Green light on 5 October insurance regulatory changes

Product design and distribution obligations

Following an extended transition period, the product design and distribution obligations (PDDO) have finally commenced. Under the PDDO, product issuers (for insurance products, usually the insurer) are required to put into place a product governance arrangement for retail insurance products. Due to the extended operation of the PDDO, financial products captured under the Australian Securities and Investments Commission Act 2001 (Cth) must also comply with the requirements.

ASIC now expects product issuers to consider the target market for products, to take reasonable steps in relation to distribution of products, to notify ASIC of significant dealings and to prepare a target market determination (TMD) that meets the requirements of the Corporations Act.

The PDDO signal a fundamental change in the way ASIC regulates products. There are three main stages under the new law, these are:

• product design;
• product distribution; and
• monitoring and review.

Issuers of insurance products should now have prepared TMDs and made them available to distributors and the general public. Distributors should already be complying with any distribution conditions placed on an insurance product and which are shown in a TMD. New products will also need to comply with these requirements.

Changes to internal dispute resolution

On 5 October 2021, Regulatory Guide 165 was superseded by Regulatory Guide 271. The new Regulatory Guide sets out ASIC’s expectations in relation to internal dispute resolution (IDR) requirements. There is revised guidance on the definition of a complaint, what constitutes a complaint, identification of systemic issues and the new timeframes applicable for IDR processes. Under the new Regulatory Guide the maximum timeframe for an IDR response is 30 calendar days after the receipt of the complaint, previously 45 days.

The changes to IDR follow changes to breach reporting requirements which commenced on 1 October 2021.

Hawking prohibitions

Under reforms to section 992A of the Corporations Act, the hawking of financial products is now subject to stricter regulation. The prohibition applies to offers, requests or invitations to ask for, apply for or purchase a financial product in certain circumstances. It applies only to offers that are made to retail clients where the interaction is of a real-time nature. This means that in addition to telephone calls and face-to-face meetings other real-time interactions in the nature of a discussion or conversation, such as instant messages or chat bots, could potentially be caught.

A customer must provide their consent in order to enliven an exception to the hawking prohibitions. Consent must be positive and voluntary as well as being clear and reasonably understood. ASIC has released new guidance in Regulatory Guide 38 in relation to its application of the new hawking law.

Deferred sales model for add-on insurance products

In one of the biggest changes to the sales of add-on insurance products, the government’s new deferred sales model has now begun. Under the model, add-on insurance products cannot be sold along with the underlying product or service until four days have passed since the customer entered into a commitment to acquire the principal product or service.

The deferred sales model may affect products that are usually sold along with the underlying product at the point of sale, affecting some embedded insurance offerings. However a number of insurance products are exempt from the new add-on insurance program and these include:

• CTP insurance;
• travel insurance;
• third party property damage insurance;
• fire and theft insurance for motor vehicles;
• comprehensive insurance for boats, motorcycles, motor homes, caravans and trucks;
• insurance sold within superannuation including group life insurance;
• postage and delivery of consumer goods insurance;
• home building insurance;
• home and contents insurance;
• landlord insurance; and
• business-related add-on insurance products.

Duty of disclosure changes

For consumer insurance contracts entered into on or after 5 October 2021, a new duty to take reasonable care not to make a misrepresentation to an insurer replaces the duty of disclosure under the Insurance Contracts Act 1984 (Cth). A consumer insurance contract is insurance that is obtained wholly or predominantly for personal, domestic or household purposes of the insured. Interestingly, the new duty may affect some insurance products which are not ‘retail’ insurance under the Corporations Act.

In determining whether a customer has taken reasonable care, the law requires the insurer to take into account any particular characteristics or circumstances of the insured that the insurer was, or ought to have been, aware of, and all other relevant circumstances. The relevant circumstances could include (from the Explanatory Memorandum):

• the type of consumer insurance contract in question and its target market;
• explanatory material or publicity produced or authorised by the insurer;
• how clear, and how specific, any questions asked by the insurer were;
• how clearly the insurer communicated the importance of answering their questions and the possible consequences of failing to do so;
• whether or not an agent was acting for the insured; and
• whether the contract was a new contract or was being renewed, extended, varied or reinstated.

Simply including notice of the duty may affect the standard of care that the consumer owes the insurer. Insurers should now have reviewed questions and sales funnels to ensure the new duty is applied in a way which is consistent with the particular insurer’s approach to underwriting and risk selection.

What’s next

ASIC has indicated it will ‘recognise there will be a period of transition’ in relation to the new reforms and will take a reasonable approach in the early stages, provided insurers are using best efforts to comply. Given the raft of changes, it is inevitable there will be some tweaking and fine-tuning required to ensure new and amended processes operate as intended.

We are assisting clients with implementation of these reforms across the insurance industry. Please get in touch with the authors if you have a question.

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