Mutual risk products (MRP) are to be classified as financial products under the Corporations Act, says the Australian Securities and Investments Commission (ASIC). The new arrangement will force MRP providers to comply with the managed investment schemes and licensing provisions of the Act, according to ASIC Executive Director of Financial Services Regulation, Ian Johnston.

MRPs provide a variety of alternative risk products to conventional general insurance. They usually involve participation in a mutual scheme based around particular professions, small business associations, franchise operations or community groups.

Mr Johnston says ASIC will consider granting relief from the managed investment and licensing provisions of the Corporations Act “in specific, limited circumstances”.

There are two types of MRP schemes – mutual discretionary funds and mutual non-discretionary funds. Both involve members contributing money, which is then pooled and distributed to purchase financial products.

Mr Johnston warned that people who take cover from MRP systems must realise they are “not insurance in the legal sense”. Nor is there any solvency or prudential regulation by the Australian Prudential Regulation Authority or ASIC.

“ASIC’s licensing of entities offering these schemes recognises that they are financial products, but people who participate in the schemes must make their own assessment about the ability and obligation of the scheme to make any payments required,” he said.

All money received as contributions must be held on trust for the members by the MRP provider, and only invested in an account held with an Australian authorised deposit-taking institution. Otherwise money must be invested in cash management trusts, used to buy general insurance on behalf of the members, pay claims by members or pay any remuneration of the MRP provider.