Today five new insurance regulatory reforms introduced by the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) come into effect in Australia:
1. Product design and distribution obligations (ASIC Regulatory Guide 274)
The product design and distribution obligation rules are intended to require insurers and insurance distributors (such as agents and brokers) to more strictly control the distribution of their insurance products in the market, to ensure that insurance products are not being sold to consumers for whom they are not appropriate or to whom they do not provide value.
The issuer of a retail insurance product is required to identify a “target market” for each retail insurance product. The target market is the group of consumers for whom the product would likely be suitable, taking into account their likely objectives, financial situation and needs. Each retail insurance product needs to be accompanied by a “target market determination” which describes this target market and also who the insurance product would not be suitable for.
The product design and distribution obligation rules require the insurer to:
- Design the insurance product to meet the needs of that target market
- Distribute the insurance product in a way that directs the product towards the target market only
- Review the effectiveness of the design and distribution of the product on a regular basis.
2. Deferred sales model for add-on insurance (ASIC Regulatory Guide 275)
The deferred sales model rules relate to the sale of “add-on” insurance, which means insurance that is provided along with a product or service. Common examples of add-on insurance are device protection insurance offered alongside the purchase of a mobile phone, or consumer credit insurance offered alongside a loan.
The aim of these rules is to prevent add-on insurance products being sold to consumer at the same time as their primary purchase, when the consumer may not have a chance to fully consider the features and value of the product.
The deferred sales model essentially provides for a four day “deferral period” between the sale of the product or service and the sale of the add-on insurance. During this period, the seller can make written offers, requests and invitations for add-on insurance, but cannot sell the add-on insurance to the customer until the fifth day. The seller then has a period of five and a half weeks during which they can offer and sell the consumer add-on insurance. After that time, the hawking prohibitions apply.
3. Hawking prohibitions
The hawking prohibitions restrict unsolicited offers of retail insurance products to consumers. The reforms strengthen the existing hawking prohibitions and also are adapted to accommodate the deferred sales model provisions (which provide that offers for add-on insurance products within the deferred sales period are not considered to be hawking).
4. Duty to take reasonable care not to make a misrepresentation
This new duty replaces the insured’s duty of disclosure to the insurer in relation to retail insurance contracts.
The existing duty of disclosure imposed on insureds to disclose every matter that is known to the insured which the insured knows, or ought to know, is relevant to the decision of the insurer whether to insure the risk, and on what terms. By contrast, the new duty is simply that insureds must take reasonable care not to make a misrepresentation to the insurer.
This reform shifts the burden onto an insurer to actively seek any information from the insured which it requires in order to assess whether it will insure a risk and the terms on which it will insure the risk. The insured is no longer expected to know or surmise what information may be important to the insurer.
The reform means that insurers need to review the questions they ask of insureds prior to entering into or renewing a retail insurance contract, to ensure that they cover every piece of information that may be relevant to the insured risks. Insurers also need to update the duty of disclosure warning notices in retail insurance contracts.
5. Internal dispute resolution (ASIC Regulatory Guide 271)
These new rules require that certain financial firms (including insurers and AFS licence holders) have an internal processes for dealing with complaints from retail consumers that meets the standards or requirements approved by ASIC. These internal processes supplement the dispute resolution processes of the Australian Financial Complaints Authority, which these firms are also required to submit to.
Most insurers and AFS licence holders would already have some dispute processes, but the new rules raise the minimum standards for these processes, with the aim of ensuring that retail consumers have access to fair, timely and effective dispute resolution.
The new rules:
- Apply to complaints about the organisation and its staff, as well as about insurance products and services
- Allow outsourcing of dispute resolution, subject to a number of restrictions
- Set maximum timeframes for acknowledging and responding to complaints
- Prescribe the minimum information that must be included in a response
- Requires the organisation to have a process for managing systemic issues which are identified from complaints
- Require organisations to adequately resource their dispute resolution processes
- Require organisations to have health and safety policies in place to support staff involved in dispute resolution.