Financial Services Regulation and Insurance

Recommendations from the Financial Services Royal Commission have resulted in the following changes being made to insurance regulation in Australia:

* 2020 General Insurance Code of Practice
*  Product design and distribution obligations and RG 274
* Breach reporting and RG 271 Internal dispute resolution
* Claims handling as a financial service
* Hawking (unsolicited sales) prohibition
* Duty not to make a misrepresentation
* Add-on Insurance deferred sales model
* Insurance unfair contract terms

The deferred sales model will enable consumers to make informed decisions on add-on insurance product purchases. It will do so by introducing a pause in the sales process between the purchase of the primary product and the purchase add-on insurance. This pause, or ‘deferral period’, will enable and encourage consumers to consider the merits of the insurance offered and to compare this insurance with alternative products.

Insurance unfair contract term extend the existing protections of the unfair contract terms regime under the Australian Securities and Investments Commission Act 2001 to insurance contracts governed by the Insurance Contracts Act 1984.

Persons providing claims handling and settling services need to be covered by an Australian Financial Services (AFS) licence or be authorised by another AFS licensee.

The licence requirements apply to:

* insurers;
* insurance claims managers;
* tradespersons (referred to as ‘insurance fulfilment providers’) who can reject claims on behalf of an insurer;
* insurance brokers who handle claims on behalf of an insurer;
* financial advisers who handle claims on behalf of an insurer; and
* people that carry on a business of representing people to pursue insurance claims for reward (referred to as ‘claimant intermediaries’).

Entities that already hold an AFS licence need to apply for a variation to their licence so it covers the financial service of claims handling and settling.

RESTRICTED USE OF THE TERM ‘INSURANCE’ AND ‘INSURER’
It is a strict liability offence for a business to describe a product or service that they offer as insurance, if the product or service is not insurance, in circumstances where it is likely that the product or service could mistakenly be believed to be insurance.

CAP ON VEHICLE DEALER SALE OR LEASE COMMISSIONS
ASIC can determine a cap on the amount of commissions that can be paid in relation to add-on risk products sold in connection with the sale or long-term lease of a motor vehicle.

An offence is created for providing or receiving commissions in connection with the supply of add-on risk products that are provided in connection with the sale or long-term lease of a motor vehicle, or the provision of credit connected with the sale or long-term lease of a motor vehicle.

An offence is committed if the commission exceeds the cap determined by ASIC for that add-on risk product.

Duty of insured not to make misrepresentations
The Bill creates a duty by an insured to take reasonable care not to make a misrepresentation to an insurer for consumer insurance contracts. The changes ensure that obligations for disclosure applied to consumers do not enable insurers to unduly reject the payment of legitimate claims.

LIMITING AVOIDANCE OF LIFE INSURANCE CONTRACTS
The Insurance Contracts Act provides that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms.

Life insurers are prevented from inappropriately cancelling a contract for misrepresentation by an insured in circumstances where the life insurer would still provide coverage.

More information about Insurance Regulation