Commissioner Sean Hughes said, 'Regrettably, the ongoing systemic failings and misconduct we have seen in the CCI market demonstrate that a range of robust regulatory responses is required. ASIC is committed to address the unfairness to consumers and lack of transparency our report has uncovered. Product issuers and distributors in the CCI market need to start to put their consumers front and centre.'
ASIC's actions to address these issues
- ASIC is undertaking investigations into the suspected misconduct of several entities involved in the CCI product market, with a view to enforcement action. ASIC states that the defendants to ASIC's future action will be publicly identified at the time proceedings commence.
- ASIC plans to consult on banning unsolicited telephone sales of CCI: ASIC writes that in light of the consumer harms identified in the report, and more particularly the concerns with respect to the unsolicited outbound sale of CCI by phone, it will shortly consult on using its product intervention powers to ban the practice.
- Consumer remediation program: ASIC's work has led to a significant remediation program expected to exceed $100 million paid to over 300,000 consumers. To date, over $51 million has been paid to over 186,000 consumers. ASIC's work to secure further compensation will continue.
- Possible further action? ASIC's expectation is that lenders and insurers design and offer products with significantly higher claims ratios. ASIC will continue to collect and publish data to measure improvements. 'If we do not see early, significant and sustained improvement in the design and sale of consumer credit insurance, our next steps may involve the deployment of our new product intervention power where we see a risk of significant consumer detriment. We also will not hesitate to pursue civil penalties where there has been a failure by any lender or insurer to act efficiently, honestly and fairly. All options are on the table,' ASIC Commissioner Sean Hughes said.
- ASIC expects all CCI lenders to incorporate a four-day deferred sales model for all CCI products across all channels, not just those entities that subscribe to the Banking Code of Practice.
ASIC's expectations — design and distribution standards for CCI
The report also confirms the standards with respect to product design and value, compliance and monitoring, improved sales practices and improved post sale conduct that ASIC expects of lenders who sell CCI and insurers who design the products/handle the claims. ASIC's expectation is that lenders and insures 'meet these standards or entirely cease selling CCI until they do'. ASIC adds that the standards also apply to any new market entrants who should ensure their products and sales processes comply with the standards as soon as they start business.
Improved product design and value
- ASIC expects that consumers should be able to select cover they are eligible to use and that meets their needs. As such CCI products should be 'unbundled'.
- Claims ratios must be significantly increased from the current poor levels of 19 cents in the dollar, so CCI provides real consumer value.
- Lenders should assess product value including claims ratios of new and existing products before deciding to sell CCI.
- Benefits should reflect the needs of consumers (eg payments for periods of unemployment rather than arbitrary limits)
Compliance and monitoring
- Lenders should not sell CCI unless they can demonstrate compliance with the standards (outlined here) and the 10 recommendations in REP 256 for the sale of all CCI products through all channels.
[Note: In October 2011, ASIC issued Report 256 Consumer credit insurance: A review of sales practices by authorised deposit-taking institutions (REP 256), which made 10 recommendations to raise industry standards and reduce the risk that CCI may be mis-sold to consumers. The recommendations cover the areas of sales practices, disclosure, training programs and monitoring systems. The recommendations are summarised in Table 2 of the Report, page 10]
- Where these standards have not been met, lenders should conduct a complete, thorough and robust review to assess any consumer harm, and identify and remediate affected consumers in a timely manner.
Improved sales practices
- Outbound unsolicited phone sales of CCI should cease
- Lenders should use 'hard filters' for key eligibility criteria for online sales and 'knock- out' questions in scripts for phone and branch sales to prevent the sale of CCI to consumers who are ineligible to claim on any primary cover.
- Lenders should take into account information they have about the consumer to ensure consumers are not being sold a CCI policy where they are ineligible to claim (this does not have to mean that personal financial advice is being provided).
- Lenders should obtain and record positive, clear and informed consent before discussing the sale of CCI with a consumer.
- Lenders should, within a short timeframe, incorporate a four-day deferred sales model for all CCI products across all channels, with the deferral period starting the day after the consumer is told their loan is approved.
Improved post sales conduct
- Lenders and insurers should not charge premiums for CCI where primary benefits are no longer available under the policy (ie the loan has been repaid).
- Lenders and insurers should give consumers appropriate annual communication about the price, limits and exclusions of the policy and remind them to lodge a claim if they had a claimable event in the last 12 months.
- Lenders and insurers should, every two years, contact consumers with CCI on a credit card (or other revolving lines of credit) about whether they want to keep their policy or cancel their cover.
- Lenders should notify a consumer with a CCI policy who applies for changes to their loan contract due to financial hardship that they have a CCI policy and provide or transfer their claim details to the insurer for assessment.
- Insurers should accurately and reliably record the number of (and reasons for) withdrawn claims and claims that did not proceed.
Attestations that the standards have been met
ASIC states that it is writing to lenders and insurers to set out the standards it expects for their processes and procedures for monitoring and supervision and will seek confirmation by an attestation from each lender that: a) the recommendations from the independent reviews have been implemented and are working effectively; b) the standards in this report are being met; and c) the remediation programs are complete, thorough and robust.
ASIC comments that the its expectations are supported by recommendations 4.1 (no hawking of insurance), 4.3 (an industry-wide deferred sales model for the sale of any add-on insurance products should be developed) and 4.8 (removal of the claims handling exemption) in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission).
Financial Sector Union of Australia response
Responding to ASIC's report, the Finance Sector Union of Australia has said the report is 'proof that self-regulation won't fix the deep-seated cultural problems in the major banks'. Finance Sector Union of Australia (FSU) National Secretary Julia Angrisano said bank workers were under intense pressure to sell CCI to customers and this report has revealed the enormous profit motive for managers who pushed this product, no doubt receiving large bonuses themselves for meeting targets. 'The banks have only themselves to blame for leaving themselves exposed to $100 million in compensation payments' Ms Angrisano is quoted as saying.
[Sources: ASIC media release 11/07/2019; ASIC Report 622: Consumer credit insurance: Poor value products and harmful sales practices; The SMH 11/07/2019; The ABC 11/07/2019; Finance Sector Union media release 12/07/2019]