Prime Minister Scott Morrison described the national rollout of the COVID-19 vaccination program as “the beginning of a big game changer”. Also game-changing for the insurance industry could be the injection of Hayne-inspired regulatory reform slated for this year.

The Morrison Government has committed to taking up the royal commission’s prescription and over the next several months, the industry can expect a number of key changes to get underway after the pandemic put a pause on implementation last year.

In December Parliament passed the Financial Sector Reform Bill 2020, progressing many of the Hayne recommendations, and the industry had already been preparing for what’s to come.

“We have seen an understandable focus on the review of insurance contracts for unfair contract terms in the last six months, given that those changes commence in April,” McCabe Curwood Principal Mathew Kaley told insuranceNEWS.com.au.

“That needs to move quickly on to preparing for the suite of regulatory change due to commence in October.

“While there's a fair bit on the list, the most important elements for many insurers will be meeting the Design and Distribution obligations, implementing the Deferred Sales Model and anti-hawking changes, obtaining a claims handling licence variation and revising complaints management systems to meet the new ASIC Regulatory Guide 271.”

Insurance lawyers from Norton Rose Fulbright have prepared a timeline to help the industry navigate the regulatory changes.

Here are the key dates the law firm has listed for this year:

JANUARY 1

Enforceable code provisions mechanism:
Subdivision A of Division 2 Part 7.12 of the Corporations Act 2001 provides the Australian Securities and Investments Commission (ASIC) with the ability to identify enforceable code provisions when approving an industry code of conduct.

Industry codes are currently self-regulated and a breach of a Code provision does not presently result in a breach of the law. ASIC is expected to engage with industry and use this power in relation to the 2020 General Insurance Code of Practice and Life Insurance Code of Practice.

A number of changes proposed by the Insurance Council of Australia were adopted. These include tightening the minimum criteria for an enforceable code provision. The test is now whether a breach of the provision is “likely to result in significant and direct detriment to the person”. Previously, the test was whether a breach “could result in significant detriment to the person”, which is much broader.

Duty to take reasonable care not to make a misrepresentation:
This represents a significant shift away from the traditional duty of disclosure. The new duty on intending insureds is to take reasonable care not to make a misrepresentation.

While the legislation is effective on January 1, insurers can adopt the new duty at any time from this date. All general and life insurance contracts entered into on or after 5 October 2021 will be subject to the new duty.

Caps on commission:
A new section 12DMC has been inserted into the Australian Securities and Investments Commissions Act 2001, allowing the regulator to set a cap on commissions for add-on risk products supplied in connection with motor vehicles.

The mechanism apples to add-on risk products in connection with the sale or long-term lease of a motor vehicle to the product recipient; the provision of credit connected with the sale or long-term lease of a motor vehicle to the product recipient or the provision of a warranty by the product recipient in connection with the sale or long-term lease of a motor vehicle to another person by the product recipient.

As the commission cap will be set by ASIC by regulation, the value of the cap is not yet known. Insurers and intermediaries should consider whether affected arrangements are suitable moving forward, and whether their sales models are viable under the new regime without amendment.

Regulation of claims handling:
The Corporations Act 2001 (Cth) has been amended to include a licensing requirement for “claims handling and settling services”. A person will require an Australian Financial Services Licence (AFSL), or be an authorised representative of an AFSL holder, in order to provide a claims handling and settling service.

A transition period applies to this regulation. To benefit from the transition period, an AFSL application or variation must be lodged with ASIC by June 30. They are then able to continue providing claims handling and settling services unlicensed until ASIC makes a decision on the application or December 31. (This date may be extended by up to six months to 30 June 2022).

Claimant intermediaries, who were not subject of scrutiny during the royal commission, have to comply with the new regulation. Treasury is currently consulting on potential exemptions from the definition of “claimant intermediaries”.

Use of the terms “insurer” and “insurance”:
Restrictions now apply on the use of the words “insurance” and “insurer”. Products that are not insurance cannot be called insurance. Similarly, a business cannot use the word “insurer” to describe their products or services if the product or service is not insurance.

APRIL 5

Unfair contract terms (UCT) regime:
Insurance contracts will be subject to UCT laws from this date onwards. Affected policy wordings should be reviewed to ensure unfair contract terms are removed, which can be a lengthy exercise because it may result in changes to underwriting decisions and criteria. ASIC may take action against an insurer for including unfair contract terms in contracts. ASIC has a track record of taking action in relation to unfair contract terms in other financial services contracts.

JUNE 30

Claims handling regulation:
Last day to lodge an application for an AFSL or variation to an AFSL to benefit from the claims handling regulation transition period.

OCTOBER 1

Strengthened breach reporting obligations:
The Corporations Act 2001 is amended to clarify and strengthen the breach reporting regime for financial services licensees. This includes a revamp of the breach reporting regime for AFSL holders under section 912D of the Corporations Act 2001.

OCTOBER 5

Product design and distribution obligations:
The Product Design and Distribution Obligations (PDDO) commence under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019. An affected product cannot be sold unless it has a Target Market Determination in place. Products that usually require a product disclosure statement will be affected by the PDDO.

Hawking prohibitions:
Current exemptions available in the Corporations Act 2001 will be removed and a new hawking prohibition will apply. The new prohibition makes it an offence to offer a financial product for issue or sale, or request or invite the consumer to apply for such a financial product, if the consumer is a retail client and the offer, request or invitation is made in the course of, or because of, an unsolicited contact. The hawking prohibitions work hand in hand with the deferred sales model. If one applies, the other does not.

Deferred sales model for add-on insurance:
The deferred sales model prohibits the sale of add-on insurance products for at least four days after a customer has entered into a commitment to acquire the principal product or service. The amendments impose offences for any failure to comply with the new requirements. Comprehensive motor insurance is exempt and Treasury is currently receiving submissions to exempt other classes of insurance.

Duty to take reasonable care not to make a misrepresentation:
The new duty applies by law from on this date.

Regulatory Guide 271:
The new Regulatory Guide 271 (replacing Regulatory Guide 165) commences. The standards and requirements highlighted in the guide are enforceable. The guide explains what financial firms must do to have a compliant Internal Dispute Resolution (IDR) system in place.

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