8 months on – Industry feeling the Hayne

There’s no doubt that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry captured the public’s attention throughout 2018/19. The Commission saw seven rounds of public hearings over 68 days, called more than 130 witnesses and reviewed over 10,000 public submissions. Headline after headline shone a light on misconduct and dubious practices in, primarily, the banking sector.

Commissioner Hayne submitted a final report to the Governor-General on 1 February 2019 with 76 separate recommendations. 54 were directed to the Government, 12 to the Australian and Securities Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), and 10 to the Industry. Of the 54 recommendations directed to the Government, over 40 still require legislation.

One of the biggest surprises, however, were the number of recommendations in the report directed at the insurance industry – with some 25 of the final recommendations targeted at that sector of the financial services market.

Eight months on from the delivery of the report’s recommendations, we provide a snapshot of the current “state of play” with respect to implementation of some of the key recommendations relevant to the Insurance industry.

Issue Recommendation Status
Insurance hawing 4.1 Hawking of insurance products should be prohibited. Legislation to prohibit insurance hawking is yet to be introduced. Nonetheless, the Government’s recent release of the Financial Services Royal Commission Implementation Roadmap (Implementation Roadmap) has indicated that legislative reform to prohibit hawking will be introduced by 30 June 2020. In the interim, ASIC’s intends to utilise its power under the Corporations Act 2001 (Corporations Act) to ban unsolicited telephone sales which will afford provisional protection to consumers ahead of the broader law reform.
Unfair contract terms 4.7 The unfair contract term provisions (UCT Regime) now set out in the Australian Securities and Investments Commission Act 2001 (ASIC Act) should apply to insurance contracts regulated by the Insurance Contracts Act (Cth).

The Government actioned Hayne’s recommendations regarding the UCT Regime and in late July this year, released an exposure draft of the Treasury Laws Amendment (Unfair Terms in Insurance Contracts) Bill 2019 (the Bill) together with a draft explanatory memorandum.

The Bill seeks to tailor the current UCT Regime so that it is appropriately applicable to insurance contracts by making the following changes:

  1. Main subject matter: Given that the ASIC Act currently excludes terms that define the main subject matter of a contract from the UCT regime, the Bill will amend this Act to provide that the main subject matter of an insurance contract is limited to the description of what is being insured.
  2. Transparent excess terms: the Bill will amend the Act in excluding terms that set the quantum or existence of the excess or deductible in an insurance contract from the UCT regime provided that they are presented transparently.
  3. Third party beneficiary: the Bill will amend the Act to allow for third party beneficiaries of insurance contracts to bring actions against insurers pursuant to the UCT Regime.
Currently, the National Insurance Brokers Association is finalising its submissions on this topic and the Bill appears likely to be passed in the near future.
Claims handling 4.8 The handling and settlement of insurance claims should no longer be excluded from the definition of ‘financial services’.

The Government expects to consult on this process sometime this year with the current intention that legislation to achieve this result is to be introduced before June 2020.

It remains unclear, at this stage, whether this amendment will be limited to retail insurance, or whether the amendments will affect the industry as a whole.

If implemented, claims handlers will be subject to an added level of scrutiny, with potential ramifications pursuant to the Corporations Act. The question also remains whether removing this exclusion from the definition of financial services will mean that increased burdens are also placed on other parties to the insurance risk matrix, for example TPAs and claims brokers.
Conflicted remuneration 2.6 Consideration needs to be given to whether each remaining exemption to the ban on conflicted remuneration remains justified including, the exemptions for general insurance products and consumer credit insurance products.

The Government has confirmed that ASIC will review conflicted remuneration in sectors including general insurance in its 2022 review. ASIC has however, already signaled that it expects to recommend a total ban on general insurance commissions.

The issue of commissions is, obviously, a key one for many involved in the insurance industry. The outcome of the 2022 review may result in a seismic shift in the way which this portion of the market operates going forward.
Design and distribution obligations and product intervention powers General comment Hayne advised in his Final Report that if the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 (Cth) (DDO & PIP Bill) were enacted, it would introduce design and distribution obligations intended to promote the provision of suitable financial products to consumers of those products.

On 5 April 2019, the DDO & PIP Bill received Royal Assent resulting in the enactment of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (the DDO & PIP Act).

The DDO & PIP Act has:

  1. amended the Corporations Act and the National Consumer Credit Protection Act 2009 to introduce design and distribution obligations in relation to financial products; and
  2. Introduced a product intervention power to enable ASIC to prevent or respond to specific conduct regarding those product which are deemed to cause significant consumer detriment.
Again, these amendments appear aimed primarily at the retail and SME sectors, however it remains to be seen how these provisions will operate in practice

Regulatory Developments

Earlier this year, the Government followed through with its pre-budget announcement that more than $550 million would be allocated to ASIC and APRA, to provide greater resourcing to the regulators to discharge their expanded remit and address misconduct.Regulatory Developments

In particular, the Government has provided more than $400 million to ASIC for the following:

  1. $146 million to undertake an accelerated enforcement approach to support the new ‘why not litigate?’ strategy. The strategy purports to make it clear that once:
    1. ASIC is satisfied breaches of the law are more likely than not;
    2. the facts of the case indicate that pursuing the matter would be in the public interest to do so;
    3. one must then ask, ‘why not litigate’.

This will no doubt see an increase in litigation pursued to completion by ASIC, with a shift away from headline-grabbing settlements and a move towards punishing misconduct and breaches via decisions in the courts. That will have a flow on effect, in terms of the strategies which insurers and their insureds are able to adopt in resolving proceedings on a commercial basis prior to trial.

  1. $63.3 million for enhanced onsite supervision of large financial institutions; and
  2. $69.9 million to deliver on its expanded mandate as primary superannuation conduct regulator, including a focus on underperforming funds and compliance with the ‘best interests’ duty.

Further, in the last few weeks we have seen the Australian Financial Complaints Authority (AFCA) given the power to name and shame financial firms involved in consumer disputes by publishing full details of their decisions. Again, it is suggested that this has been done to increase transparency and accountability in the financial services space.

Where to now?

According to the Implementation Roadmap released by Treasurer Frydenberg, by mid-2020 close to 90 per cent of the Government’s commitments will have been implemented, with all remaining Royal Commission recommendations requiring legislation to have been introduced by the end of 2020.

Between now and the end of 2020, the overall impact on the insurance industry both in terms of internal claims processing, claims handling accountability and the broader impact on the financial services market will become far clearer.

A number of steps, set out above, have already been undertaken to implement Royal Commission recommendations. In addition, ASIC’s “litigation blitz” is well under way, with the following proceedings being in the last few months:

  • Civil penalty proceedings against Select AFSL Pty Ltd and associated companies alleging breaches around the telephone sale of life insurance;
  • Federal Court proceedings against the Bank of Queensland, Bendigo Bank and Adelaide Bank over alleged unfair contract provisions in standard form small business loan contracts;
  • Proceedings commenced against ANZ for allegedly inappropriately charged fees;
  • Proceedings commenced against the NAB in relation to a home-loan introducer program. ASIC says that that program brought in almost 46,000 loans to the bank. A single breach of the legislation prohibiting banks from conducting business with unlicensed parties being subject to an up to $1.8 million fine.