Claims handling update

AN OVERVIEW OF CHANGES

Schedule 7 of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (FSRA) and regulations, make “claims handling and settling services” (CHSS) a NEW financial service under Chapter 7 of the Corporations Act 2001 (‘Corporations Act’) and apply certain requirements of Chapter 7 to those providing CHSS.

BY MARK RADFORD

Principal, Radford Lawyers

CHSS captures a broad range of claims activities, from an initial inquiry before an insurance claim is lodged to the formal lodgement, assessment and settlement of an insurance claim in relation to both retail and wholesale clients. It only catches insurance products subject to the Corporations Act, not discretionary arrangements or self-insured retentions.

Does an insurance broker need an AFS licence?

An insurance broker entity can be only caught if they are acting on behalf of insurers in providing CHSS. There is no obligation on an insurance broker to hold an AFS licence if it only acts for insureds in providing CHSS.

Note that a separate company in a broking group that is not an insurance broker as defined above (e.g., underwriting agency) will need to consider its position separately. This article only covers insurance brokers.

Where an insurance broker is acting on behalf of an insurer in providing CHSS, they must: • obtain an AFS licence for CHSS/vary an existing AFSL to cover CHSS – but only for the CHSS they provide for the insurer (which might be very limited); or • act as an Authorised Representative (AR) of a person that has an AFSL for CHSS; e.g., get the insurer to appoint you as its AR for the limited CHSS you may provide for them; or • fall within one of the relevant exemptions – for insurance brokers, this would typically only be likely to be where they only provide CHSS in relation to wholesale clients for an APRA regulated insurer that is acting under the APRA regulated insurer wholesale client exemption.

For insurance brokers acting for Lloyd’s Underwriters for retail client business, an AFSL covering the CHSS will be expected and the arrangement will need to be structured to fit within the retail client exemption in section 911A(2)(el).

When considering whether you provide services to wholesale clients for the purposes of the above exemption, remember that the law has extended the retail client definition for CHSS to apply to third party beneficiaries (not just contracting insureds) that are provided with the retail client type of cover in the Act.

When does an insurance broker need to apply for an AFSL/variation to AFSL?

The obligation to obtain an AFSL/AFSL variation for CHSS won’t apply before the end of 30 June 2021.

ASIC has however asked all persons seeking to rely on the transition period to lodge the application as soon as possible as rejections occurring close to the 30 June 2021 deadline may mean that the applicant has insufficient time to rectify and re-submit their application and may not be able to access the transition period as a result if ASIC rejects it.

Who do you have to appoint as your representatives in relation to CHSS if you get an AFSL/vary for CHSS?

Typically, an insurance broker: • would only need to authorise any employee/director providing a CHSS as their representative – not an

Authorised Representative; • could appoint another AFSL holder with

CHSS to act for them under their own

AFSL and not that of the broker; • would need to appoint as their

Authorised Representative anyone that will provide CHSS on their behalf that is within the category of persons required to get an AFSL( see s911A(2)(ek)) but does not wish to get the AFSL. This may not be possible if that person holds an

AFSL but it does not cover CHSS; and • would only need to appoint persons who are not within the above CHSS AFSL categories or who are exempt under the lawyer licensing exemption, as their representative not as an AR.

The transition period provides that licensees can give notice of Authorised Representatives under s916A during the transition period authorising them to provide claims handling and settling services after the end of that transition period (the same applies regarding an authorised representative giving notice to individuals under section 916B).

What are some of the key obligations on insurance broker AFSL holders?

• If you access the transition period as noted above the new obligations apply to claims made after 1 January 2021 but only from the end of the transition period (i.e. 1 January 2022). • The Chapter 7 general licensing obligations under section 912A of the Corporations Act will apply – the extended retail client definition will need to be taken into account regarding CHSS.

Internal dispute resolution system relevant to CHSS must take into account the new retail client definition for CHSS.

Claims AFSL holders are responsible for the CHSS conduct of their representatives.

No FSG obligation applies.

The AFSL holder or their representative must provide a Cash Settlement Fact Sheet to insureds who are retail clients if they are offering to settle all or part of a claim using a cash payment (i.e. not repair or replacement) where the cash payment is not the only option legally available to the client to settle the claim, or the part of the claim.

Liability limited by a scheme approved under Professional Standards Legislation.