The Parliamentary Joint Committee on Corporations and Financial Services has published its report on the life insurance industry. The report includes a nice summary of previous 'inquiries, reviews, reforms and events' since 2013. The Committee appears to think that all of these previous efforts have been more or less inadequate. Senior Regulatory Counsel Michael Mathieson reports.
The Committee considers the consumer protections applying to life insurance to be 'substantially weaker' than those applying to other products and services. It says those protections should be aligned with the protections in the Australian Consumer Law. Section 15 of the Insurance Contracts Act is seen as the main culprit. That section has excluded protections such as those against misleading or deceptive conduct, unconscionable conduct, unfair contract terms and unfair practices. It has done so on the basis that policyholders are adequately protected by the duty of utmost good faith. The Committee roundly rejects that justification, saying it is 'no longer credible'. In a telling passage, the Committee says:
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.
The Committee also wants the BEAR – the Banking Executives Accountability Regime – to be extended in two ways. First, it wants the BEAR (which would need to be renamed) to be extended to life insurance and life insurers. Secondly, it wants the BEAR to include conduct matters and for ASIC to have associated powers. How this would work, given the current design of the BEAR and the responsibility given to APRA for it, is not discussed in the report.
The Committee also wants ASIC's product intervention powers to be broader than what was proposed in the exposure draft Bill released just before Christmas. Specifically, it wants ASIC to be able to make orders concerning remuneration and it wants orders to be able to last for longer than 18 months.
Not content with this, the Committee also wants penalties that turn on the size of the benefit obtained by the wrongdoer (the penalty should be three times the size of the benefit) and ASIC should conduct random audits of life insurance advisers on a significant scale (20 per cent of advisers over a three-year period).
The Committee does not have a particularly high opinion of the FSC's Life Insurance Code of Practice or the ISWG's Insurance in Superannuation Code of Practice. The Committee describes the Insurance in Superannuation Code of Practice as a 'somewhat tardy response to a pressing issue'.
The Committee is not persuaded that the 'current voluntary approaches to industry self-regulation' in the two codes 'are sufficient to deter misconduct and address the poor practices that have become all too prevalent in the life insurance industry'. Rather, the Committee recommends that the Government implement 'the co-regulatory approach put forward in the ASIC Enforcement Review Taskforce Position Paper'. As part of this, ASIC would have the power to undertake enforcement action (halting misconduct, remedies and sanctions) in relation to 'systemic or systematic breaches of codes of practice' in the life insurance sector. The Committee would also like to see the two codes combined into a single code.
The Committee is perplexed by the myriad payments within the life insurance and life insurance advice sectors. It is clear that it does not have much faith in the Life Insurance Framework remuneration reforms, although it appears to agree they were an acceptable 'first step'.
The Committee said:
Evidence to the committee, particularly from ASIC, indicates that a plethora of hidden payments including commissions, fees, performance-related payments, soft dollar benefits, and non-financial benefits exist within the various structures of the life insurance industry.
The Committee is troubled by shelf-space fees, that is, fees paid by a life company to a dealer group in exchange for the life company and its products being included on the dealer group's approved product list. The Committee 'was particularly disconcerted by the evidence it received that life insurers and advice licensees are finding ways to work around the conflicted remuneration restrictions that commenced on 1 January 2018 regarding shelf space fees'.
The remedy proposed by the Committee is for ASIC to conduct a 'systematic review and risk assessment of all payments and benefits flowing between participants in each sector of the life insurance industry –direct, group, and retail – and inform the government of any regulatory gaps', following which the Government should consider further regulation of payments. As mentioned, the Life Insurance Framework remuneration reforms are likely to turn out to have been just a first step.
The Committee is also troubled by payments from life insurers to superannuation trustees, in particular so-called 'profit-sharing arrangements'. In the view of the Committee: 'It would not be in the interest of members to have premiums, paid out of members' funds, returned to trustees and taken as profit'. In this respect, the Committee recommends that ASIC and APRA undertake an audit of all superannuation trustees to identify such payments and report on their findings.
The Committee bravely enters the debate about approved product lists. It does not see how an APL could be restricted to a single related party product other than for a limited amount of time. The Committee says 'it stretches credulity' that a company would be able to produce 'the best products' on the market 'indefinitely'.
The Committee recommends that an APL should have a balance of affiliated and non-affiliated products and, if affiliated products are recommended, the affiliation should be disclosed. Further, the customer should be given a comparison with non-affiliated products. The Committee also thinks that the use of APLs in the past should be investigated to see whether it has involved any contravention of competition laws.
In relation to making it easier to opt out of group life insurance cover, the Committee says it 'is puzzled by how long it has taken to institute what would, on its face, appear to be a straightforward reform'.
The Committee is also troubled by duplicate group life insurance covers. It does not think this should be left to the industry (although it wants industry to do more). Rather, it wants the ATO to give individuals information about likely duplicate group life insurance covers and encouragement to do something about it. The Committee says it views 'the current dearth of action by trustees and life insurers to fix the problem of duplicate insurance within group superannuation as completely unacceptable given that systems already exist which can be used to remedy the matter'.
The Report also include chapters on access to medical information, genetic information and claims handling. It is, on any view, a significant report. Those in the life insurance sector who are suffering reform fatigue should perhaps consider their options.