DEFERRED SALES MODEL FOR ADD-ON INSURANCE?

The Australian Securities and Investments Commission (ASIC) is proposing the introduction of a deferred sales model as a means of regulating the sale of add-on insurance and warranties by caryard intermediaries.

ASIC had previously flagged the concept and, after three and a half years of scrutiny, has now formally released its proposal for using its product intervention powers.

The proposal would see a four-day period introduced after a consumer has made the decision to purchase a vehicle. The customer would also have to be provided with online information before making the purchase.

ASIC is also proposing that mechanical risk products on new cars should be prohibited where the manufacturer’s warranty still has more than 12 months’ cover.

ASIC sought public input, with submissions due by 12 November and the AADA has submitted its response.

James Voortman, the CEO of the AADA commented that the ASIC Consultation Paper was somewhat problematic.

“It is unclear to us why ASIC has singled out automotive add-on insurance for special attention, given that Treasury has recently put forward sweeping proposals for the whole of the add-on insurance market,” he said.

“We understand their concerns about consumer detriment, but as they note in their paper, this is largely a product of poor product design rather than the sales channel through which it’s sold,” he said.

“We are also puzzled by their references to Dealer warranties, which are not even financial products, yet ASIC wishes to include them in the deferred sales model, ” he said.

Mr Voortman is looking forward to addressing those concerns directly with ASIC through the consultation process going forward.

The new ASIC powers allow the corporate regulator to intervene and take temporary action where financial and credit products have resulted in or are likely to result in significant consumer detriment. The range of temporary actions include banning a product or product feature, imposing sale restrictions, and amending product information or choice architecture.

To aid the process ASIC released “Consultation Paper 313 Product intervention power”, which provides case studies of past products and practices to illustrate the circumstances in which ASIC may have contemplated using the product intervention power (had it been available) to address consumer detriment identified at the time.

Other possible measures on which ASIC is consulting include supplementary requirements such as ‘knock-out’ questions to bar sales where a product has little to no value, as well as preventing the sale of warranties that provide low levels of cover.

ASIC would also monitor the impact of its intervention orders.

ASIC commissioner, Sean Hughes, said there had been a history of unfair conduct and poor results for consumers in the add-on insurance market.

“We have seen policies sold to consumers when they have been ineligible to claim under them. ASIC has secured over $130 million in refunds to compensate consumers for their losses from these practices,” he said.

“As well as compensation for past conduct we are proposing changes to improve consumer outcomes in the future.”

Announcing the consultation, ASIC Deputy Chair, Karen Chester, said the product intervention power was “an incredibly important addition to ASIC’s regulatory toolkit”.

“ASIC can now step in and respond to significant consumer detriment in a targeted and timely way. But there are also important checks and balances – it is a temporary intervention power and we must consult before each and every use,” she said.

Investigations are continuing into other matters stemming from the Hayne Royal Commission, with “a very large pipeline of investigations and enforcement action under way”.

“In many of those referrals and case studies from the Royal Commission, we saw that an over-reliance on disclosure in some ways proved an enabler for the poor conduct and poor consumer outcomes,” Ms Chester said.

“The product intervention power is not a new concept. Australia is joining regulators in other jurisdictions with product intervention powers like the US, UK, the EU, Hong Kong and Taiwan.”

The power is unique in its focus on reducing significant detriment to consumers, rather than stepping in only after a breach of the law. ASIC can also use the power on a market-wide basis to address industry-wide problems. ASIC is required to consult before making a product intervention order.

“ASIC having this power was recommended by the 2014 Financial System Inquiry, supported by the Financial Services Royal Commission, consulted on and agreed to by the Government, and received overwhelming support across the Parliament in April this year,” Ms Chester said.

The product intervention power was enacted in April 2019 with new design and distribution obligations and is available for the regulator to use now. The design and distribution obligations do not apply to industry until April 2021.

ASIC recently levelled 87 criminal charges at the Commonwealth Bank insurance arm CommInsure in relation to breaches on ‘hawking’ laws in the selling of financial products.

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