ASIC’s Deputy Chair Peter Kell has a long history in consumer protection and as the financial services sector, including insurance, goes through a shake-up to improve customer outcomes, Insurance Adviser speaks to him about the regulatory challenges ahead and what broking professionals can expect.
Insurance Adviser: ASIC has been shining the regulatory spotlight on the financial advice/life insurance industry in the past year. Will that extend to general insurance advice in 2017?
Peter Kell: We have a wide range of work underway in the financial advice area. In the insurance area, obviously life insurance is a major focus for us, but we would also be looking at a range of issues in general insurance sector.
We are planning to undertake some proactive work in the second half of the year around general insurance practices in the investigation of potentially fraudulent claims and to review more broadly general insurance claims handling, using some of the learnings from our life insurance claims work.
Claims handling is in the spotlight as part of our work in life insurance and there’s no reason why we shouldn’t take this opportunity to improve claims handling in the general insurance sector. For example, we would consider: are there particular types of policies that have much higher claims denial experience than others?; are there areas where processes can improve to ensure better outcomes for consumers and better results?
Firms that are incapable of… ‘keeping their house in order’… is a classic risk indicator of where you are likely to face non-compliance… further down the track.
As I’m sure this audience knows better than most: the rubber hits the road when it comes time to make an insurance claim, and in many ways, that’s when the customer really grapples with the policy, so it is vitally important that the claims area works as well as possible.
We will be talking to industry participants but we will also look at an analysis of disputes received by the Financial Ombudsman Scheme (FOS), as well as issues raised by other stakeholders, such as consumer advocates. We note with some interest that we have seen a bit of an uptick of complaints going to FOS. We want to make sure that claims handling is working well right across the insurance sector.
On another note, we’ve also had some concerns raised with us by consumer organisations, particularly around the issue of insurance investigations and fraud. A report published last year by the Financial Rights Legal Centre suggested that there were some concerns around the process through which potentially fraudulent claims are assessed and investigated. And it is only reasonable that we have a look at that.
In ASIC’s view it is clearly important that the insurance industry as a whole takes a rigorous approach to dealing with fraudulent claims, but it is also important that it doesn’t become an excuse for putting consumers through difficult processes and for denying legitimate claims. There is a balance there that needs to be struck.
More generally, there’s ongoing work around how to improve disclosure in the general insurance sector. This was something that was highlighted in the Financial Services Inquiry and we are keen to engage with the sector on how we can help insurers and intermediaries come up with better ways to provide information and disclosure for products especially as we all move to digital channels.
One of the other key pieces of work is playing our part in lifting professional standards in the industry. That includes working to implement the government’s new legislative reforms that relates to the professional standards of financial advisers that provide personal advice. In light of this, we think that it’s appropriate to give some consideration to whether the Tier 1/Tier 2 framework is applied in the right way. This aspect of our work will be relevant to NIBA members who provide advice on general insurance. There’s a big bit of work… around how standards should apply around advice, the minimum standards that should be in place and the transition to those new standards. Obviously, it is something that we would consult on.
IA: Speaking of reforms, the government has accepted and is now consulting on recommendations to introduce design and distribution obligations and product intervention powers in financial services. What are ASIC’s views on their relevance to the general insurance sector?
PK: We think these recommendations from the Financial Services Inquiry will be very important for ASIC, to help us do a better job and improve market outcomes. We argued for these powers in part because we are relying too heavily on disclosure as a regulatory tool for fixing all sorts of market problems. Disclosure will always be a key part of the regulatory system but it can’t deal with every single consumer detriment; and the issue that was arising was in the attempt to do so, we were ending up with longer and longer disclosure documents that no one read, products that still weren’t working and advice that still wasn’t working. So you need, in our view, a few more tools in the regulatory toolkit.
Product intervention powers will potentially allow us to act faster to address significant problems in financial services markets especially around products consumers may not understand. It might also help us address market problems where we need a collective solution.
The proposal for stronger obligations on the part of product issuers and distributors is a clear message that everyone in the supply chain needs to take responsibility to make sure the right products end up in the right hands.
All parts of the financial services sector, including brokers, need to read the message that is coming through with these proposals. The message I think is clear: that in the past, too often, you had product manufacturers saying: ‘We’ve made this product, it might be high-risk or more complex but it’s not our fault if it ends up in the wrong hands, that’s the intermediary’s fault.’ And the intermediary will turn round and say: ‘This is not our problem; we didn’t design this product, we are just distributing this on behalf of the manufacturer.’ Those days where different parts of the industry turned around and pointed the finger at each other, that has to change. The proposal for stronger obligations on the part of product issuers and distributors is a clear message that everyone in the supply chain needs to take responsibility to make sure the right products end up in the right hands.
IA: These laws are similar to what are already in place in the UK. Are there any lessons from there for Australia?
PK: It is still relatively early days, even in the UK, with product intervention powers.
There has been some commentary that suggests that product intervention powers mean that the regulator would be going out and banning products full-stop on a regular basis. That is a misunderstanding. Outright product bans are not going to be a regular outcome; rather it’s more likely that it will be modifying some aspect of a product or distribution system, to ensure that it is safer and that it targets the right consumers more effectively. The UK experience to date has been that these powers can be used in different ways to get the right market outcome and banning is going to be the last resort rather than the first port of call.
IA: What are the key areas in financial advice that ASIC sees as challenges for 2017; and is general insurance one of them?
PK: It’s a big year for ASIC. There has obviously been, over the last few years, significant community concern about aspects of the financial services sector – in Australia and overseas. There’s been a desire to see better standards, and we’ve seen that more recently in relation to life insurance here. I don’t think anyone in the general insurance sector should imagine that they can somehow ignore this trend. Consumers and other stakeholders such as policy makers and parliamentary committees have clearly signalled that they want the problems of the past cleaned up and higher standards in the future. That is a good challenge to have and ASIC has been given significant additional funding to help deliver on that, whether in financial advice, credit, super or insurance. So our challenge is going to be to deliver on that. To work through some of those projects and to demonstrate that we can generate better outcomes and work with the industry to do so.
Related to that is the challenge that we all face – that is, how to ensure that the raft of reforms that are planned for the financial sector can go through in a way that helps everyone: consumers and customers, industry participants and the regulator.
IA: With your background quite heavily in consumer protection, and a recent focus by ASIC on behavioural economics, what areas in general insurance do you see is ripe for ASIC to apply this approach to, if any?
PK: Behavioural economics is not particularly mysterious – it’s a way of thinking more carefully about how consumers and market participants actually behave rather than assume they will always behave in some sort of simple instrumentally rational manner. It’s relevant right across the board. Behavioural economics… helps us both to understand market issues and in some cases help us to come up with solutions to market problems.
We have set up a small unit within ASIC to look at behavioural economics. An example is our work in add-on insurance through car yards. There are a number of behavioural economic analyses of a fairly well-recognised phenomenon that shows that you get decision fatigue after you’ve made a series of significant decisions. So that is an example of where we have used behavioural economics to help us understand why the problems have emerged and to set up the industry for some lessons.
It’s also particularly useful when reviewing communications sent by financial services firms to customers. Behavioural economics helps us to really focus in on the issues that are really going to make a difference in consumer communications and to help get a larger and better response. One implication of that is that we are more actively reviewing the communications that firms send to their customers in those instances where remediation or refunds are due, especially when they arise from a mistake or some mis-selling on the part of the firm so that we can try to get the best outcome for the largest number of consumers.
IA: Looking at ASIC’s corporate plan, ASIC will be examining professional indemnity insurance arrangements including coverage held by smaller licensees. There are reports that some general insurance brokers have been targeted. Can you shed light on what’s happening with this?
PK: It’s a follow up to the work in a report we published in late 2015 on professional indemnity insurance for licensees providing advice. It’s not specifically targeted at brokers, rather it is looking at a range of small licensees (those with 20 or fewer ARs) and so within that sample there will naturally be some general insurance brokers.
We are seeking to better understand the adequacy of professional indemnity insurance held by small advice licensees. We want to understand the coverage available for licensees, what are licensees doing to ensure they have the right coverage, are they finding any particular sorts of difficulties, are there any gaps in terms of what professional indemnity insurance is supposed to deliver.
We are envisaging that we would have outcomes around the middle of the year and look forward to having a discussion with the sector then.
IA: Finally, ASIC has suspended or cancelled a few broker AFS licences in the last few months for failing to lodge financial statements and auditor reports. Why would ASIC take action in relation to this particular issue?
PK: It’s a regular area of work for ASIC but it is not just in relation to brokers. It tends to be smaller licensees generally. Two reasons why we take this sort of action: first, it is a requirement; second, we have found over the years that firms that are incapable of providing that information and ‘keeping their house in order’, so to speak, that it is a classic risk indicator of where you are likely to face non-compliance or more significant problems further down the track. So we do take it quite seriously. It’s a hygiene issue.
IA: Any final words?
PK: Overall, in ASIC’s view, it’s important that we have a dialogue with the sector. NIBA is very important for us… being the regulator, we won’t always see eye to eye on every issue but we value the opportunity to have a dialogue and I’m looking forward to speaking at the NIBA conference.