The Brief | 16 April 2019

The Brief is your monthly financial services update. To help you save time, each month we'll give you a quick run-down of what happened in financial services from experts across our firm.

Climate (in)action

APRA declared that it wants to see continuous improvement in how regulated institutions disclose and manage climate-related financial risks in coming years. An information paper released on 20 March discloses that all banks, general insurers and superannuation trustees are actively improving their understanding of these risks. However, fewer than half of life insurers and private health insurers surveyed are taking similar steps.

Faulty genes? Don't tell your life insurer!

…Unless you want more than $500,000 of life cover. The Financial Services Council announced a moratorium, effective for five years from 1 July 2019, that will enable consumers with adverse genetic testing results to keep them secret when applying for up to $500,000 of life cover (or $200,000 of trauma cover or $4,000 per month of income protection) from any of the 22 companies that issue individually-underwritten life insurance in Australia. The moratorium will be reviewed in 2022. Consumers with excellent genes will still be able to share their good fortune with their insurer (and their Instagram followers).

Consumers, like ASIC, uncertain about what 'personal advice' means

ASIC shared the findings of a report it commissioned into whether consumers understood the difference between general and personal financial product advice. It seems to us a bit cheeky for ASIC to complain that the term 'general advice' confuses consumers, when AFS licensees are explicitly required to use that phrase to describe any statement of opinion about a product. The research was conducted between March and May 2018, so the release of the report almost 12 months later is interesting given that ASIC is now appealing a decision made against its own interpretation of 'personal advice'.

'ASIC and APRA lead the world,' say ASIC and APRA

'World-leading' was how ASIC and APRA described the release of two reports by the regulators following a two year project that analysed life insurers' data. Highlights from the first edition of the half yearly report include:

• APRA's data collection — demonstrating that 92% of all finalised claims were admitted and only 8% declined, which no one will recall being mentioned in the Royal Commission hearings; and
• ASIC's claims comparison tool — demonstrating that for total and permanent disability insurance, there is a six month difference in the time it takes to accept a claim between the quickest and slowest insurers. Time will tell if this tool provides an incentive for those at the slower end of the range.

Cyber action

ASIC invited submissions on its proposed review of the ePayments Code, its first in nine years. One of the issues identified by ASIC is that we are all technically in breach of our bank and credit union terms when we let our children have access to our smartphones or when we use a password manager. This makes it difficult for financial institutions to identify which transactions are truly unauthorised and for which we won't be held accountable.

APRA sought feedback on draft guidelines relating to the new cross-industry prudential standard on information security, CPS 234, which commences on 1 July. APRA hasn't published guidelines on cyber risks since 2013. The new guidelines contain more detail on issues such as testing and incident reporting and are updated to reflect the increased frequency of cyber-attacks over the past six years.

AFCA can't do that, can it? AFCA can

AFCA issued its first newsletter and used the opportunity to remind members that not all complaints about a fee or a premium fall outside its jurisdiction. It provided a case study in which AFCA ordered that a 39% premium increase for a customer's home and contents policy should be reduced by half because the insurer failed to provide evidence that it had used its flood modelling fairly. Financial service providers should take note of the broad jurisdiction AFCA considers that it has in relation to the setting of premiums, fees, charges, rebates and interest rates. We expect more disagreement between insurers and AFCA in this area.

Other action you might have missed

• APRA wrote to life insurers at the start of March, expressing concern that they were too reliant on reinsurers not registered to carry on business in Australia (hardly surprising given that foreign ownership of life insurance companies has been on the rise). One option APRA is considering is prescribing an aggregate limit for a life insurer's total exposure to offshore reinsurers, instead of an individual limit per reinsurer. Submissions are due by 10 May.
• Treasury consulted on minor changes to superannuation legislation to correct drafting errors. For example, it turns out that leap years are a thing.
• APRA proposed updating the prudential standard on credit risk for banks and other deposit-takers with effect from 1 July 2020. Included in the reforms is a proposal that APRA can require a lender to limit or even cease certain lending or credit activity.
• The Government heralded amendments to the unfair contract terms legislation, which would redefine a 'small business' that benefits from the legislation. These amendments should be of particular interest to insurers, as both the Government and Opposition have foreshadowed extending the unfair contract terms legislation to insurance contracts.

Royal Commission action

As ever, much of the action in March centred on the Royal Commission recommendations. Here's a round-up of all the action:

The Federal Government:

• got off to a shaky start by reversing its decision to prohibit trail commissions on new loans arranged through 'critically important' mortgage brokers and instead will ask the ACCC and the Council of Financial Regulators to review trail commissions in three years' time, citing a lack of evidence that they lead to poor consumer outcomes;
• found its footing and released a consultation paper on making certain provisions of the 12 financial services industry codes of practice enforceable – the consultation paper suggests that AFCA would be an appropriate forum for complaints about code breaches but that consumers should not be able to pursue subsequent court action without the leave of the court;
• spent up big, announcing that the Federal Budget would provide over $400 million in funding for ASIC and over $150 million for APRA to 'stamp out misconduct in our financial sector' – for white collar criminals who require heavier 'stamping', a further $35 million was allocated to the Federal Court to fund new judges, staff and facilities;
• circulated draft regulations to support the proposed ban on grandfathered conflicted remuneration and to ensure that, once the ban commences in 2021, advisers who continue to receive conflicted remuneration must pass it on to customers and keep records of these rebates. Consultation ends on 25 April;
• requested submissions on the impact of introducing standard definitions and terms in MySuper group life insurance policies, as well as prescribing minimum, maximum or fixed coverage for life and total and permanent disability insurance – if you can think of any other ways of improving consumers' understanding of insurance in superannuation without introducing standard terms, please share them with Treasury by 26 April; and
• tackled the tricky issue of making binding death benefit nominations under superannuation in Aboriginal and Torres Strait Islander communities – the trickiness arises from identifying when there is an 'interdependency relationship' between members of these communities, which have more of a collectivist kinship structure compared with an Anglo-Celtic family structure. Insights and ideas are due by 24 May.

ASIC:

• expressed its frustration with the 'unreasonably delayed' further reviews by Macquarie, AMP and the big four banks into their fees-for-no-service failures, and issued a report card on each institution with more to follow.

APRA:

• will have its capability reviewed and, on 13 March, Treasury released the review panel's terms of reference and invited submissions from the public regarding APRA's capability; and
• put superannuation trustees on notice that it will focus on underperforming funds over the next 12 months and it will be publicising more frequently the action it is taking to address underperformance. It also emphasised that it will be taking action on the Royal Commission's recommendation that there be independent certification where a superannuation entity uses a related company to provide group life insurance to members.

Want to know more about how these issues affect your business? Reach out to a member of our team.