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The Royal Commission’s final report and what it means for your business

January 26, 2019

What it means for your business

Announced in November 2017, the Royal Commission was charged with considering “the conduct of banks, insurers, financial services providers and superannuation funds” along with “how well equipped regulators are to identify and address misconduct.”

In the insurance industry, the Hayne Royal Commission has landed with full force, with the media highlighting tales of consumer suffering and the follies of financial executives.

With the final report due by February 2019, what are the practical outcomes likely to be?

The findings

The inquiry has highlighted numerous acts of misconduct by the major players, ranging from financial planners “churning” clients’ insurance policies to disaster insurance sold to homeowners with ineligible properties.

In its interim report released in September 2018, the Royal Commission pointed to a number of areas relevant to the insurance industry:

  • ‘Add-on’ insurance – sold with home loans, car loans and credit cards.
  • Inappropriate advice – including “insurance rewriting and false accounts”.
  • Funeral insurance – ASIC highlighted the sale of funeral insurance products to Aboriginal and Torres Strait Islander people, including misrepresentations and pressure selling.

Other issues raised have included the industry’s exemption from laws banning unfair contract terms (UCT), along with claims handling and the administration of life insurance by super trustees.

What are the implications?

Colin Biggers & Paisley Lawyers (CBP) warns that the insurance industry and its customers could face potentially significant repercussions, “which may include increased premiums, stricter regulation and focus on underwriting discipline. In particular, the possibility of class actions, civil penalties and criminal prosecutions means that considerable focus could be directed at cover for civil fines and penalties under professional indemnity, and directors’ and officers’ insurance policies.”

A stricter regulatory environment is also likely, given the commission’s comments concerning regulator ASIC and its history of action (and inaction) in response to complaints and findings of misconduct.

Insurance brokers should also consider potential changes to quality of advice, conflicts of interest, remuneration, product management, ASIC’s Direct Life Review and AFCA changes, according to Radford Lawyers.

In its submission, the Consumer Action Law Centre called for accidental death insurance, accidental injury insurance, funeral insurance and add-on insurance to be prohibited. It also called for: the banning of “conflicted remuneration” for general and life risk insurance; an end to the sale of add-on insurance by motor dealers; and for claims handling to be subject to the Corporations Act, among other measures.

ASIC also called for insurance products such as funeral insurance to be regulated under the Corporations Act, for the UCT regime to be extended to insurance, and for additional powers for ASIC regarding claims handling, along with civil penalties for a breach of the utmost good faith test and reforms regarding conflicted remuneration.

While there are many legitimate causes for corrective action to be taken, note that many of these will increase the industry’s costs. For example, the National Insurance Brokers Association has argued that banning conflicted remuneration and removing the general insurance exclusion could harm consumers, resulting in more expensive advice, lower claim settlements and reduced competition.

At present, it’s impossible to predict the Commission’s outcomes with any certainty, not until the report’s release next month.