Claims as a Financial Service - what you need to know

Claims as a Financial Service – what you need to know

royal commission collab

The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 was passed by Parliament on 10 December 2020. It covers a range of reforms, in line with the revised regulatory timetable and includes claims handling and settling services for insurance products regulated by ASIC (Claims as a Financial Service). ASIC also issued a draft information sheet on 27 November and we extract the key points for you in this article.

Key takeouts 

While the definition of claims handling activity is broad, the range of providers that need an AFSL or to be an Authorised Representative is limited to those with the authority to reject all or part of a claim. Those doing only claims fulfilment or making a recommendation to the insurer, like an adjuster or investigator, do not need their own authorisation, with the insurer being responsible for their actions.

AFSL applications and AR appointments need to be in by 30 June 2021, but the authorisation requirements are effective from 31 December 2021 giving ASIC time for licensing. An AR can represent more than one AFSL holder without getting cross-approval from others, removing a potential problem.

Claims as a Financial Service

Who must hold an AFS licence with a claims handling authorisation

AFS licence and claims handling authorisation

Stop press

Treasury has issued Regulations to exclude certain parties not intended to be captured but that meet the claimant intermediary definition when handling insurance claims. These people are excluded because handling claims is typically not their core business and often they often do so for no monetary benefits.

They are:

  • mortgage brokers and mortgage intermediaries;
  • insurance brokers;
  • qualified accountants;
  • veterinarians;
  • travel agents;
  • financial advisers;
  • property managers;
  • estate managers; and
  • public trustees.

What does “authority from an insurer to reject all or part of a claim” mean?

Precisely what it says. If you only have the authority to recommend, then you don’t need a licence. It comes down to decision-making authority so insurers and fulfilment providers should clarify their roles and responsibilities to avoid any unintended consequences.

How to apply for an AFS licence or variation to provide a claims handling service

ASIC’s draft information sheet is clear: “Select the elements of a claims handling and settling service that apply to you - ASIC will grant an AFS licence or variation with an authorisation that covers only those elements. In your application, you will need to specify if you are: an insurer; a member of one of the categories of person who act on behalf of an insurer and require a claims handling authorisation, or neither (in which case you will be assumed to be a claimant intermediary).

In your application, you will need to specify if you are:

  • an insurer
  • a member of one of the categories of person who act on behalf of an insurer and require a claims handling authorisation, or
  • neither (in which case you will be assumed to be a claimant intermediary).”

Who is exempt from the AFS licensing regime

A ‘general exemption’ means that some persons who are often involved in the claims handling process do not need to hold a licence. Some examples are:

  • loss assessors or loss adjusters
  • specialists who are providing an expert opinion to help an insurer assess a claim (e.g. engineers, geologists, forensic accountants)
  • investigators
  • other ‘fulfillment providers’ (e.g. builders, smash repairers) – unless they are authorised to reject claims
  • independent medical examiners
  • debt collection agents, and
  • superannuation trustees.

There are some specific exemptions for foreign insurers and wholesale insurers if they have an authorised intermediary. Lawyers providing legal services relating to claims handling are also exempt.

What about authorised reps?

As an AFS licensee, you can provide financial services directly or through a representative or another AFS licensee who acts on your behalf.

ARs are ‘external’ to you and would otherwise require an AFS licence with a claims handling authorisation to provide these services (e.g. a financial adviser or claims manager who handles claims on behalf of an insurer).

There are formal processes for appointing and notifying ASIC about your authorised representatives:

  • Authorised representatives are your representatives by law. They may be an individual or another company (a ‘corporate authorised representative’).
  • A person can be the authorised representative of multiple claims handling licensees.
  • An authorised representative can ‘sub-authorise’ other people with the consent of the AFS licensee.

As an insurer, if you want another AFS licensee to be your authorised representative (e.g. a financial adviser or insurance broker), you must give them a binder.

AFS licensees with a claims handling authorisation may provide their services to multiple entities, including other AFS licensees (e.g. a claims management company which holds its own AFS licence with a claims handling authorisation and provides services to multiple insurers).

Insurance fulfilment providers are deemed to be acting on your behalf when providing services or goods to satisfy an insurer’s liability. These providers are your representatives by law because they provide claims handling and settlement services on your behalf (e.g. a smash repairer who is engaged by an insurer but who does not have authority to reject claims).

You do not need to appoint these people as your authorised representatives, and there is no process you need to follow under the Corporations Act to engage these persons to provide claims handling services on your behalf.

Other people involved in claims handling may also be acting on your behalf (e.g. loss assessors, loss adjusters, investigators). They also do not need to be appointed as authorised representatives unless they have authority to reject claims.

Providing financial product advice

Thankfully, giving a recommendation or opinion (or a report of either of those things) which is reasonably necessary as part of handling and settling an insurance claim is not providing financial product advice.

However, if you recommend how a settlement amount is to be structured or should be managed or if you recommend an insurance product, then you will be providing financial product advice.

Claims as a Financial Service

What are your obligations as an AFS licensee?

As an AFS licensee, you must comply with the obligations in sections 912A and 912B to:

  • do all things necessary to ensure that the financial services covered by the AFS licence are provided efficiently, honestly and fairly
  • have adequate arrangements in place to manage your conflicts of interest
  • comply with your AFS licence conditions
  • comply with the financial services laws
  • take reasonable steps to ensure your representatives comply with the financial services laws, unless those representatives are insurance fulfilment providers
  • have available adequate financial, human and technological resources, unless you are also regulated by APRA
  • maintain the competence to provide the financial services
  • adequately train your representatives and ensure they are competent to provide the financial services
  • have a dispute resolution system that satisfies section 912A(2) where financial services are provided to retail clients (including an internal dispute resolution system and membership of the Australian Financial Complaints Authority (AFCA))
  • have adequate risk management systems, unless you are also regulated by APRA, and
  • have compensation arrangements if financial services are provided to retail clients.

This is a long list and the fear is that licensees will become lost in the detail. For GI insurers my top 5 are:

  1. Abide by the GI Code of Practice including following timeframes and communication standards
  2. Get your dispute resolution processes sorted – see Reg Guide 271
  3. Manage conflicts of interest – this includes ensuring that incentives, KPIs and remuneration arrangements do not derogate from your obligations to claimants
  4. Ensure you can provide evidence of a competent, properly trained and adequately resourced workforce
  5. Have robust supervision of your providers – from the selection process to training and competency requirements through to performance and ‘consequence management’.

You will need to demonstrate that you can meet these obligations when applying for an AFS licence (or a variation to an existing AFS licence) to authorise you to provide a claims handling and settling service.

As an AFS licensee, you also have obligations to ASIC under sections 912C–912E to:

  • comply with ASIC’s directions to provide a statement about the financial services you provide
  • notify ASIC of breaches or likely breaches of any of your obligations as an AFS licensee
  • assist ASIC with surveillance checks on your compliance with your obligations
  • notify ASIC of any change in control of your organisation, and
  • notify ASIC if you have not started providing financial services within six months after you are granted an AFS licence.

ASIC can take enforcement action if you breach your obligations as an AFS licensee. This includes cancelling or suspending your AFS licence or imposing conditions on your licence, as well as seeking civil penalties.

Pages 11 – 22 of the ASIC Draft Information Sheet contain further details about what the obligations mean and what you must do.

A couple more specific details:

For cash settlements the requirement is to give the insured a Cash Settlement Fact Sheet which seems rather easier than a Statement or Opinion of some kind. It is only needed if the claim can be legally settled in some form other than by cash. It must contain:

  • options for settlement legally available under the insurance contract (e.g. to have the insured’s product repaired or replaced, or to receive a cash payment)
  • the sum insured
  • the amount of the cash settlement in total and as a breakdown of each component (e.g. sum insured, emergency payments and ex gratia payments), and
  • a statement that the client should consider obtaining independent legal or financial advice before agreeing to the cash settlement.

Claimant intermediaries who carry on a business of representing insured people in pursuing a claim and do so in return for any benefit (monetary or otherwise) will need to be licensed or authorised and subject to the corporations law requirements. Clearly, this will include claims preparers, ‘storm chasers’ and advisors – perhaps credit hire companies will also be regulated under this category.

Timing

How can we help

How Finity can help

At Finity we have management consultants and claims experts and can assist with:

  • Evaluating your current claims operating model and conducting a gap analysis against the CFS requirements
  • Strategic advice on the need to obtain an AFSL or become an AR for the purposes of claims handling
  • Supply chain management, especially supervisory requirements, performance monitoring and KPIs
  • CFS compliance readiness frameworks for fulfilment providers and claims managers
  • Optimising your claims operational and compliance performance through better use of data, including AI
  • Incorporating “claims risks” into your risk management frameworks.

How The Fold Legal can help

The Fold Legal has extensive experience with licensing applications and advice on claims management. Based on this experience, there are a few key take-aways to consider:

  • A number of businesses currently outsource claims handling overseas. In this situation, you will need to ensure that these businesses and their employees providing claims handling and settlement services are authorised representatives. You will also need to ensure that you have adequate monitoring and supervision arrangements in place.
  • ASIC have set service standards for licensing. ASIC aims to decide whether to grant or vary an AFS licence within 150 days of receiving a complete application in at least 70% of cases, and within 240 days in at least 90% of cases. This means for claims, applicants will need to have this in mind to apply for the licence. We recommend getting into ASIC early and no later than 1 April 2021 with an application.
  • Ensure that a completed application, including all the required supporting documents is provided to ASIC, otherwise they can reject the application and require a new submission
  • Responsible Managers will need to have claims handling and servicing experience. At a minimum, they must be able to demonstrate 3 out of the last 5 years’ experience in claims handling, plus have a degree or diploma in a finance or financial service stream.
  • Ensure that applicants prepare the claims handling proof which covers a broad range of general conduct obligations that apply to all AFS Licensees.
  • Authorised representatives who provide claims handling services can act for multiple licensees – there is no need to seek cross-endorsement.
  • You will need to tell ASIC about the specific claims handling activities you will carry out. ASIC will grant the AFS licence or variation that covers only those elements. For example:

a. making a recommendation or stating an opinion in response to an inquiry about a claim or potential claim
b. making a recommendation or stating an opinion that could influence a decision about making or continuing with a claim
c. representing someone in pursuing a claim
d. assisting another person to make a claim
e. assessing whether an insurer is liable under an insurance product
f. making a decision to accept or reject all or part of a claim
g. quantifying an insurer’s liability under an insurance product
h. offering to settle all or part of a claim, or
i. satisfying a liability of an insurer under a claim.


About the Fold

Servicing clients nationally from offices in Sydney and Brisbane, The Fold Legal offers a full range of regulatory, corporate and commercial legal services to financial services and credit businesses. As a specialist industry-focussed law firm, The Fold has extensive industry knowledge and is known for giving strategic advice that specifically addresses clients’ commercial needs. If you need advice on what the Royal Commission recommendations mean for your business, get in touch with The Fold’s team of experts.

Download the response here or read our ongoing Regulatory Compass Blog here.

Contact us 

Raj Kanhai

Ph +61 2 8252 3332
raj.kanhai@finity.com.au

 

Charmian Holmes

Ph +61 7 3854 4202
charmianh@thefoldlegal.com.au


[1]  https://download.asic.gov.au/media/5538220/sample-afs-licence-application-published-1-april-2020.pdf
[2] https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-1-afs-licensing-kit-part-1-applying-for-and-varying-an-afs-licence/
[3] Source: ASIC Attachment 1 to Media Release (20-300MR): Draft information sheet (INF 000)