State of flux

State of flux

It’s not just the virus – the industry is dealing with a maze of key regulatory reforms

By Bernice Han

On April 5 next year unfair contract terms (UCT) law will apply to insurance contracts, bringing the industry into line with other financial services providers that have been complying with the provisions since July 2010.

The extension of the UCT regime to standard insurance contracts issued to consumers is a major shakeup for the industry – one that will require insurers, brokers and other intermediaries to relook at, and rewrite if need be, the way existing policies are set out.

In 2016, UCT protections were given to small businesses.

For the insurance industry it will no doubt be a tedious, complex process. As the National Insurance Brokers Association told its members in May, the change is something that the industry is going to have to “come to grips with and to learn about”.

But the UCT reform is not the only change the industry has to adjust to. The insurance industry is presently in a state of flux as it faces a raft of reforms coming together at much the same time.

In the pipeline are many other measures that will overhaul the way the industry goes about its business.

From the way products are designed and distributed to the handling of claims, no stone has been left unturned as Canberra makes good on its promise to act on every recommendation that Kenneth Hayne made in his royal commission final report last year.

As insurance lawyers like to point out, a number of Hayne’s key proposals aimed at the industry aren’t new. Work on a number of them, such as ending the UCT exemption to insurance contracts and the introduction of a deferred sales model for add-on products, had already started before the royal commission into financial sector misconduct in 2018.

Pressure for increased oversight of the industry was already running high before then-Prime Minister Malcolm Turnbull finally caved in and agreed to the royal commission. What the final report from Commissioner Hayne did was hasten the urgency of reform, speeding up the pace at which the changes would take place.

And it may not be a bad thing to have to deal with the changes all at once, according to Mathew Kaley, a principal at law firm McCabe Curwood.

“I think there are advantages in all of it happening at once. You can focus on these things,” Mr Kaley told Insurance News.

“Do it once, meet all of these new requirements and it’s done. It’s a broad and deep change to the regulatory environment.”

He says a lot of the planned legislative changes are aimed at producing products that meet customer needs and expectations more effectively.

“It is placing more of an onus on the product issuers and insurers to design their products to meet those customer needs and to only sell them to the target market customers,” he said. “I do think that will have a beneficial end result for consumers.”

One of the biggest regulatory changes came into effect last year, when the Australian Securities and Investments Commission (ASIC) was given new powers to ban financial or credit products if they cause significant consumer detriment.

The move to boost ASIC’s enforcement toolkit with Product Intervention Power (PIP) stemmed from the Government’s response to the December 2014 report of the Financial System Inquiry (FSI), which made 44 recommendations.

Apart from having the powers to ban products, the PIP also gives ASIC the authority to impose restrictions on the way a product can be sold, order the removal of certain features and attach conditions to the way it is marketed. Issuers and distributors of financial products must comply with the design and distribution obligations from October 2021.

ASIC has the discretion to also amend or ban remuneration arrangements that are tied to a product’s commercial success.

While the PIP is now in effect, with UCT changes to follow in April next year, the progress of other items on the reform agenda has been held back because of the pandemic disruption.

In May Treasurer Josh Frydenberg announced a deferment of six months for the implementation of some Hayne royal commission reforms, to allow the industry to focus on the immediate challenge of supporting customers during the coronavirus pandemic.

Measures that the Government had been planning to introduce into Parliament by June 30, when the last financial year ended, will now enter the House of Representatives by December. Those that were due to be introduced by the end of this year are now set to take place by next June.

The UCT changes will begin on April 5 next year as planned, because the legislation has already secured passage in Parliament. The Insurance Council of Australia (ICA) says its members have advised they are well advanced in reviewing their policy documentation in preparation for the UCT regime.

ICA spokesman Campbell Fuller says the body and its members are in talks with Treasury and the Government about several key policy issues that will be addressed in the legislation scheduled to be passed by the end of the year.

Since the deferrals were announced in May, ASIC has followed up with an update in the following month, outlining its revised timetable of ongoing regulatory projects.

Here’s an update on some of the major regulatory changes that the industry can expect in the months ahead:

• Internal dispute resolution (IDR) review

ASIC has released regulatory guide RG271, updating its requirements for how financial firms deal with consumer and small business complaints under the regulator’s IDR procedures. The guide sets out, among other things, reduced timeframes for responding to complaints and what information firms must include in written IDR responses to allow consumers to decide whether to escalate their complaints.

The guide comes into effect on October 5 2021.

• Product design and distribution obligations

The new laws were due to start on April 5 next year after a two-year transition period, but have been pushed by six months to October 5. The changes are intended to force issuers and distributors to adopt a consumer-first approach when they develop, market and sell products.

Status: ASIC plans to publish a regulatory guide in the third quarter, responding to industry requests for guidance to be finalised as soon as possible.

• Internal dispute resolution data collection and reporting

Status: ASIC will commence the second phase of its targeted consultation on IDR data collection and reporting in the third quarter.

• Removal of claims handling exemption

Status: ASIC says it may engage in targeted consultation with a new information sheet on how to apply for an Australian financial services licence and comply with licence obligations, pending introduction of legislation into Parliament.

• No hawking of insurance and deferred sales model for add-on products

ASIC has put up a revised draft product intervention order on the sale of add-on insurance and warranty products sold with motor vehicles for consultation. The consultation closes on August 19. One of the suggestions in the revised draft involves changing the definition of an add-on insurance product to an add-on motor vehicle financial risk product, which is defined to include both insurance and warranty products.

• Enforceable code provisions

ASIC intends to consult on a draft update to Regulatory Guide 183, which covers approval of financial services sector codes of conducts.

• Remediation policy review

The measure aims to put consumers at the heart of the process and provide guidance on how licensees can achieve fair, transparent and timely outcomes.

Status: ASIC will consult on its proposals to extend Regulatory Guide 256 beyond financial advice licensees in the third quarter of this year – that’s around about now.

The start date for the new General Insurance Code of Practice has also been interrupted by the pandemic, with the deadline for implementing most of the new provisions extended by six months to July next year.

However, vulnerable customer and financial hardship provisions were fast-tracked by at least six months to July 1, when the current financial year started. The requirement on insurers who are Code signatories to have measures in place to support customers facing domestic violence went ahead as planned on July 1.

In the new code, key changes include requiring subscribers to use plain English in communications materials given to customers and giving the Code Governance Committee enhanced sanction powers in the event of a breach.

Mandatory standards for claims investigators have also been introduced and subscribers must provide consumers with information on cash settlements and a scope of works statement.