After huge delays, the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Bill) has finally been passed by Parliament on 10 December 2020. As part of the reforms proposed by the original Royal Commission Report, the Bill includes a deferred sales model for add-on insurance products.
The Bill makes changes to the ASIC Act to implement an industry-wide deferred sales model for add-on insurance products, i.e. any insurance product that is sold incidentally to a primary good or service.
These changes apply to any insurance contract or any contract that has ‘insurance provisions’. The Bill makes substantive changes to the ASIC Act rather than the Corporations Act (though there will be consequential changes to the Corporations Act). This means that all financial products will be caught, including financial products that may be ‘incidental financial products’ under the Corporations Act and therefore would not be otherwise regulated.
Why the changes?
ASIC has been conducting investigation into the sale of add-on insurance products for a number of years, which have indicated that:
- Add-on insurance products represent poor value for customers;
- Customer claim outcomes are considerably worse for add-on insurance products than for insurance products offered in markets where there is meaningful competition; and
- Customers are at risk of unfair sales and adverse outcomes.
What does this mean?
Add-on insurance product providers (i.e. the person who provides the primary good and service, as well as any related third parties who sell add-on insurance products) are prohibited from selling an add-on insurance product during the deferral period.
The legislation distinguishes between an add-on insurance pre-deferral period and an add-on insurance deferral period. The add-on insurance pre-deferral period, is a period that:
- Begins when the customer indicates an intention to acquire the primary product or service; and
- Ends immediately before the start of the deferral period.
This allows the provider to discuss add-on insurance products with customers before the primary product or service is sold, without triggering anti-hawking obligations.
The add-on insurance deferral period itself begins at the later of:
- The time when the customer acquires or commits to acquire the primary product or service; and
- The time when the customer is given the prescribed information about the add-on insurance product,
and ends after four days.
ASIC will prescribe information that must be provided to the customer. There’s no guidance on what this information must contain, aside from the fact that the customer can ‘opt-out’ of receiving offers or invitations for add-on insurance products.
An important point to note is that an add-on insurance product is taken to be ‘sold’ at the earliest point at which no further action is required from the customer, for the sale to occur (regardless of when the sale itself actually occurs).
For example, a customer purchases a phone. The salesperson mentions screen protection insurance as a potential add-on purchase. Before giving the prescribed information about the add-on insurance product to the customer, the salesperson explains the insurance product and invites the customer to fill out the paperwork to apply for the insurance product. The customer fills out the paperwork, and is not required to take any further action. The customer is then given the prescribed information. The salesperson processes the paperwork at the end of the deferral period.
This is an offence because the salesperson essentially sold the add-on insurance product before the add-on insurance deferral period began, i.e. the parties agreed that the customer would purchase the insurance policy before the add-on insurance deferral period was triggered by providing the completed application form before being given the prescribed information.
What are the offences under the new regime?
It is an offence for a provider to offer, request, or invite the customer to ask for, apply for, or purchase an add-on insurance product:
- During the add-on insurance deferral period, other than in writing; or
- Between the end of the add-on insurance deferral period (i.e. the four days) and six weeks after the beginning of the add-on insurance deferral period, other than in writing.
However, after six weeks has passed, providers will be prevented from contacting customers due to the anti-hawking regime (which has also been updated due to the Royal Commission). These regimes do not overlap – instead, the anti-hawking regime will apply from the end of the deferred sales regime.
If the customer contacts the provider during the add-on insurance deferral period, the provider can respond to the customer’s inquiry (using any method of communication), as long as the response relates only to the purpose for which the customer initiated the contact.
For example, if a customer calls to ask about the cost of the product, the provider could call back to discuss the cost, but they could not take the opportunity to discuss the scope of the product.
The purpose of this restriction is to prevent pressure-selling tactics, which ASIC has previously identified as being one cause of the high level of customer detriment customarily associated with add-on insurance products.
Under the Act, customers have a right to opt-out of receiving offers, requests and invitations, and it is an offence to contact a customer if the customer opts-out.
Breaching the deferred sales model can result in civil penalties, criminal penalties, or both. ASIC can choose to issue an infringement notice rather than commencing civil or criminal proceedings. If a provider complies with an infringement notice, no further action would be taken and the payment would not be considered to be an admission of guilt.
The customer has a right to return the product and seek a refund of the fees for the mis-sold product. This right lasts for a month after the end of the product’s cooling off period. The provider must refund the entire amount paid, unless the customer has made a claim under the product.
The add-on insurance deferred sales model doesn’t apply in the following situations:
- The customer receives advice given by a person who is subject to the best interests duty, i.e. where an adviser recommends a primary product and that add-on insurance relates to that product; or
- There is an existing product intervention order which includes a prohibition or restriction on the sale of the insurance product.
The purpose of these exemptions is to avoid overlap between existing regimes, and to prevent the possibility of conflicting duties and obligation. There is, however, no exemption that applies generally, where the deferred sales model might be inconsistent with an existing consumer protection (for example, the regulatory regimes that currently apply to the sale of new and used motor vehicles in every State and Territory, that include cooling off periods). Presumably where such conflicts arise, these could be dealt with using one of the exemptions below.
The add-on insurance deferred sales model also doesn’t apply where:
- The product is a comprehensive motor vehicle insurance policy;
- Where ASIC specifically exempts a person; or
- Where the regulations specifically exempt a product.
ASIC is able to exempt a person via passing a notifiable instrument. In doing so ASIC is obliged to consider a number of factors, including whether:
- There is a high risk of underinsurance or non-insurance without an exemption;
- Historically, the add-on insurance product or class of add-on insurance products, has been good value for money;
- There is evidence that the add-on insurance is well-understood by consumers; and
- There are any differences between the add-on insurance product and financial products of a similar kind that are not sold as add-on insurance.
These conditions will make it difficult for start-ups and new products to qualify for an exemption. For example, if a product has no sales or claims history, it is impossible for ASIC to form a view as to whether it has been or will offer good value for money.
It will also be difficult for innovative products to qualify for an exemption where the product belongs to a class of insurance that historically has a poor history of value for money or where there is little data to support the consumer benefit arguments. In that situation, the product provider would need to distinguish between their products and the other equivalent products that have historically resulted in poor consumer outcomes.
The things to remember are:
- If you offer any insurance or warranty product that is sold alongside a primary product or service, seek legal advice on whether it is subject to the deferred sales model regime. Because the changes are being made to the ASIC Act, they may apply to financial products that are not regulated under the Corporations Act.
- If you offer insurance products as a result of a referral system, seek legal advice on whether this amounts to add-on insurance – the chances are good that it will.
- Products that are subject to the deferred sales model are subject to other obligations such as the design and distribution obligations if those products are consumer insurance products.
- Review your sales process including how it is positioned in the context of the primary product or service sale, to ensure that you will not be accidentally in breach of the deferred sales model, i.e. that the four-day deferral period applies prior to the point at which no further action is required by the customer to process the sale of the add-on insurance product.
- This is a one-size-fits-all approach. If your business model is seriously impacted by the deferred sales model, consider applying for an exemption from ASIC. There will have be a strong consumer benefit argument to win support for an exemption.
When do the new laws start?
The add-on insurance laws will commence on 5 October 2021. It applies to commitments to acquire primary products and services entered into or after that date.
How can we help
The Fold Legal
We are able to review your product and sale process and provide advice on whether it will be subject to the deferred sales model. We can also review the case for seeking an exemption and assist with ASIC relief applications.
In addition to compliance measures, we can review the contracts between primary product/service providers and financial services providers to ensure that the parties are obliged to comply with the deferred sales model.
How Finity can help
If your business model is impacted by these regulatory changes, Finity can help with the development of an alternate strategy including modelling product value when considering an application for exemption with ASIC. Support is also available on the operational processes required to be compliant and the growth options available. In addition, Finity has developed a comprehensive regulatory toolkit to assist you in meeting your Design and Distribution Obligations.
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.
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