In business, being able to pivot builds short-term survival along with long-term resilience. And when it comes to insurance, adapting to changing governing circumstances is a must for growth.
In the past couple of years the Financial Services Royal Commission proposed insurance regulatory reforms, and on 17 December 2020 Parliament passed the Financial Sector Reform (Hayne Royal Commission Response) Act 2020.
The insurance industry had already been preparing for what’s to come and now a number of key changes are well under way.
To help you navigate these regulatory changes, below are some of the key dates and reforms to be aware of and follow in 2021.
Tougher breach reporting obligations:
The Corporations Act 2001 is changed to clarify and strengthen the breach reporting regime for financial services licensees. This includes an overhaul of the breach reporting regime for AFSL holders under section 912D of the Corporations Act 2001. The main features of these changes include:
- expanding the kinds of situations that need to be reported by licensees to ASIC (including situations that are deemed reportable);
- requiring ASIC to publish data about breach reports on its website.
Product design and distribution obligations:
The Product Design and Distribution Obligations (PDDO) have been introduced under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019. An affected product cannot be sold unless it has a Target Market Determination in place. Products that usually require a product disclosure statement will be affected by the PDDO. ASIC has released Regulatory Guide 274 to outline its approach and guidance to the obligations.
Current exemptions available in the Corporations Act 2001 will be removed and a new hawking prohibition will apply.
The new prohibition makes it an offence to offer a financial product for issue or sale, or request or invite the consumer to apply for such a financial product, if the consumer is a retail client and the offer, request or invitation is made in the course of, or because of, an unsolicited contact.
The hawking prohibitions work hand in hand with the deferred sales model. If one applies, the other doesn’t.
Deferred sales model for add-on insurance:
The deferred sales model prohibits the sale of add-on insurance products for at least four days after a customer has entered into a commitment to acquire the principal product or service.
The alterations impose offences for any failure to comply with the new requirements. The following classes of insurance products will be exempt: compulsory third party (CTP) insurance for motor vehicles; third party property damage, fire and theft insurance for motor vehicles; comprehensive insurance for boats, motorcycles, motorhomes, caravans, and trucks; insurance sold within superannuation (including group life insurance); postage and delivery of consumer goods insurance; home building insurance; home and contents insurance; and landlord insurance.
Duty to take reasonable care not to make a misrepresentation:
The new duty applies by law from this date.
Regulatory Guide 271:
The new Regulatory Guide 271 (replacing Regulatory Guide 165) commences. Certain standards and requirements highlighted in the guide are enforceable. The guide explains what financial firms must do to have a compliant Internal Dispute Resolution (IDR) system in place.
Previous changes in 2021
Enforceable code provisions mechanism:
Subdivision A of Division 2 Part 7.12 of the Corporations Act 2001 provides the Australian Securities and Investments Commission (ASIC) with the ability to identify enforceable code provisions when approving an industry code of conduct.
Currently, industry codes are self-regulated, and a breach of a Code provision does not presently result in a breach of the law. However, ASIC is expected to engage with industry and use this power in relation to the 2020 General Insurance Code of Practice and Life Insurance Code of Practice.
A number of changes to Subdivision A of Division 2 Part 7.12 proposed by the Insurance Council of Australia were adopted. These include tightening the minimum criteria for an enforceable code provision. Previously, the test was broad and focused on whether a breach ‘could result in significant detriment to the person’. Now
it seems the test is whether a breach of the provision is ‘likely to result in significant and direct detriment to the person’.
In both voluntary and mandatory codes, enforceable code provisions can be designated. Provisions which could be designated as enforceable may include:
- cooling off periods (which already apply under s 1019B of the Corporations Act 2001);
- providing information to consumers; and
- fees and charges.
Caps on commission:
A new section 12DMC has been inserted into the Australian Securities and Investments Commissions Act 2001, allowing the regulator to set a cap on commissions for add-on risk products supplied in connection with motor vehicles, including:
- the sale or long-term lease of a motor vehicle to the product recipient;
- the provision of credit connected with the sale or long-term lease of a motor vehicle to the product recipient; or
- the provision of a warranty by the product recipient in connection with the sale or long-term lease of a motor vehicle to another person by the product recipient.
The commission cap will be set by ASIC by regulation, so the value of the cap is yet to be known.
Moving forward, insurers and intermediaries should consider whether affected arrangements are suitable and whether their sales models are viable under the new rule without revision.
Regulation of claims handling:
The Corporations Act 2001 has been amended to include ‘claims handling and settling services’ as a financial service. In order to provide a claims handling and settling service, a person will now require an Australian Financial Services Licence (AFSL) or be an authorised representative of an AFSL holder.
A transition period applies to this regulation.
An AFSL application or variation must be lodged with ASIC by June 30 to benefit from the transition period. They are then able to continue providing claims handling and settling services unlicensed until ASIC makes a decision on the application or 31 December 2021. (This date may be extended by up to six months to 30 June 2022).
Claimant intermediaries, have to comply with the new regulation.
Use of terms ‘insurer’ and ‘insurance’:
There are now restrictions on how the words ‘insurer’ and ‘insurance’ are used. Products that are not insurance cannot be called insurance and a business cannot use the word ‘insurer’ to describe their products or services if the product or service is not insurance.
Unfair Contract Terms (UCT) regime:
Insurance contracts are subject to UCT laws from this date onwards. Affected policy wordings should be reviewed to ensure unfair contract terms are removed, which can be a lengthy exercise because it may result in changes to underwriting decisions and criteria.
ASIC has a track record of taking action in relation to unfair contract terms in other financial services contracts, and under the UCT regime, may take action against an insurer for enforcing unfair contract terms in contracts.