This article was written by Astrid Sugden, Mandy Tsang and Jovana Zelenbaba.
The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Bill) was passed today in both Houses. It is anticipated that the Bill will receive Royal Assent shortly.
Our previous alerts provided key takeaways and our analysis of the Financial Services Royal Commission exposure draft legislation in relation to insurance (Exposure Draft).
This alert considers the Bill and provides our in-depth analysis in respect of the key differences between the Exposure Draft and the Bill for the narrowing of insurers’ rights to avoid life insurance contracts, proposed duty to take reasonable care not to make a misrepresentation to an insurer, deferred sales model for add-on insurance products, caps on commissions, restrictions on the use of the terms “insurance” and “insurer” and proposal to make claims handling a financial service.
Explore our Royal Commission hub to keep up-to-date, access related content and view additional resources.
We are happy to assist you in considering the proposals and how they impact to your business. Please contact your usual KWM contact if you would like to discuss the report further.
Narrowing of insurers’ right to avoid life insurance contracts
Summary of legislation
The Bill narrows the right of an insurer to avoid a life insurance policy on the basis of non-fraudulent misrepresentation or non-disclosure.
An insurer must now demonstrate that they would not have entered into the relevant policy on any terms if they had known that the information had been omitted or misrepresented.
At present, an insurer is not required to demonstrate that it would not have entered into a life insurance policy on any terms in order to exercise its right to avoid a contract for non-fraudulent misrepresentation or non-disclosure.
This amendment restores the insurer’s right to its pre-2013 position.
The Bill applies to life insurance policies which are entered into on or after the later of 1 January 2021 or the day after the Bill receives Royal Assent (with some variations).
Insurers should consider the impact of the narrowing of their right to avoid a life insurance policy for non-fraudulent misrepresentation or non-disclosure on their practices and procedures.
Duty to take reasonable care not to make a misrepresentation to an insurer
Summary of legislation
The Bill amends the insured’s existing duty of disclosure to create a new duty to take reasonable care not to make a misrepresentation to the insurer before entering into a “consumer insurance contract” (CIC).
Key differences between the Exposure Draft and the Bill
When an insured has taken reasonable care not to make a misrepresentation
The Exposure Draft included a non-exhaustive list of matters which may be taken into account in determining whether an insured has taken reasonable care not to make a misrepresentation. The Exposure Draft also provided that the standard of care may be lowered in certain circumstances. The Bill includes an additional matter that may be taken into account, being “whether the contract was a new contract or was being renewed, varied or reinstated”.
The revised explanatory memorandum (EM) has also been heavily amended to revise or remove previous examples which were included in the Exposure Draft, as well as to include new examples. However, many of the amendments do not provide clearer guidance on the standard of care required by insureds in order to discharge their duty. Indeed, the revised examples no longer state whether a consumer’s obligations in discharging their duty would be more or less onerous in the relevant circumstances.
For example, in support of a statement that the type of insurance contract may affect what the insured is required to do to satisfy the new duty, the EM provides the following example:
“…if a consumer purchases a bespoke motor vehicle insurance contract that has unique terms, such as for an antique car, it is likely that, before the contract is entered into, the insurer would seek more detailed information about the consumer their circumstances that if the consumer was purchasing a standard motor vehicle insurance contract.”
This example does little to clarify how the consumer would discharge their duty and in particular, when a consumer would be taken to have exercised reasonable care where the insurer has asked for more detailed information.
All amendments associated with the new duty to take reasonable care not to make a misrepresentation will apply to CICs (other than life insurance contracts) that are entered into on or after 5 October 2021.
For life insurance contracts which are entered into prior to 5 October 2021, the new duty of disclosure will apply as if the contract was entered into on or after 5 October 2021 if the contract is varied to increase a sum insured or to provide one or more additional kinds of cover. This is so provided that any such variation was not automatic. In such circumstances, the new amendments will apply to that contract to the extent of the variation.
The new duty of disclosure will not apply to life insurance contracts which are entered into prior to 5 October 2021 and which are extended or reinstated on or after 5 October 2021. Any such contracts will continue to be subject to the existing duty of disclosure.
The Bill also makes it possible for an insurer to apply the new duty from an earlier date. An insurer can effectively apply the new duty to a contract of insurance from the date of commencement of the Bill (being the date after the Bill receives Royal Assent or 1 January 2021, whichever is later) if, before the contract is entered into, the insurer gives the insured a written notice that the contract is a CIC.
Insurers will need to put in place new policies and procedures to address the new duty of disclosure and the potentially higher risks which insurers are exposed to as a result of the proposed changes. In particular, CICs will need to be amended to include descriptions of the new duty to take reasonable care not to make a misrepresentation.
New blackout period for sale of add-on insurance products
Summary of new legislation
The Bill introduces an industry-wide deferred sales model (DSM) for the sale of add-on insurance products. The model imposes a range of restrictions on the offer or sale of “add-on insurance products” (and communications in respect of such) during certain prescribed periods.
Key differences between the Exposure Draft and the Bill
Timing for the sale of an add-on insurance product
The Bill has been amended to clarify that an add-on insurance product will be taken to be sold no later than at the first time at which no further action is required from the customer for the sale to occur (even if the sale does not actually occur until a later time). An offence will be committed where this occurs prior to the expiry of the add-on insurance deferred sales period, even if the sale is not actually processed until after the expiry of the add-on insurance deferred sales period.
Requisite connection for add-on insurance products
The EM clarifies that for an insurance product to be an add-on insurance product, there needs to be a connection between the offering and selling of the add-on insurance product and the principal product or service. Therefore, products such as those which are purchased on a standalone market or complimentary insurance are unlikely to fall within the scope of the DSM.
ASIC’s power to issue infringement notices
ASIC has been given the ability under the Bill to issue an infringement notice under the ASIC Act to impose a penalty for an alleged breach of the DSM. The EM notes that if an infringement notice is complied with, no further action will be taken and the payment will not be considered an admission of guilt. However, if the infringement notice is not complied with, ASIC may pursue criminal or civil penalties.
New right of return and refund for customers
The Bill includes a new right of return and refund for customers for a specified period of time where the add-on insurance product is sold to the customer during the add-on insurance deferral period. This right operates in addition to any penalties which may be imposed.
Definition of “motor vehicle”
The Bill retains the original proposed exception to the DSM for comprehensive motor vehicle insurance. However, a new definition is included for the term “motor vehicle”. This term is defined in the Bill to mean a motor-powered vehicle that is designed to travel by road, is designed to carry passengers or is a motorcycle, and does not have a carrying capacity that exceeds two tonnes.
ASIC’s ability to exempt certain classes of add-on insurance products
ASIC no longer has the ability under the Bill to exempt a class of add-on insurance products from the DSM by way of legislative instrument if ASIC considers that consumers are likely to need to be covered by the products immediately upon acquiring the principal products or services to which the products relate.
However, ASIC’s ability to exempt an add-on insurance product or class of add-on insurance products sold by a specific person from the scope of the DSM by way of a notifiable instrument has been retained. The EM clarifies that in considering whether to grant such an exemption, ASIC must have regard to whether or not, in the absence of an exemption, there is a high risk of under or non-insurance, taking into account the likelihood and impact of a claim occurring during the deferral period, (rather than considerations as to the impact upon the insurer).
Additional record-keeping obligations
In addition, the EM states that providers (including third-party providers) of add-on insurance will be expected to comply with additional record-keeping obligations for “good business practice”.
The DSM will apply to commitments to acquire principal products and services entered into on or after the commencement of the amendments, being the later of 5 October 2021 or the day after the Bill receives Royal Assent.
It appears in light of the above amendments that most of the changes requested by the industry have not been taken on board. In particular, the Bill does not take into account submissions from the Insurance Council of Australia (ICA) that:
- there should be an exemption for all add-on general insurance products, and that ASIC could instead use its product intervention powers to require products with a proven risk of serious consumer detriment to be subject to the DSM; or
- customers should have the flexibility to waive or shorten the deferral period.
This is despite the concerns raised by the ICA of likely widespread consumer detriment, as the DSM would significantly reduce a customer’s ability to choose insurance products which provide them with the coverage that they need, when they need it. Further, there would be increased compliance costs which would be passed onto consumers by way of increased premiums.
Insurers will need to ensure that they have revised their existing business practices and any associated policies and procedures to address any changes required as a result of the DSM.
In particular, insurers will need to have in place appropriate record-keeping policies to monitor any add-on insurance deferral periods which apply (and communications with customers). Insurers should also consider whether to apply for an exemption from the DSM regime.
Insurers, time to put your commissions caps on
Summary of new legislation
The Bill amends the ASIC Act 2001 (Cth) (ASIC Act) to:
- enable ASIC to impose a cap on the amount of commissions payable in respect of the supply of add-on risk products, including insurance products and insurance-like products, which are sold in connection with motor vehicles;
- impose criminal and civil penalties and make it a strict liability offence for a person to pay or receive a commission for motor vehicle add-on risk products which exceed the applicable cap; and
- give consumers the right to recover any commissions that exceed the applicable cap.
Key differences between the Exposure Draft and the Bill
Definition of “motor-vehicle”
The term “motor-vehicle” was originally defined in the Exposure Draft to mean “any motor-powered road vehicle (including a four-wheel drive vehicle)”.
This definition has been significantly amended in the Bill to mean any motor-powered vehicle of a kind intended for use as land transport (whether or not it is for use on a road), as well as any other vehicle of a kind intended to be towed by such a motor-powered vehicle (such as a caravan). Rail transport and motor vehicles that are of a kind primarily for use by persons with restricted mobility (such as wheelchairs) are expressly excluded.
Strict liability offences
Under the Bill, a breach of an applicable cap is no longer a strict liability offence for those who attempt to contravene, or are involved in the contravention of, the offence.
The Bill also differs from the Exposure Draft to additionally provide that:
- if a person is convicted of two or more offences constituted by contraventions of Subdivision D (‘Consumer protection’) of the ASIC Act (other than section 12DA of the ASIC Act), which includes the new prohibition on exceeding any applicable caps on commissions; and
- the contravention appears to the Court to have been of the same or a substantially similar nature and to have occurred at or about the same time,
the Court must not impose on that person fines which together would exceed the maximum fine for one offence by that person against the relevant provision of the ASIC Act.
The amendments will apply to commissions provided under contracts for add-on risk products entered into on or after the later of 1 January 2021 or the day after the Bill receives Royal Assent.
To ensure compliance from the commencement of the Bill, insurers will need to put in place system controls to keep track of applicable caps as and when ASIC determinations are released.
Suppliers of add-on risk products will also need to ensure that they comply with applicable caps and assess their impact on the commercial terms of add-on insurance products.
Restricting the use of the term ‘insurance’ and ‘insurer’
Summary of legislation
To assist in avoiding any confusion on the part of consumers on the nature of the products or services which they are purchasing, the Bill amends the Insurance Act 1973 (Cth) (Insurance Act) to make it a strict liability offence:
- for a person to use the term ‘insurance’ to describe products or services which they supply if the product or service is not insurance and it is likely that it could mistakenly be believed to be insurance;
- for a person to describe themselves as an ‘insurer’ in connection with a product or service which the person supplies if the product or service is not insurance and it is likely that it could mistakenly be believed to be insurance, or the person is not appropriately registered or authorised.
Key differences between the Exposure Draft and the Bill
Other than with respect to the timing for the commencement of the new restrictions (discussed below), the Bill does not include any amendments to the Exposure Draft.
However, amendments have been made to the EM. In particular, the EM has been amended to:
- clarify that the offence which the Bill creates for the use of the term “insurance” to describe a product or service which is not insurance does not operate to restrict a person from using that term to describe a product or service that another person is supplying;
- clarify the rationale for the maximum penalties which may be imposed in respect of the new offences which the Bill creates in respect of the use of the terms “insurance” and “insurer”. The EM notes that consumers generally place trust in businesses which brand their products as insurance or refer to themselves as an insurer and expect their claims to be paid out by those businesses. Therefore, serious consumer detriment may arise from any breach of this trust; and
- include examples which provide guidance on when the use of the term “insurance” to describe a product or service would or would not contravene the new offence relating to the use of that term.
The Bill has been amended to provide that the new restrictions will commence on the later of the day after the Bill receives Royal Assent and 1 January 2021.
As discussed in our previous alert, certain products or services may be exempted under the regulations and ASIC will also have the power to exempt certain persons (or classes of persons). However, other than for government entities and State insurances, no exemptions from the new restrictions are currently contained in the Bill or the EM.
Providers of risk management products should also consider whether they should make submissions to be exempted from the new regime.
In addition, businesses which are not insurers but provide other risk management products will need to carefully assess whether the description of their products will imply that they are an insurer or that the products are insurance.
Insurance claims services, can you handle it? Claims handling set to become a new financial service
Summary of new legislation
The Bill makes the handling and settling of insurance claims a new ‘financial service’. As a result, insurers, insurance claims managers, claimant intermediaries, insurance brokers and other persons who provide ‘claims handling and settling services’ (“CHS services”) in respect of insurance products will be required to hold an Australian Financial Services (“AFS”) licence (“AFSL”) covering such services, or to otherwise become an Authorised Representative (“AR”) of an AFS licensee.
Key differences between the Exposure Draft and the Bill
Insurance claims managers
The Bill includes further details in the definition of “insurance claims manager”. The term “insurance claims manager” is defined to mean a person that carries on a business of providing CHS services on behalf of one or more insurers. Where the person, as part of that business, also provides goods or other services, the providing of CHS services on behalf of one or more insurers must be the primary part of that person’s business. The regulations may also prescribe circumstances in which the provision of CHS services on behalf of one or more insurers are or are not taken to be the primary part of a business. The revised definition clarifies that a person who may perform CHS services as an ancillary or minor part of their business will not be caught.
The definition of “insurance claims managers” under the Bill appears to have been amended in light of a recommendation made by the ICA in its submissions in response to the Exposure Draft. In its submissions, the ICA recommended that the Bill should precisely define the term “insurance claims managers” to ensure that only those entities that carry on claims management as their principal business activity are caught, and to ensure that persons who may undertake such activities from time to time as ancillary activities are excluded.
Claimant intermediaries are newly included as a category of persons who will need an AFSL, or will otherwise need to be an AR, if they provide CHS services. For the purposes of the Bill, a claimant intermediary is a person who carries on a business of representing persons insured under certain insurance products (as prescribed by the regulations) in pursuing a claim under the relevant insurance product for a benefit.
In its submissions, the ICA recommended that the Bill should include a precise definition of the term “loss assessors” to ensure that only those entities that carry on loss assessment as their principal business activities are caught (much like its recommendation regarding the term “insurance claims managers”).
However, the Bill has instead removed loss assessors from the list of people who will require an AFSL (or will otherwise need to become an AR) in order to provide CHS services.
Insurance fulfilment providers
The EM clarifies that a tradesperson who is authorised by an insurer to accept a claim and begin immediate repairs is not required to hold an AFSL, on the basis that such arrangements allow claims to be handled quickly and should therefore be encouraged (particularly in circumstances where there has been a natural disaster).
However, if the tradesperson is authorised by an insurer to reject all or part of a claim, then the tradesperson will be required either to obtain an AFSL covering claims handling or to be authorised by a person with an AFSL covering claims handling. This is so on the basis that the tradesperson has taken over an important part of the claims handling process which could result in consumer harm.
Whilst insurance fulfilment providers may not require an AFSL or need to become an AR, the Bill includes a new provision which specifies that insurance fulfilment providers (such as smash repairers, builders and other tradespeople) who:
- provide goods or services to a person insured under an insurance product in satisfaction of the liability of the insurer under the product;
- have been engaged by an AFS licensee, or by another person on behalf of an AFS licensee, to provide those goods or services; and
- do not otherwise provide those goods and services as a representative of the AFS licensee,
are taken to be acting on behalf of the AFS licensee in providing goods or services.
The express carve-outs which were previously included in the definition of CHS services for services provided by lawyers have been removed. These carve-outs are now included instead as exemptions to the requirement to hold an AFSL. Therefore, under the Bill, services provided by lawyers may be considered CHS services to the extent that they fall within the definition. However, lawyers will not be required to hold an AFSL in respect of those services to which an exemption applies. For example, a lawyer who provides advice in their professional capacity as a lawyer about matters of law, legal interpretation or the application of the law to any facts, will not be required to obtain an AFSL.
The Exposure Draft provided an exemption from the AFS licensing requirement for product issuers who provide CHS services to retail customers under an arrangement with an AFS licensee who has the appropriate authorisations to provide the CHS services to retail customers. Under the Bill, this has been amended so that the exemption only applies if the issuer of the insurance product is prescribed by the regulations, or of a class prescribed by the regulations.
Generally, a person can only be an AR of two or more AFS licensees if each of those licensees have provided their consent or the licensees are related bodies corporate. However, a new paragraph in the Bill provides that consent is not required if only CHS services are provided by the person as an AR of any AFS licensee.
This change will decrease the administrative burden of ARs and AFS licensees, particularly where the AR (for example, an insurance claims manager) may work for multiple insurers.
Trustees of registrable superannuation entities
The amendments set out in Schedule 7 (‘Claims handling and settling services’) of the Bill do not require a trustee of a registrable superannuation entity to obtain an AFS licence covering CHS services. However, a trustee of a registrable superannuation entity who provides CHS services will be subject to equivalent regulation as part of providing a superannuation trustee financial service.
Efficiently, honestly and fairly
As was the case under the Exposure Draft, AFS licensees with licences covering CHS services must comply with the general obligations in section 912A of the Corporations Act 2001 (Cth) (Corporations Act), including the obligation to ensure that claims are handled efficiently, honestly and fairly.
The EM notes that whether an insurance claim has been handled efficiently, honestly and fairly will depend on the circumstances of each case, and provides that relevant factors include the vulnerability of the insured, any surges in the volume of claims to be processed (for example, as a result of a natural disaster) or any other unforeseen circumstances which operate to restrict normal operations.
Insurers will need to consider how this differs from the existing duty to act in good faith.
Adequately trained and competent
AFS licensees are also required under section 912A of the Corporations Act to ensure that their representatives are adequately trained and competent to provide the CHS services.
The Bill has been amended to expressly state that AFS licensees are not required to take reasonable steps to ensure that any insurance fulfillment providers who are their representatives comply with AFS laws that relate to CHS services. However, the AFS licensee will remain responsible for the conduct of such representatives in respect of other obligations. In particular, AFS licensees will remain responsible for ensuring that those representatives are competent to provide the relevant financial services.
The EM has been amended to include a reminder of the extraterritorial application of the financial services laws in the Corporations Act. This means that an insurer will remain responsible for the conduct of any overseas representative to which the insurer outsources its CHS services.
Financial Service Guide
The Exposure Draft previously provided that no Financial Services Guide (FSG) was required to be provided to retail customers if the “financial service” provided consisted only of CHS services.
However, the Bill now provides that a claimant intermediary must give an FSG to their client if they are a retail client. The EM states that consumers who receive such services are more vulnerable to the conduct of the person representing them. Therefore, the consumer is in greater need of disclosure to ensure that the services which they are receiving are appropriate for their needs.
Cash Settlement Fact Sheet
The Bill expands the circumstances in which a Cash Settlement Fact Sheet (previously known as a Statement of Claim Settlement Options) must be given, with Cash Settlement Fact Sheets also now required to be given by persons acting on behalf of one or more AFS licensees. Additionally, the Bill now provides that a Cash Settlement Fact Sheet is only required to be given if cash payment is not the only option legally available to the client to settle the claim.
The Bill also includes additional content requirements for Cash Settlement Fact Sheets. For example, a Cash Settlement Fact Sheet is now required to contain not just a statement setting out the total amount of the cash settlement being offered, but also the amount of each component of the total amount of the cash settlement being offered (and, if applicable, an outline of the client’s rights of review).
The amendments relating to CHS services will commence on the later of 1 January 2021 and the day after the Bill receives Royal Assent. However, the amendments will apply to different persons providing CHS services and to different insurance claims at different times.
The amendments will not apply to:
- any providers of CHS services before the end of 30 June 2021; and
- any insurance claims that were started before the date upon which the legislation commences.
By 30 June 2021, providers of CHS services will be required to have applied for a new or varied AFS licence which covers the CHS services (unless an exemption applies).
In addition, once a provider is granted a licence to provide CHS services, the new amendments will apply to them in full after the later of 31 December 2021 and a later day prescribed by the Minister (which must be before 1 July 2022). The new amendments will apply in turn to all claims which are commenced after the commencement date.
Guidance from ASIC: claims handling Information Sheet and Proof
On 27 November 2020, ASIC released a draft Information Sheet on compliance with AFS licence obligations in respect of CHS services.
The Information Sheet provides guidance from ASIC on matter such as:
- what will be considered a CHS service;
- when an AFS licence or variation for CHS services is required;
- the obligations of AFS licensees and ASIC’s expectations of AFS licensees in complying with those obligations; and
- when and how licence applications can be made (including any matters which will need to be demonstrated by the applicant).
For example, on the obligation placed upon AFS licensees to ensure that relevant financial services are provided efficiently, honestly and fairly in accordance with section 912A(1)(a) of the Corporations Act, ASIC states that AFS licensees will generally need to handle and settle insurance claims in a timely way, in the least onerous and intrusive way possible, fairly and transparently and in a way which supports consumers (particularly consumers who are experiencing vulnerability or financial hardship).
The Information Sheet also includes further examples of how the AFS licensing regime may apply to CHS services in certain circumstances. A number of these examples are included in addition to, or are otherwise similar to, the examples which are included in the EM. Some of the examples are also similar to examples which were previously included in the exposure draft of the EM.
ASIC indicates in the Information Sheet that they will be accepting applications for an AFSL or for a variation to an existing AFSL from as early as 1 January 2021 on the assumption that Royal Assent will be received by the end of the year. The Information Sheet reiterates the transitional arrangements described above and includes a strong recommendation from ASIC for applications to be submitted as soon as possible after 1 January 2021, and no later than 1 June 2021.
The draft Information Sheet will be updated by ASIC to reflect the final form of the Bill and will subsequently be made available on ASIC’s website.
On 27 November 2020, ASIC also released a draft Proof which applicants seeking an AFSL for CHS services will be required to supply as part of their application.
The Proof requires an applicant to provide certain information in support of the applicant’s ability to comply with the obligations under section 912A of the Corporations Act to:
- provide the relevant CHS services efficiently, honestly and fairly, including to ensure that the provision of such services is timely, transparent and fair (including by reference to relevant industry codes) and that claimants experiencing vulnerability or financial hardship are appropriately supported;
- manage conflicts of interest;
- monitor and supervise representatives and ensure that they are adequately trained and competent to provide the relevant CHS services; and
- comply with the relevant requirements relating to the content and provision of Cash Settlement Fact Sheets.
The draft Proof will be updated by ASIC to reflect the final form of the Bill and subsequently published in Section 3 of Regulatory Guide 3 (‘AFS Licensing Kit: Part 3 – Preparing your additional proofs).
In light of ASIC’s newly published Information Sheet and accompanying Proof, insurers who provide or intend to provide CHS services should start preparing their AFSL applications now. We have extensive experience in this area and would be happy to assist.
 Please refer to the following articles: Financial Services Royal Commission Report: In-depth analysis, Financial Services Royal Commission draft legislation – Will insurers be able to implement all changes consistently?, and Insurance claims services: Can you handle it? Claims handling set to become a new financial service.
 Page 3 of the submission of the ICA dated 28 February 2020 and titled “Financial Services Royal Commission: Enhancing Consumer Protections and Strengthening Regulators: Draft Legislation” (ICA Submissions).
 See “Recommendation 1: Flexibility to shorten the deferral period” in Attachment B to the ICA Submissions.
 Page 3 of ICA Submissions.
 Section 12DA of the ASIC Act provides, in summary, that a person must not engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
 See “Recommendation 3: Definitions of “loss assessors” and “insurance claims managers”” in Attachment D to the ICA Submissions.