Consumer protections
Introduction
3.1 The aim of consumer protections is to protect Australian consumers under
a national law by ensuring that consumers have the same protections, and
businesses have the same obligations and responsibilities, across Australia.
However, as the evidence in this chapter illustrates, life insurance is currently
exempt from several consumer protections.
3.2 This chapter begins by summarising the Australian Consumer Law (ACL) and
its application to financial services. The chapter then examines the consumer
protections that apply to life insurance and compares those protections to the
ACL. A substantial list of exemptions is identified and some significant
exemptions are discussed in detail to provide examples of the potential for
reform. The proposed product design and distribution obligations and ASIC's
product intervention powers, and the Banking Executive Accountability Regime
(BEAR), are also considered.
3.3 Given that this chapter focusses on legislated consumer protections, the
Life Insurance Code of Practice is discussed separately in chapter 4.
Australian Consumer Law
3.4 The ACL is a national consumer law in effect from 1 January 2011,
covering:
- a national unconscionable conduct and unfair contract terms law
covering standard form consumer and small business contracts;
- a national law guaranteeing consumer rights when buying goods and
services;
- a national product safety law and enforcement system;
- a national law for unsolicited consumer agreements covering
door-to-door and telephone sales;
- simple national rules for lay-by agreements; and
- penalties, enforcement powers and consumer redress options.
3.5 The ACL is split across different Acts and regulators depending on the
type of product or service that is being offered. The regulators for the ACL
are:
- the Australian Competition and Consumer Commission (ACCC), in
respect of conduct engaged in by corporations, and conduct involving the use of
postal, telephonic and internet services under the Competition and Consumer
Act 2010 (Competition and Consumer Act);
- state and territory consumer protection agencies, in respect of
conduct engaged in by persons carrying on a business in, or connected with, the
respective state or territory; and
- the Australian Securities and Investment Commission (ASIC) in
relation to financial products and services under the Australian Securities
and Investments Commission 2001 (ASIC Act).
Productivity Commission
consideration of life insurance and the ACL
3.6 In 2008, the Productivity Commission considered whether consumer
protections for financial services in the ASIC Act should be exempt from the
generic provisions of the ACL. The Productivity Commission stated that 'statutory carve outs of this nature
can potentially provide unscrupulous operators with opportunities to make minor
changes to their activities so as to slip between the regulatory cracks. To
avoid this, there should be no exclusions of particular sectors from the new
national generic consumer law.'
3.7 The Productivity Commission considered that there was a strong
underlying rationale for consumer law to encompass all sectors. The 2008 report
recommended that the generic consumer law should apply to all consumer
transactions, including financial services, with ASIC to remain the primary
regulator.
3.8 In its 2017 review of the ACL, Consumer Affairs Australia and New
Zealand stated that a key strength of the ACL is its generic nature, applying
across all sectors of the economy. Consumer Affairs Australia and New Zealand suggested
that exemptions in the ASIC Act should be reviewed, with a view to removing
those that are no longer in the public interest, particularly given the
objective of providing a generic, economy-wide law. The review noted that:
The ACL contains a number of exemptions, many of which were
carried over from the former Trade Practices Act. CAANZ [Consumer
Affairs Australia and New Zealand] considers that exemptions in the ACL risk
undermining the benefits of a nationally consistent approach to consumer
protection.
CAANZ [is] proposing to extend the unconscionable conduct
protections to publicly-listed companies and apply the unfair contract terms
protections to standard form insurance contracts.
Life insurance consumer protections
3.9 This section summarises the consumer protections that currently apply to
life insurance (the duty to act in utmost good faith) as well as those that are
due to come into operation in 2018 (the FOFA conflicted remuneration
provisions). The main protections that apply to life insurance are listed in Table
3.1.
Table 3.1: Life insurance consumer protections
|
Consumer Protections
|
Non-financial
services under the Competition
and Consumer Act 2010
|
Financial
services
|
Life insurance
|
|
The duty of
the utmost good faith
|
N/A
|
N/A
|
Insurance Contracts Act 1984 Section 13
applies to each party
|
|
Insurers may
not refuse to pay claims in certain circumstances
|
N/A
|
N/A
|
Insurance Contracts Act 1984 Section 54
|
|
Remedies
|
N/A
|
N/A
|
Insurance Contracts Act 1984 Sections
54-56
|
|
Pre 1/1/11
federal, state, territory laws
|
N/A (The former Trade Practices
Act contained similar consumer protection provisions to those in the CC Act).
|
The ASIC Act contained consumer
protection provisions predating the commencement of the CC Act.
|
Insurance Contracts Act 1984 provisions
dealing with the duty of utmost good faith that predated the Competition and Consumer Act 2010 were amended
in 2013.
|
|
Information
Standards
|
Part 3-4: The Minister may set
information standards.
|
Product Disclosure Statement
requirements are contained in the Corporations Act and the National Consumer
Credit Protection Act.
|
Product Disclosure Statement
requirements under the Corporations Act.
|
|
FOFA and
Conflicted Remuneration
|
|
|
From 1 January 2018, commission caps introduced over three years.
|
Source: Australian Securities
and Investments Commission, Submission 45, p. 31; Australian Securities and Investments Commission, answers
to question on notice, 4 August 2017 (received 4 December 2017).
Duty to act in the utmost good
faith
3.10 Section 13 of the Insurance Contracts Act 1984 (Insurance
Contracts Act) requires each party to act towards the other party, in respect
of any matter arising, with the utmost good faith.
3.11 The ACL Review Final Report of March 2017 concluded that the duty
to act in utmost good faith provided less consumer protection than that
provided by ACL.
3.12 In addition, ASIC's ability to commence proceedings under the Insurance
Contracts Act is more restricted than for other consumer protection provisions.
ASIC is limited to representative proceedings under the Insurance Contracts Act,
intervening in existing proceedings, or taking licensing action under the
Corporations Act.
3.13 Furthermore, ASIC is not able to seek civil penalties for a breach of
the duty of utmost good faith. A review of penalties is currently being
considered by the government-established ASIC Enforcement Review Taskforce.
ASIC has proposed that the government consider amending the sanctions regime
that applies to life insurance in order to deter poor conduct by life insurers
by:
- allowing civil penalties for breaches of the utmost good faith
duty; and
- aligning penalties for directors of life insurance companies with
the civil and criminal penalties that apply to directors of managed investment
schemes.
3.14 Further evidence received by the committee comparing the effectiveness
of the duty of utmost good faith to unfair contract terms laws is discussed in the
later section on unfair contract terms.
FOFA
3.15 The Future of Financial Advice (FOFA) reforms (Part 7.7A of the
Corporations Act) include conduct obligations for the giving of personal advice
to retail clients, and obligations to act in the best interests of the client,
and to prioritise the interests of the client ahead of those of the advice
provider. The FOFA reforms also included a ban on conflicted remuneration
structures including commissions and volume based payments. When they were
originally introduced, however, the FOFA reforms excluded any bans on
conflicted remuneration in relation to life insurance.
3.16 However, from 1 January 2018, benefits will no longer be exempt,
although the commission caps and clawback arrangements will be introduced over
a three year transition period as discussed in chapter 5.
Life insurance exemptions from consumer protections
3.17 A range of consumer protections apply to financial services. This
section summarises the consumer protections from which the life insurance
industry is currently exempted. The consumer protections that apply to
financial services and from which the life insurance industry is exempted are listed
in Table 3.2.
3.18 Table 3.2 also indicates equivalent or related consumer protections
under the Competition and Consumer Act 2010 that apply to non-financial
services.
Section 15 of the Insurance
Contracts Act 1984
3.19 Some of the most significant exemptions from consumer protections in the
life insurance industry arise from section 15 of the Insurance Contracts Act.
The explanatory memorandum to the Trade Practices Amendment (Australian
Consumer Law) Bill (No. 2) 2010 set out the way in which insurance contracts
are exempted from the operation of various consumer protections under the ACL:
Section 15 of the Insurance Contracts Act 1984 provides
that a contract of insurance (as defined by that Act) is not capable of being
made the subject of relief under any other Commonwealth Act, a State Act or an
Act or Ordinance of a Territory. In this context 'relief' means relief in the
form of:
- the judicial review of a contract on the ground that it is harsh,
oppressive, unconscionable, unjust, unfair or inequitable; or
- relief for insureds from the consequences in law of making a
misrepresentation,
but does not include relief in the form of compensatory
damages. The effect of section 15 is to mean that the unfair contract terms
provisions of either the ACL or the ASIC Act do not apply to contracts of
insurance covered by the Insurance Contracts Act 1984, to the extent
that that Act applies.
Table 3.2: Consumer protections and exclusions for the life
insurance industry
|
Protection
|
Consumer
protections for non-financial services under the Competition and Consumer Act 2010
|
Consumer
protections for financial services
|
Consumer
protections for life insurance
|
|
Misleading or
deceptive conduct
|
Part 2-1:
|
ASIC Act: Section 12DA:
Misleading or deceptive conduct, including representations.
|
Excluded by section 15 of the Insurance
Contracts Act 1984.
|
|
Unconsionable
conduct
|
Part 2-2:
|
ASIC Act: Section 12CA – 12CC: Unconscionable
conduct within the meaning of the unwritten law and also in connection with
financial services. Conduct may be unconscionable
if it is particularly harsh or oppressive, and is beyond hard commercial
bargaining.
|
Excluded by section 15 of the Insurance
Contracts Act 1984.
|
|
Unfair
contract terms
|
Part 2-3: Standard
form consumer and small business contracts.
|
ASIC Act: Section 12BF – 12BM:
Standard form consumer and small business contracts.
|
Excluded by section 15 of the Insurance
Contracts Act 1984.
|
|
Unfair
practices
|
Part 3-1: False or
misleading practices, unsolicited supplies, pyramid schemes, pricing.
|
ASIC Act: Section 12BB,
12DB – 12DM: False or misleading representations, pricing, rebates, bait
advertising, referral selling, accepting payment without supply, harassment
or coercion, pyramid selling, unsolicited supplies.
|
Excluded by section 15 of the Insurance
Contracts Act 1984.
|
|
Unsolicited
consumer agreements
|
Part 3-2: Relevant types of
agreement are prescribed in regulations.
|
Sections 736, 992A and 992AA of
the Corporations Act regulate the hawking of financial products.
|
There are limited exclusions in
relation to certain insurance products under regulation 7.8.24 of the
Corporations Regulations
|
|
Guarantees and
warranties
|
Part 3-2: Guarantees
consumer rights when buying goods and services.
|
Section 12ED: Warranties in
relation to the supply of financial services that will be rendered with due
care and skill and be fit for purpose. There is no warranty that financial
services will be supplied within a reasonable time, although protection is
provided by section 12DI of the ASIC Act.
|
Excluded by subsection 63(b) of
the CC Act and subsection 12ED(3) of the ASIC Act.
|
|
Claims
handling exemption
|
N/A
|
N/A
|
Excluded by Corporations
regulations 7.1.33 (discussed in chapter 7)
|
|
Corporations
Act Chapter 7
|
N/A
|
Protections on informed
consumer about financial products and fairness, honesty and professionalism
of providers
|
Section 765A of the
Corporations Act, excludes insurance contracts and life policies that are not
contracts.
|
|
Dollar
disclosure
|
N/A
|
Section 947B – 947D set out
what information is required in statements of advice. Section 1013D sets out
what information is required in product disclosure statements.
|
Instrument 2016/767 provides
exemptions for the life insurance industry from disclosing dollar amounts for
costs, fees, charges, expenses, benefits and interests.
|
|
Product design
distribution and intervention power
|
N/A
|
Proposed powers for ASIC to proactively intervene where it identifies
significant consumer detriment.
|
Treasury's proposals paper
appears to propose to exempt distributors who provide personal advice.
|
|
National
Consumer Protection Act 2009
|
|
|
Lenders are not required to
provide life insurance rebates to businesses that pay loans off early.
|
Source: Australian Securities and Investments Commission, Submission 45, p. 31; Australian Securities and Investments Commission, answers
to question on notice, 4 August 2017 (received 4 December 2017);
Treasury, answers to question on notice, 22 August 2017 (received 6 September
2017); Treasury Proposals Paper, Design and Distribution Obligations and
Product Interventions Power, December 2016, p. 3.
3.20 Although the wording has varied over the time, the central aspects of section 15
which exclude relief in respect of harsh, oppressive, unconscionable, unjust,
unfair or inequitable contracts have been in the Insurance Contracts Act since
it came into effect in 1984.
3.21 The introductory remarks on operating fairly in the first version of the
Insurance Contracts Act state that it was:
An Act to reform and modernise the law relating to certain
contracts of insurance so that a fair balance is struck between the interests
of insurers, insureds and other members of the public and so that the
provisions included in such contracts, and the practices of insurers in
relation to such contracts, operate fairly, and for related purposes.
3.22 The explanatory memorandum for the bill which led to the Insurance
Contracts Act argued that the duty to act in good faith meant that other
consumer protections were not necessary:
In view of the Bill's clear statement of the duty of good
faith, a general power to review its terms is unnecessary. Furthermore, it is
appropriate that there should be no question whether the Bill or State
legislation or other Commonwealth legislation applies in a particular case and
so no room for lengthy disputes as to which should apply.
Unfair contract terms
3.23 Unfair Contract Terms (UCT) laws apply to standard form consumer
contracts. A standard form contract will typically be one prepared by one party
to the contract and not negotiated between the parties—it is offered on a 'take
it or leave it' basis. The ASIC Act defines 'consumer contract' as follows:
A consumer contract is a contract at least one of the parties
to which is an individual whose acquisition of what is supplied under the
contract is wholly or predominantly an acquisition for personal, domestic or
household use or consumption.
3.24 A term of a consumer contract is unfair if it:
- would cause a significant imbalance in the parties' rights and
obligations arising under the contract;
- is not reasonably necessary to protect the legitimate interests
of the party who would be advantaged by the term; and
- would cause detriment to a party if it were to be applied or
relied on.
3.25 The following actions can be pursued in relation to unfair contract
terms:
- A court can declare a term of a standard form consumer contract
to be unfair. Once a term is declared to be unfair, it will be void. However,
the remainder of the contract will continue to apply, if it can continue
without the void term.
- Individuals can apply to a court to have a term of a standard
form contract they entered into declared unfair and accordingly, void.
- ASIC can also apply to have a term of a particular standard form
contract declared unfair.
- The law does not impose a pecuniary penalty on a business that
includes or seeks to rely on an unfair contract term. However, consumers can
seek redress for any loss that is incurred as a result of a term of a standard
form contract that is declared to be unfair.
3.26 Some indication of the potential extent to which unfair terms may
permeate contracts can be gained from the work that the ACCC has done in other
industries. In 2013, the ACCC completed a review of the unfair contract
terms in the airlines, telecommunications, fitness and vehicle rental
industries, as well as some contracts commonly used by online traders.
Following the review, 79 per cent of unfair terms were removed from standard
form contracts following the ACCC finding that the following unfair terms were
in standard form contracts:
- Contract terms that allow the business to change the
contract without consent from the consumer.
- Terms that cause confusion about the agency arrangements
that apply and that seek to unfairly absolve the agent from liability.
- Terms that unfairly restrict the consumer's right to
terminate the contract.
- Terms that suspend or terminate the services being
provided to the consumer under the contract.
- Terms that make the consumer liable for things that would
ordinarily be outside of their control.
- Terms that prevent the consumer from relying on
representations made by the business or its agents.
- Terms seeking to limit consumer guarantee rights.
- Terms that remove a consumer's credit card chargeback
rights when buying the service through an agent.
3.27 The committee also notes that, following the passage of unfair contract
terms legislation for small business loans, major banks have reviewed those
contracts and removed unfair contract terms.
3.28 The ACCC has identified significant inconsistencies in the way that unfair
contract terms legislation applies. For example, life insurance is covered by
the Insurance Contracts Act and is therefore exempted from the unfair contract
terms legislation. By contrast, private health insurance, state and
Commonwealth government insurance, and re-insurance are not regulated by the Insurance
Contracts Act and are therefore subject to the unfair contract terms laws.
3.29 Divergent views were put to the committee about the proposal to subject
the life insurance industry to the application of unfair contract terms.
Broadly speaking, regulators and consumer groups were very much in favour of
moves to apply unfair contract terms to life insurance, while the life
insurance industry was, at best, somewhat reticent about such moves.
3.30 However, even amongst industry participants, the committee received different
perspectives from life insurance companies and the Financial Services Council
(FSC). For example, the FSC argued that there would be greater consumer benefit
in amending the Life Insurance Code of Practice rather than extending unfair
contract terms legislation or intervention powers.
3.31 By contrast, some life insurance companies acknowledged that they were
now generally supportive of subjecting life insurance contracts to some form of
unfair contracts terms, while also noting that this would not be a straightforward
matter. For example, ANZ indicated that, while it supported the extension
of unfair contract terms laws to life insurance, it was of the view that
consumer protections should be framed as an extension of the existing duty of
utmost good faith rather than applying the current unfair contract terms laws
to life insurance. ANZ gave the following reasons for this view:
- there are a number of existing consumer provisions in the Insurance
Contracts Act 1984;
- there is inconsistency in the unfair terms provisions in the Competition
and Consumer Act and the ASIC Act;
- the 'subject matter' of a contract of insurance will be very
different to the 'subject matter' of many standard form consumer contracts; and
- reasonable exclusions of cover which have been disclosed to
consumers at the time they enter into the contract of insurance should either
specifically fall within the 'subject matter' of the contract, or otherwise be
exempt from the operation of the new law.
3.32 ANZ also argued that the life insurance industry would need sufficient
time to amend existing policies to ensure that they do not contain unfair
terms.
3.33 Mr Nicholas Scofield from Allianz Australia Insurance acknowledged that
there were different views within the industry over the application of unfair
contract terms to the life insurance industry. He noted that while the
Insurance Council had come to the view that it wanted to 'work on the
application of unfair contract terms to general insurance', he was of the view
that there were particular challenges in achieving this. Mr Scofield indicated
that, in his view, there was significant uncertainty as to what the 'subject
matter' of a life insurance contract actually was, and that this may differ
significantly from that for general insurance and other goods and services.
Nevertheless, Mr Scofield said that Allianz was willing to work constructively
with government and other stakeholders to address these matters.
3.34 ASIC observed that the life insurance industry had argued against
extending unfair contract terms to life insurance. ASIC acknowledged that there
were issues that would need to be overcome in applying unfair contract terms to
life insurance. However, ASIC supported extending unfair contract legislation
to life insurance and was of the view that these challenges could be overcome
and that the application of unfair contract terms to life insurance would be an
important addition to the protections available for consumers.
3.35 ASIC explained that the introduction of unfair contract terms was complicated
by the fact that life insurance premiums are calculated on the actuarial risk
that is assumed by the life insurer. In other words, it cannot necessarily be
assumed that a contract that covers certain risks while excluding others is
unfair because it may have been designed in that way in order to be able to
offer it at a much lower price than a contract without the exclusions.
3.36 Mr Nick Kirwan, Policy Manager at the FSC, drew the committee's
attention to the difficulties experienced in the United Kingdom (UK) when
unfair contract term provisions had been applied to life insurance.
Specifically, the courts in the UK found that if one party was able to vary a
contract (that is, increase the premium), then the other party had to have the
right to cancel. The courts' interpretation was that the consumer had the right
to cancel without a penalty. In addition, the court also decided that 'if the
person's health had changed and they'd had a life insurance policy which they
cancelled, they were suffering a penalty because they wouldn't be able to
replace that insurance again'. Mr Kirwan was therefore of the view that if the
government were to legislate for the removal of unfair contract terms from life
insurance policies, the legislation would need to consider the UK experience
and ensure that it does not result in significant premium increases.
3.37 The committee notes that this has resulted in life insurance policies in
the UK now being offered with fixed premiums with terms of only up to 10 years.
This experience may necessitate specific life insurance provisions deeming
unilateral premium adjustments by an insurer be 'fair' for the purposes of
unfair contract term provisions where clear motive is given to the insured that
premiums may increase and how.
3.38 However, Mr Peter Kell, Deputy Chairman of ASIC, explained that the
unfair contract terms provisions already require certain tests to be satisfied to
take into account the particular requirements of the life insurance industry:
…it's a three-part test. One of the key elements of that
test, for any industry sector, is the term 'necessary' from a business
perspective, if you like. So there is the opportunity within the UCT [unfair
contract terms] provisions, as they are currently constructed, to take into
account particular issues within different sectors. That's one of the reasons
we think it can and should be extended to insurance, and that it won't be an
insurmountable problem to offer that additional level of protection.
3.39 Several submitters and witnesses strongly disagreed with the arguments put
forward by the life insurance industry about the duty of utmost good faith
obviating the need for unfair contract terms to apply to life insurance. For
example, the Financial Rights Legal Centre informed the committee that it has
long been the view of consumer advocates that there is no sound reason to
exempt the insurance industry from the unfair contract terms protections. The Financial
Rights Legal Centre argued that the duty of utmost good faith had not prevented
the use of unfair terms in insurance contracts and did not provide consumers
with a remedy against their use:
There have been a number of arguments put forward by the
insurance industry against imposing the UCT regime on insurers. One, for
example is that the duty of utmost good faith as codified in the Insurance
Contracts Act 1984 (Cth) is adequate to ensure consumers are protected. Insurers
have argued that this duty covers the same issues that arise with unfair
contracts and imposing the UCT regime on insurers would add an additional layer
of regulatory complexity. Financial Rights strenuously disagrees with this view
and believes that the duty of utmost good faith has neither prevented the
spread of unfair terms in insurance contracts nor has it provided the courts or
external resolution schemes with any power to provide a remedy to consumers
when an unfair term has been used.
Sections 13 and 14 of the Insurance Contracts Act do not
provide that an insurer is in breach of the duty of utmost good faith merely
because of the fact that they wish to rely on a contractual term that is
unfair. The Financial Ombudsman Service has struggled in determinations to deal
with unfair contact terms due to the limitation in the Insurance Contracts Act
1984 and the limited scope of the duty of utmost good faith.
3.40 Similarly, CHOICE pointed out that the duty of utmost good faith was
legally uncertain and had not prevented the spread of unfair terms in insurance
contracts:
The insurance industry has claimed that the duty to act in
the utmost good faith under the Insurance Contracts Act 1984 is
sufficient protection for consumers and that an UCT prohibition is not
required. The utmost good faith clause in the Insurance Contracts Act is unclear
and jurisprudence is imprecise. This makes application of the law particularly
difficult. The leading High Court case notes utmost good faith is more commonly
applied in relation to requirements of honesty in the dealings and processes
around the contract. This does not go to the fairness of particular terms to a contract. To
date, the utmost duty of good faith has not put an end to the types of clauses
outlined above.
3.41 The Financial Rights Legal Centre argued that subjecting general and
life insurance contracts to the unfair contract terms regime would have
significant benefits including greater transparency and fairness for consumers,
as well as allowing for the provision of remedies for consumers who have
suffered significant detriment because an insurer relied on an unfair term:
It would create an incentive for insurers to draft their
contracts with an eye to fairness and would further incentivise insurers to
review their existing contracts and remove terms which may be unfair, rather
than face enforcement action later. It would also improve the fairness of
insurance contract fine print—making policies easier to read and compare,
giving consumers stronger protection under the law, and promoting genuine
competition.
3.42 Likewise, CHOICE stated that, compared to the imprecision of the
requirement to act in utmost good faith, the unfair contract terms provisions
were clear, precise, and balanced and should be seen as best practice:
The UCT obligations are very clear; the legislation even
provides an extensive list of the types of terms which would be considered
unfair. This is a far cry from the amorphous 'utmost good faith' requirements.
The UCT obligations are so clear that the Australian Competition and Consumer
Commission and consumer organisations have used the laws to engage directly
with businesses around removing unfair terms. This has seen many businesses
voluntarily improve their terms. With limitations on regulator budgets and the
cost of litigation for business compliance, the UCT provisions should be viewed
as balanced best practice regulation.
3.43 CHOICE also argued that there are actually much stronger arguments to
apply unfair contract terms protections in insurance, and particularly life
insurance, than in many other goods and services where they already apply. CHOICE
considered that unfair contract terms goes to the heart of some of the cultural
problems in the insurance industry in terms of appropriate conduct and the
treatment of consumers. In CHOICE's view there are strong economic arguments
for actually having consistent law that applies across product and service
markets. Furthermore, CHOICE noted that unfair contract terms have been
reviewed several times by government agencies and there have been multiple
recommendations to remove the exemptions for the life insurance industry.
3.44 The Consumer Action Law Centre informed the committee that it considers
that there is no sound reason to carve out the insurance industry from these
otherwise economy-wide provisions.
3.45 In 2008, the Productivity Commission's review of Australia's consumer
policy framework recommended a prohibition on unfair contract terms in standard
form contracts and argued for a single, generic consumer law to apply across
all sectors of the economy finding 'little reason for any variation' in its
content.
3.46 In 2012, the then Commonwealth government introduced a bill to extend
the protections from unfair contract terms available for consumer contracts of
other financial products and services to general insurance contracts. The bill was
referred to the committee. However, the bill and the inquiry lapsed when the House of Representatives was
dissolved in August 2013.
3.47 The Senate Economics References Committee also identified concerns with
exemptions for the general insurance industry from consumer protections and
specifically laws on unfair contract terms. That committee recommended removing
the exemption following its conclusion that:
General insurance plays an important role in maintaining the
financial stability of consumers, and indeed, of the Australian economy. Given
this, effective protections are essential during all stages of a consumer's
relationship with an insurer. The committee is of the view that the exemption
of general insurers from the unfair contract terms provisions…is unwarranted
and creates a significant gap in consumer protections.
3.48 As part of the consideration of life insurance policy reform (including
proposals to make insurance contracts subject to the unfair contracts
provisions), ASIC drew attention to the penalty provisions for breaches of the
duty of utmost good faith which it considered to be inadequate at present.
3.49 Consumer Affairs Australia and New Zealand has recently conducted a wide‑ranging
review of the ACL. Treasury advised that following the review findings, there
was support amongst consumer affairs ministers to remove the exemption from the
application of unfair contract terms laws currently enjoyed by the life
insurance industry:
While it has been argued that the duty of utmost good faith provides
equivalent consumer protections to UCT provisions, a number of stakeholders
have disagreed. Most recently, the final report of the Australian Consumer Law
Review, released in March 2017, has proposed that this exemption be removed on
the basis that this equivalence has not been demonstrated.
Consumer affairs ministers considered the report on 31 August
2017 and supported the proposal to remove the exemption.
3.50 Treasury informed the committee that it was now starting to look at unfair
contract terms laws for life insurance with a view of providing advice to the
minister.
Product design and distribution obligations
and product intervention powers
3.51 ASIC advised the committee that Australia's approach to the regulation
of financial services in recent years has placed a heavy emphasis on product
disclosure. Mr John Price, ASIC Commissioner, told the committee that the emphasis on
product disclosure assumed, perhaps somewhat optimistically, that the investor
will be able to read the disclosure and understand it and will act rationally.
3.52 However, there has been an acknowledgement that this light-touch
approach may need to be augmented by further regulation. For example, one of
ASIC's great concerns has been the lack of accountability around products that have
been manufactured and marketed to groups of individuals for whom they are
unsuited. In this regard, ASIC advised the committee that it was particularly
pleased to see that the Financial System Inquiry (FSI) had recommended both
product governance obligations and a product intervention power for ASIC.
3.53 ASIC's submission noted that the FSI had concluded that the current
disclosure arrangements were not sufficient to deliver fair treatment to
consumers. The FSI therefore proposed the following reforms to the financial
services sector:
- increase the obligations of product issuers and distributors to
act in the interest of consumers by introducing a targeted and principles-based
product design and distribution obligation, a serious breach of which would be
subject to a significant penalty;
- provide ASIC with a product intervention power that would enable
ASIC to modify or, if necessary, ban harmful financial products where there is
a risk of significant consumer detriment; and
- review ASIC's penalties and powers to ensure that the enforcement
regime provides a credible deterrent for poor behaviour and breaches of
financial services laws (for example, giving ASIC greater ability to ban
individuals from the management of financial services firms).
3.54 Following the FSI conclusion that further measures were needed to ensure
that consumer outcomes aligned with commercial incentives throughout the whole
financial product lifecycle, Treasury instituted a consultation process on product
design and distribution obligations and product intervention powers.
3.55 Treasury categorised its approach to protecting financial consumers as
an evolution that had moved from empowering consumers through disclosure to one
where disclosure is supplemented by making financial service providers more
accountable. Noting that the FOFA legislation already bans financial advisers
from receiving some benefits that could conflict with advice (conflicted
remuneration), the additional proposed measures include:
- products to be targeted at consumers based on the ability of the
product to meet consumer needs (design and distribution obligations); and
- powers for ASIC to proactively intervene where it identifies
significant consumer detriment (product intervention power).
3.56 The Treasury proposals paper indicated that distributors that provide
personal advice will be excluded from the distributor obligations. Importantly,
Treasury also indicated that the intervention power would not extend to
remuneration of distributors selling products.
3.57 In evidence to the committee, Mr Peter Kell, Deputy Chairman of ASIC was
firmly of the view that the proposed laws would be improved by:
- extending the coverage of financial products to include funeral
insurance;
- giving ASIC the ability to make interventions in relation to
remuneration; and
- increasing the 18 month timeframe for which interventions can
apply.
3.58 Mr Greg Medcraft, then Chairman of ASIC, reinforced the point made by
Mr Kell that remuneration is a critical part of the whole process because
the incentives embedded in remuneration can influence the way that products are
distributed and sold. Mr Medcraft suggested that it was therefore essential
that ASIC's intervention powers include the ability to intervene with respect
to remuneration.
3.59 Mr Kell also pointed out a further benefit of the product intervention
power, namely that it would assist industry sectors in removing unethical
practices by relieving those participants with good intentions from the problem
of losing market share by being the first to move.
3.60 Consumer rights groups strongly supported the proposed changes. For
example, the Consumer Action Law Centre submitted that it supports the
implementation of the product design and intervention powers.
3.61 The Financial Rights Legal Centre supported the proposed product design
and intervention powers and argued that they should be put in place without
exemptions:
…exclusions are not justified and would limit ASIC's ability
to take action in the life insurance market, particularly against dodgy sales
practices. It is our view that ASIC needs the ability to use PIPs [product
intervention powers] across the entirety of the financial products and services
it regulates.
3.62 The Financial Planning Association of Australia (FPA) supported the Financial
System Inquiry recommendation on product intervention powers with the caveat
that product intervention powers should not be used solely to rectify product
disclosure. The FPA suggested that a limited form of merits regulation, along
the lines of regulating for product safety, market integrity, and/or systemic
stability, would be an appropriate use of product intervention powers. The FPA
noted that a similar approach has been adopted by the European Union and the
European Securities and Markets Authority.
Corporations Act—Chapter
7—financial product exemptions
3.63 Section 765A of the Corporations Act provides that a range of products
are not financial products for the purposes of Chapter 7 of the Corporations
Act, including health insurance, insurance provided by the Commonwealth, states
and territories, a contract for insurance, and a life policy that is not a
contract.
3.64 These financial product exemptions may limit ASIC's powers to enforce
the object of Chapter 7 of the Corporations Act which is to promote:
- confident and informed decision making by consumers of
financial products and services while facilitating efficiency, flexibility and
innovation in the provision of those products and services; and
- fairness, honesty and professionalism by those who
provide financial services; and
- fair, orderly and transparent markets for financial
products; and
- the reduction of systemic risk and the provision of fair
and effective services by clearing and settlement facilities.
3.65 Consumer Affairs Australia and New Zealand suggested that it is not
sufficiently clear in the drafting of the ASIC Act that its existing
protections that mirror certain ACL protections apply to financial products as
well as financial services. In light of this lack of clarity, Consumer Affairs
Australia and New Zealand recommended that the ASIC Act be amended to clarify
that all ACL-related consumer protections that already apply to financial
services also apply to financial products.
Banking Executive Accountability Reform
3.66 In the 2017–18 budget, the government announced the proposed
introduction of the Banking Executive Accountability Regime (BEAR). The BEAR
aims to enhance the responsibility and accountability of banks and their directors
and senior executives.
3.67 The proposed legislation would empower APRA to more easily remove or
disqualify directors and impose financial consequences on individuals and
banks. The proposed measures would require banks to register individuals with
APRA before appointing them as senior executives and directors. In July 2017
the government released a consultation paper on the proposed reforms.
3.68 ASIC explained that the proposed BEAR addresses the prudential aspects
of bank executives and directors conduct. Prudential matters are supervised by
APRA. The BEAR does not cover conduct in relation to customers or shareholders,
matters which are supervised by ASIC.
3.69 By contrast, ASIC noted that the executive accountability regime in the United
Kingdom covers conduct in relation to customers and shareholders issues as well
as conduct in relation to prudential issues.
3.70 ASIC also indicated that the current BEAR proposal is restricted to
banks, whereas in the United Kingdom, the regime applies to financial services
more generally.
3.71 Mr Greg Medcraft, then Chairman of ASIC, acknowledged that while the
BEAR legislation probably needed to start with the banks, it should then be
broadened to include insurance companies.
3.72 Mr Medcraft also expressed support for extending the application of the
BEAR to conduct issues in addition to the proposed systemic prudential matters
that the BEAR currently proposes to address. In this regard, Mr Medcraft argued
that the most frequent issues that arise in financial services are conduct
issues that affect consumers and investors rather than major systemic matters
that have prudential consequences. Extending the BEAR to conduct issues would
allow ASIC to take action against senior management on matters that had
adversely affected consumers and investors.
3.73 Treasury informed the committee that the proposed BEAR focuses on banks
due to both the critical role that banks play in the economy and in response to
community concern regarding recent poor behaviour by the banks.
3.74 Treasury also explained that the scope of the BEAR is intended to
include all entities within a group with an Authorised Deposit Taking
Institution (ADI) parent. This would include subsidiaries of ADIs, including
those that provide non-banking services and those that are foreign
subsidiaries. The proposed scope would mean that the BEAR may apply in relation
to a business such as a life or general insurer that is part of an ADI group or
subgroup. Importantly, however, the BEAR would not apply to a life insurer that
was not part of an ADI group or subgroup.
3.75 On 24 November 2017, the Senate Economics Legislation Committee
recommended that the BEAR legislation be passed with the implementation date to
be extended to one year from the passage of the bill. That committee also
argued that:
Consumer protections are just as important as prudential
matters in establishing and maintaining community trust in the financial
sector. While the BEAR is a welcome and important start, the committee believes
that, in time, heightened accountability obligations should be extended to
non-ADI firms in the financial sector and also to matters that affect consumer
outcomes (as has been done in the United Kingdom).
Committee view
Consumer Protections
3.76 Evidence to the inquiry highlighted inconsistencies in consumer
protections between the financial services sector and other sectors of the
economy. Given the increasingly integrated nature of the economy and the
bundling of products both within financial services and with non-financial
services (such as loans for cars or houses), the committee considers that such
inconsistencies create:
- barriers for consumers in understanding and asserting their
rights; and
- unnecessary operating complexities and costs for business.
3.77 The committee notes that the 2008 Productivity Commission found a strong
underlying rationale for a generic consumer law to encompass all sectors of the
economy, including financial services. The committee endorses this view and considers
that it is in the interests of both consumers and businesses for consumer
protections in relation to financial and non-financial services to be aligned.
3.78 More specifically, the committee also notes that consumer protections
are not harmonised across financial services including life insurance. In
addition to the impacts on consumers' rights and regulatory burdens on business
discussed above, such inconsistent applications of the consumer protection law also
create inappropriate incentives for industry participants that are subject to
weaker consumer protections. The committee considers that financial products,
including life insurance, that are sold together or in product bundles should
all be subject to harmonised consumer protections. The committee is therefore
recommending that consumer protections apply consistently to all financial
services and products.
3.79 The committee is particularly concerned that consumer protections in
relation to life insurance are grossly inadequate due to the very large number
of exemptions, some of which are summarised in Table 3.2.
3.80 A glaring example of the lack of adequate consumer protections is
Section 15 of the Insurance Contracts Act which rules out judicial review
of contracts which are harsh, oppressive, unconscionable, unjust, unfair or
inequitable. This appears to leave an enormous gap in consumer protections for
an industry as large as life insurance that has performed poorly in protecting
consumers.
3.81 Furthermore, the symmetrical nature of the good faith duty is incompatible
with the highly asymmetrical nature of the relationship between an individual
or small business dealing with large powerful life insurance companies.
3.82 The committee notes that in the early 1980s with an industry dominated
by mutual life insurers, it may have been possible to sustain an argument that
a duty to act in good faith may have been sufficient to offset the loss of
substantial consumer protections through the application of section 15 of the Insurance
Contracts Act.
3.83 However, persistent misconduct by today's corporate life insurance
industry demonstrates that the rationale for Section 15 of the Insurance
Contracts Act is no longer credible. It is simply no longer reasonable to
exempt the life insurance industry from the application of consumer protections.
3.84 The committee is not swayed by arguments from the life insurance
industry that the industry needs special provisions due to the nature of risk
involved in the industry, or the potentially high value of transactions. Instead,
the committee considers that such points are an argument for stronger, not
weaker, consumer protections because when the life insurance industry is not
accountable for its share of the contracted risk, the consumer ends up being
fleeced and left carrying all the risk.
3.85 While this inquiry is focussed on life insurance, the committee is
convinced the same consumer protections should apply to all insurance,
including both life and general insurance. The committee is therefore
recommending that Section 15 of the Insurance Contracts Act be reformed to
enable consumer protections to apply to life insurance contracts, with
appropriate transitional and other arrangements to accommodate the challenges
observed by ASIC to exist.
3.86 The committee notes that this recommendation is consistent with the
intended operation of the Australian Consumer Law, namely that consumers have
the same protections, and businesses have the same obligations and responsibilities,
across Australia.
3.87 Furthermore, the committee notes that the 2017 Senate Economics References
Committee inquiry into General Insurance recommended removing the exemptions which
the general insurance industry currently enjoys with respect to unfair contract
terms provisions.
3.88 While the committee has considered unfair contract terms in some detail,
it considers that the same conclusions can be drawn about other consumer
protections under the Australia Consumer Law.
Recommendation 3.1
3.89 The committee recommends that:
- consumer protections for financial and non-financial services are
aligned to remove current inconsistencies;
- section 15 of the Insurance Contracts Act 1985 be reformed
to enable consumer protections to apply to life insurance contracts, with
appropriate transitional and other arrangements to accommodate the challenges
observed by ASIC to exist;
- consumer protections for life insurance are aligned with consumer
protections for other financial services and products, including but not
limited to removing the exemptions identified in Table 3.2 of this chapter;
- consumer protections for life insurance uniformly cover:
- all life insurance industry sectors, including direct, retail and
group;
- all life insurance industry participants, including but not
limited to insurers, distributors, licensees, advice licensees, advisers,
superannuation trustees and employees of such organisations; and
- all forms of life insurance, including but not limited to life,
trauma, disability, income protection; funeral insurance; and
- consumer protections for general insurance are aligned with
consumer protections for other financial services.
3.90 The committee notes that, following the passage of unfair contract terms
legislation for small business loans, major banks have reviewed those contracts
and removed unfair contract terms.
3.91 The committee also notes that following a review in 2013 by the Australian
Competition and Consumer Commission, 79 per cent of unfair contract terms were
removed from standard form contracts across a range of other industries.
3.92 The above examples suggest that it would not be unreasonable to expect
that contracts for life insurance might also contain unfair contract terms.
3.93 The committee therefore observes that life insurers could take a
proactive approach and immediately begin reviewing their contracts with a view
to removing any unfair contract terms. Indeed, life insurers should not need to
wait for the passage of legislation that requires the removal of unfair
contract terms. Nevertheless, experience has shown that the life insurance
industry is unlikely to remove unfair terms unless required to do so. The
committee therefore recommends that, in addition to its recommendation above on
removing the exemptions from consumer protections that the life insurance
industry currently enjoys, that ASIC engage with life insurers to begin
removing unfair contract terms from life insurance contracts as soon as
possible.
Recommendation 3.2
3.94 The committee recommends that ASIC engage with life insurers to begin removing
unfair terms from life insurance contracts as soon as possible.
Design and distribution obligations
and ASIC's product intervention powers
3.95 The committee notes the government's proposed design and distribution
obligations and ASIC's product intervention powers. The committee endorses the
key features of the Treasury Proposals Paper, namely that:
- products are to be targeted at consumers based on the ability of
the product to meet consumer needs (design and distribution obligations); and
- ASIC is to have powers to proactively intervene where it
identifies significant consumer detriment (product intervention power).
3.96 However, the committee notes that ASIC's proposed product intervention
powers do not include the ability to make interventions in relation to
remuneration. The committee considers that the nature of remuneration, and in
particular the incentives that it puts in place, can have a profound and not
always positive influence on the way that products and services are sold. All
too often, certain types of remuneration have sent the wrong signals with the
effect that customer outcomes have come a poor second to the self-interest of
certain industry participants.
3.97 The committee therefore endorses the suggestions made by both the Deputy
Chairman and then Chairman of ASIC that the proposed legislation would be improved
by:
- extending the coverage of financial products to include funeral
insurance;
- giving ASIC the ability to make interventions in relation to
remuneration; and
- increasing the 18 month timeframe for which product intervention
orders can apply.
Recommendation 3.3
3.98 The committee recommends that ASIC's proposed product intervention
powers be amended to:
- include funeral insurance;
- give ASIC the ability to make interventions in relation to
remuneration; and
- increase the 18 month timeframe for which product intervention
orders can apply.
3.99 The committee notes that several proposed pieces of legislation cover
financial services but not necessarily life insurance. Examples include the
Banking Executive Accountability Regime (BEAR) and the proposed product design
and distribution obligations and ASIC's product intervention powers.
3.100 The committee considers that where new legislation is proposed, there
should be a presumption that the legislation would apply uniformly to all
financial services including life insurance.
3.101 In this regard, the committee also endorses the views expressed by the
then ASIC Chairman that, once implemented, the BEAR regime should be extended
to cover life insurance.
Recommendation 3.4
3.102 The committee recommends that the government's proposed Banking
Executive Accountability Regime, financial product design and distribution
obligations, and financial product intervention powers for ASIC, should apply
to life insurance and life insurers.
3.103 The committee also endorses the views expressed by the ASIC Chairman
with respect to the scope of the BEAR. In this regard, the committee agrees
that most of the issues that have come before this committee over the last
decade have been poor conduct or misconduct that has resulted in substantial
adverse impacts on consumers and investors.
3.104 The committee supports the notion that the scope of the BEAR should be
extended to cover consumer and investor matters and that ASIC have the
requisite power to take action on conduct in relation to those matters. The
committee is of the view that extending the scope of the BEAR in this manner
would alter the risk calculus of senior management within the financial
services industry. The committee considers that such a shift would have
positive outcomes for consumers and investors.
3.105 The committee recognises that widening the scope of the BEAR will not
happen immediately and that the proposed regime first needs to be bedded down.
Nevertheless, the committee is persuaded of the importance of including conduct
matters under the BEAR. On this basis, the committee is recommending that the
scope of the BEAR be extended to include consumer related conduct matters and enable
ASIC powers to take action on these matters.
Recommendation 3.5
3.106 The committee recommends that the scope of the Banking Executive
Accountability Regime be extended to include consumer related conduct matters
and enable ASIC powers to take action on these matters.
3.107 Finally, the committee notes that the Financial System Inquiry
recommended a review of ASIC's penalties and powers to ensure that the
enforcement regime provides a credible deterrent for poor behaviour and
breaches of financial services laws.
3.108 The committee endorses the view put forward by the Chairman of ASIC that
creating a sufficient deterrent for misconduct in the financial services sector
requires both significant penalties and a reasonable prospect of being caught.
ASIC has long advocated for penalties to significantly exceed the benefits
obtained, so that penalties provide a deterrent, rather than just becoming a
cost of doing business.
3.109 The committee welcomes the establishment of the ASIC Enforcement Review
Taskforce. The committee supports the ASIC Enforcement Review Taskforce
proposal for a substantial increase in civil penalty amounts under
ASIC-administered legislation. The penalties proposed by the Taskforce would be
three times the benefits obtained.
3.110 In light of both the views of the corporate regulator and the ASIC
Enforcement Review Taskforce, the committee is therefore recommending that
penalty amounts under ASIC-administered legislation be three times the benefits
obtained for every life insurance industry participant involved in a
transaction, including advisers, licensees and insurers.
3.111 The committee is also recommending that ASIC undertake a major audit of
financial product advice in the life insurance industry that will audit one in
every five advisers over a three year period. This will create a reasonable
prospect that advisers, licensees and insurers engaging in misconduct are
caught.
Recommendation 3.6
3.112 The committee recommends that the penalty amounts under
ASIC-administered legislation, including the life insurance industry, should be
set at three times the benefits obtained for every party to the transaction,
including advisers, licensees and insurers.
Recommendation 3.7
3.113 The committee recommends that ASIC conduct random audits of 20 per
cent of the life insurance adviser population over a three year period. Where
misconduct is identified, appropriate entries should be recorded on the
financial advisers register, and statistics on licensees and insurers should be
published, so the public can be informed. Advisers that have been reviewed must
also publish the outcome on their website in a highly visible location. If
necessary ASIC should be provided with additional funding to allow these random
audits to occur.