General insurance was an early adopter of the code-of-practice concept, which basically allowed the industry to set standards and self-regulate.

It wasn’t wholeheartedly embraced by some of the industry’s more rigid leaders in the 1990s, when the first code was launched. While their fingerprints were all over that first tentative code, it has evolved into an effective way of setting service benchmarks.

Each regular independent review has resulted in a code better and more responsive than its predecessor. Administered by a compliance committee, the code gives insurers service performance standards to aim for and a mechanism for reporting and fixing their failures.

It’s not perfect. There are disappointing breaches and some insurers reportedly haven’t taken the process as seriously as they should. Examples highlighted at the recent financial services royal commission left Kenneth Hayne bemused at the concept of a code that relies on its participants to simply follow the rules.

His interim report last October, while focused on the banking code of practice, said failure to comply with a code “is unrecognised or, if recognised, is not remedied”.

That concern led to a recommendation in Commissioner Hayne’s final report that “the law should be amended to provide for enforceable provisions of industry codes and for the establishment and imposition of mandatory industry codes”.

He called on the Insurance Council of Australia (ICA) – along with the Australian Securities and Investments Commission and representative bodies for life insurance, superannuation and financial services – to “take all necessary steps” by June 30 2021 “to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder designated as enforceable code provisions”.

Insurers are also expected to alter their codes “to empower… the Code Governance Committee to impose sanctions on a subscriber that has breached the applicable code”.

Commissioner Hayne is a former High Court judge and was assisted in his investigations by some of the legal industry’s sharpest minds, so, as well-known lawyer John Morgan says, no one should be surprised that the core thinking in the commission’s final recommendations is so “highly legalistic”.

“In the code space, what we saw was a three-part connectivity,” Mr Morgan told ICA’s Annual Forum in Sydney last week.

“The first thing is that there are promises in the code that are serious. The second is that if they are serious they must be enforceable, and then the leap – I think the most challenging one – is that the type of enforcement that is envisaged for the code is a highly legalistic punishment-based enforcement. That’s a huge shift.”

The code’s enforcement at present is based around sanctions, which basically involve naming and shaming. Otherwise it’s a case of monitoring breaches and ensuring they’re dealt with.

It has been taken to a “naming” only once, in the early years of this century, when Rural & General Insurance was identified by the code committee in its annual report as a serial sinner. The fact this insurer no longer exists has far more to do with prudential regulations than the resultant blow to its reputation.

ICA CEO Rob Whelan told last week’s forum the few breaches handled by the code compliance committee recently have mainly related to insurers’ failure to get documents to customers within the specified timeframe.

While he’s sympathetic with consumers wanting a more solid form of sanction against erring insurers, he says the royal commission’s decision “to take it into black-letter law means you’re going to have two codes. It changes the whole picture.”

He says companies’ cultures have changed for the better through the adoption of a voluntary code of practice that sets benchmarks for service, “but now they’re just going to say, ‘Well, just do it anyway, because you have to.’ They’ll make you comply and they’ll punish you if you’re not compliant. That’s unnecessarily punitive and draconian.”

Former long-serving compliance committee chairman and legal industry doyen Michael Gill, who has been involved with industry codes since the 1970s, told the ICA forum that confusing voluntary codes with the law is “very, very dangerous”.

“If the Government or a regulator believes that some behaviour should have public law penalties attached to it, then they should make it a part of the law,” he said.

Mr Gill says a code is part of an industry’s or profession’s self-regulatory or co-regulatory regime, with the aim of setting higher standards than those set by the law.

“I don’t think the law should intervene and remove from an industry or profession their right to set their own standards well above what the law requires,” he said.

Mr Whelan suggests the code will become unwieldy and even unworkable if its ability to adjust readily to changing circumstances, new services or emerging social pressures comes up against the mandatory enforcement provisions called for by the royal commission.

“What is it? Is it a black-letter law document with some attendant nice thoughts, or is it something that actually embraces the will of the industry to do a better job for its customers? That’s my dilemma.”

How the industry deals with this dilemma will dictate the effectiveness and direction of the insurers’ code.

But if the cold, headmasterly attitude that senior regulators displayed at the ICA forum is any guide, insurers will have a tough time turning around this confusing new approach to setting voluntary standards.