A speech by ASIC Commissioner Danielle Press at the National Insurance Brokers Association (NIBA) Convention, Gold Coast, 15 October 2019.
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Introduction
Thank you and good morning.
Thank you also to NIBA for inviting me to speak today.
Today I will outline ASIC’s strategic priorities for the year ahead, and then address in more detail our important work in the insurance and financial advice sectors.
But before that, let me tell you about our ‘hot off the press’ report on the inherent limitations of disclosure. We published this report – prepared jointly with the Dutch Authority for the Financial Markets (AFM) – just last night. And it is a must read.
The limitations of disclosure
Our joint report with the AFM presents more than 10 years of case studies where mandated disclosure and warnings have failed to deliver intended consumer outcomes or even worse, have backfired. Many of those case studies involve insurance.
We all need to shift away from an over-reliance on disclosure to protect consumers. We recognise that disclosure documents contribute to market transparency and efficiency. But they generally do not enhance consumer decision making nor permit real-time comparison of products and services. Disclosure is necessary but not sufficient. So instead of over-relying on disclosure, we will look to use targeted powers like the product intervention power more often.
Your own industry has done work looking at the limitations of disclosure. Together, these findings show that tweaking disclosure is not the answer. The upcoming design and distribution obligations (DDOs) provide an opportunity to prioritise consumer needs – to design and offer products and services that deliver value (not surprises) and are sold fairly. I encourage you all to read this report and look at what you need to do in your own organisations to monitor consumer outcomes and prepare for DDOs.
ASIC’s key strategic priorities
In late August, we released our Corporate Plan for 2019 to 2023.
The Plan outlines how we aim to achieve our vision for a fair, strong and efficient financial system for all Australians through our internal change program and our key strategic priorities.
The strategic priorities represent the most significant ways in which we are addressing consumer harm, punishing wrongdoing, and encouraging better culture and behaviour – including a greater emphasis on fairness and professionalism – throughout the industry.
Our strategic priorities for 2019-20 are:
- High deterrence enforcement action
- Prioritising the recommendations and referrals from the Royal Commission
- Delivering as a conduct regulator for superannuation
- Addressing harms in insurance
- Improving governance and accountability
- Protecting vulnerable consumers, and
- Addressing poor financial advice outcomes.
Let me touch on each briefly.
High deterrence enforcement action
ASIC is focused on effective enforcement action, particularly cases that have a high deterrence value and those responding to egregious misconduct.
We will also focus on breaches of key conduct obligations owed by Australian Financial Services licensees, including insurance brokers, to their customers under s912A of the Corporations Act – among them is the cornerstone obligation to act ‘efficiently, honestly and fairly’. Importantly, we now have civil penalties for a breach of this primary obligation.
Illustrative of our enhanced enforcement focus, between July 2018 and June 2019 there has been:
- a 20% increase in the number of ASIC enforcement investigations,
- a 51% increase in enforcement investigations involving the big six (or their officers or subsidiaries), and
- a 216% increase in wealth management investigations.
We are very clear about taking matters to court. We will both succeed, and we will fail there. Nevertheless, the ultimate interpretation of the courts, particularly where the law is untested or its operation unclear, is a fundamental part of our system of government and has clear benefits for both our regulated population and ASIC.
Prioritising the recommendations and referrals from the Royal Commission
An important strand of work is directed at meeting the outcomes of the Royal Commission.
We are prioritising this work and working with the Government, APRA and other regulators to get the job done.
I will return to some of the Royal Commission recommendations we are working on that touch insurance and financial advice shortly.
Delivering as a conduct regulator for superannuation
In establishing ASIC as the primary regulator of conduct in superannuation, consistent with the Government’s response to the Royal Commission, we will look to improve outcomes in superannuation through:
- taking decisive regulatory and enforcement action to deter misconduct, and
- the supervision and surveillance of superannuation trustees – with a focus on whether trustees act in the best interests of members and treat them fairly.
Addressing harms in insurance
We will take enforcement and other regulatory action against mis-selling of insurance products, particularly to vulnerable consumers, and review product features and practices that concern us.
We have undertaken significant reviews of specific insurance areas, such as consumer credit insurance, total and permanent disability (TPD) insurance and insurance claims investigation practices. You can expect our review of TPD insurance to be published in the next few days.
We will also support and help to implement insurance law reforms that enhance our ability to take action for poor conduct and poor consumer outcomes in insurance.
I will say more about our work in the insurance sector shortly.
Improving governance and accountability
We are conducting enhanced and intensive supervision of key firms, including via our Close and Continuous Monitoring program and our Corporate Governance Taskforce.
These supervisory approaches aim to identify cultural, organisational and management failings that may lead to conduct problems, breaches of the law and unfair outcomes. The goal is to help identify deficiencies beforethey become breaches of the law.
At the start of this month we released our first Corporate Governance Taskforce review, examining director and officer oversight of non-financial risk.
We are also committed to supporting and implementing the proposed financial services executive accountability regime.
Protecting vulnerable consumers
Considering the impact of harm to consumers, particularly those who are vulnerable, is central to how we prioritise our work.
We recognise that all consumers can be vulnerable over their lifetime, including as a result of unfair sales practices.
Our new product intervention power and the design and distribution obligations will be vital to the protection of vulnerable consumers by stopping significant consumer detriment and ensuring that financial products which are designed for and sold to consumers, meet the particular needs of those consumers and achieve fair outcomes for them.
The design and distribution obligations regime will commence in April 2021, and we expect to consult on draft guidance for the regime by the end of this year.
Our guidance will be principles-based and is not intended to supplement the regime with detailed or prescriptive rules.
While we anticipate that our guidance will assist you in considering your obligations, it will not provide industry-specific guidance. Industry has significant materials to draw upon before our guidance is released, with the legislation, explanatory memorandum and draft regulations now released.
The regime is designed in a way that places responsibility with you to consider your products in light of your customers’ objectives, financial situation and needs. We expect industry to actively take up this responsibility.
We encourage you, if you have not already started, to engage with this material and consider how to ready your business for compliance in April 2021.
Addressing poor financial advice outcomes
We will support measures to improve the professionalism of financial advisers. This includes enhancing the Financial Advisers Register.
We will target potential misconduct and harms to consumers that may arise from the industry’s shift towards ‘general advice’ models.
We are also closely monitoring the potential harms to consumers that may result from larger institutions departing from the advice sector.
ASIC’s work in insurance
Let me now say more about our work to address harms in insurance.
Unfortunately and disappointingly, we have seen very low value products and policies sold to consumers ineligible to claim under them. We have seen mis-selling and unfair practices. Simply, too many poor results for consumers.
As you know, we are overseeing significant remediation in the general insurance space. For the sale of add-on insurance products in the car dealer distribution channel, refunds of over $130 million to over 245,000 consumers. And in consumer credit insurance (CCI), remediation is expected to exceed $100 million to over 300,000 consumers.
We have issued guidance to industry on product design and sales practices for CCI, consulted on banning (through the use of our modification powers) unsolicited outbound telephone sales of CCI and direct life insurance, and currently we are consulting on using our product intervention power to introduce a deferred sales model to apply to sales of add-on insurance products and warranties by caryard intermediaries.
We are also supporting Treasury with developing the insurance law reforms coming from the Royal Commission, particularly in relation to unfair contract terms and issues in claims handling.
On unfair contract terms – extending unfair contract term provisions to insurance contracts should help to ensure fairer outcomes for consumers and small businesses. Particularly, addressing the imbalance of power experienced by consumers and small business when they enter into ‘take it or leave it’ standard form insurance contracts.
General insurance products are important risk management tools for consumers and small businesses to protect their living standards and assets. We encourage insurers to start reviewing policies for potentially unfair terms and to ensure the terms strike a fair balance between the interests of the policyholder and the insurer.
On claims handling – we look forward to enhanced powers in relation to insurance claims handling, something that we have long advocated for. We consider that claims handling is a key area in the insurance product life cycle where our supervision can help reduce consumer harms.
We have undertaken several reviews of claims handling practices, including our recent review into how general insurers investigate comprehensive car insurance claims.
We published our report – Roadblocks and roundabouts: A review of car insurance claim investigations (REP 621) – in early July. We found that insurers are investigating some claims in ways that cause significant consumer harm, erode trust in insurance and are without fair process.
We call on the industry to respond to our findings by implementing better standards, improving written communication to consumers, and reviewing how claims are selected for investigation.
Insurance codes
I want to also briefly touch on the work that the life and general insurance industries have undertaken to date in reviewing and updating their codes of practice.
These codes, and the commitments they make, have a pivotal role to play in restoring consumer trust in the industry.
The ongoing code reviews demonstrate that the industry understands that these codes are living documents that must be strengthened over time to keep pace with community standards.
Insurers and distributors – including brokers – must work together to ensure standards are consistent and successfully achieve the goal of improving outcomes for consumers.
The codes will only be effective in achieving this goal if all parties involved in the insurance industry work together and agree on the need to lift standards.
Similarly, they will only be effective if they are not only enforceable, but rigorously enforced.
We welcome efforts to strengthen code enforceability and encourage you to consider whether your code compliance bodies can be strengthened further.
On the topic of code compliance, I note the Insurance Brokers Code Compliance Committee report published last Friday. It indicates room for significant improvement in the way that brokers who subscribe to the Insurance Brokers Code of Practice manage their timeframes in handling consumer complaints as part of internal dispute resolution processes. The Compliance Committee’s report found that of the 1,049 complaints received during 2018:
- two-thirds of complaints were about service levels experienced by consumers when making an insurance claim
- only 63% of complaints were resolved within 21 days
- another 12% took more than 45 days to resolve, and
- more than one-quarter of subscribing insurance brokers do not monitor timeframes during their internal dispute resolution process.
ASIC will continue to consider the findings in this report. As you are aware, ASIC has recently consulted on proposals to update the internal dispute resolution requirements in Regulatory Guide 165. Our consultation closed in August and we are currently considering submissions received.
ASIC’s work in the financial advice sector
Let me now move to our work to address poor financial advice outcomes.
2021 Life Insurance Review
Starting first with the 2021 Life Insurance Review.
As you would be aware, when the Life Insurance Framework reforms were introduced in 2018, the Government asked ASIC to conduct a review in 2021 to establish whether the reforms to specify the maximum upfront and ongoing commission amounts have been effective in better aligning the interests of consumers and those providing life insurance advice.
We will conduct a surveillance to assess the quality of advice provided to consumers, looking at representative and random samples of life insurance advice.
Since January 2018, we have also been collecting aggregate level data from life insurers every six months to assist with our 2021 review.
We are currently analysing the data collected to date, though it is still too early to comment on any real trends that may be attributed to the reforms.
In undertaking the review we will consider the factors identified by the Royal Commission and, if we think the reforms have not been effective, we will consider recommending to the Government that the cap on commissions be reduced further.
Of course, our expectation is that consumers receive good quality advice across all policy types, premium structures and commission structures. This includes:
- acting in the best interests of clients and prioritising a client’s interests if the advice provider has a conflict of interest, and
- providing advice that is fit for its purpose and leaves the client in a better position.
We will continue to take action to protect consumers where financial advisers and insurance brokers are failing to comply with their obligations under the law, including to act in the best interests of their clients.
Conflicted remuneration
We will continue to support Treasury in implementing the Royal Commission reforms that relate to banning conflicted remuneration.
Ending grandfathered remuneration
The Royal Commission recommended that grandfathering provisions for conflicted remuneration be repealed as soon as reasonably practicable.
Legislation was introduced in August to ban grandfathering arrangements.
We are continuing our investigation into industry’s moves to voluntarily end grandfathered conflicted remuneration by January 2021, and the extent to which benefits of this are being passed on to affected clients before that date. This is consistent with the Direction issued to ASIC by the Treasurer.
Our investigation involves both quantitative and qualitative reviews to monitor the industry’s approach to ending grandfathered arrangements.
The purpose of the quantitative review is to obtain data to understand the extent to which payers of grandfathered remuneration have changed, or are in the process of changing, their arrangements during the review period.
We have asked that licensees provide us with data, including in relation to:
- the product for which the grandfathered remuneration was paid
- the dollar amount paid, and what percentage commission this represents
- whether the entity has renegotiated or intends to renegotiate arrangements that require them to pay conflicted remuneration
- if the entity has not ended their grandfathered arrangements and does not intend to, why not, and
- whether the entity has passed, or intends to pass on, the benefits of ending grandfathered remuneration to retail clients and if so, how the pass-through mechanism has operated, or will operate (i.e. rebate to the client, fee reduction or other).
The purpose of the qualitative review is to explore why payers of grandfathered remuneration have or have not ended grandfathered arrangements and how rebating arrangements are working in practice. The qualitative review will also enable us to highlight examples of payers who have ended their grandfathered remuneration arrangements.
We expect to deliver our final report from this investigation to the Treasurer by 30 June 2021. We also expect to update the Treasurer and industry as appropriate during the review period.
General insurance and consumer credit insurance commissions
The Royal Commission also questioned the current exemptions for general insurance and consumer credit insurance products from the ban on conflicted remuneration.
Commissioner Hayne went on to recommend that these exemptions be reviewed by Government in three years as part of a broader review to assess the effectiveness of current measures put in place by Government, regulators and financial services entities to improve the quality of advice. And the Government has accepted this recommendation.
ASIC will provide input to this review. We will also consider how best to support the Government in undertaking the review.
Of course, a forthcoming review does not and should not prevent the industry from itself reviewing and considering innovative ways to alter its commission structures to reduce conflicts of interest in the meantime.
Consumer research
You may also be interested to know that we are addressing misconduct and consumer harms that may arise from the industry’s shift towards ‘general advice models’, including consumer testing more appropriate labels and alternative warnings for general advice.
This work builds on our Mind the Gap report published in March (REP 614), which revealed substantial gaps in consumer comprehension of general and personal advice.
In addition, following on from our Financial advice: What consumers really think report (REP 627), published in August, we will commission further research in 2020-21 to explore whether consumers have unmet advice needs. The project will examine:
- the state of the financial advice industry
- the demand for and supply of financial advice, and
- what measures may be required, if any, to reduce any gaps between supply and demand.
Other financial advice work
Finally, we are also assisting Treasury to implement the other Royal Commission recommendations relating to financial advice for which legislation is expected to be introduced and passed by mid-2020.
Conclusion
In closing,there are high community expectations on the financial sector and on ASIC right now. Importantly, we have very high expectations of ourselves and the firms and people we regulate.
Australians deserve a fair, strong and efficient financial system. Ultimately, all of us, the regulators and the regulated, must do better and get it right.
Thank you, and I invite your questions.