Australia: NAB to pay $49.5m in compensation related to credit insurance sales

Elouise Fowler writes in the AFR that NAB will have to pay compensation of $49.5 million to clients sold unsuitable credit insurance contracts.Link

Credit insurance as a brand has been devastated by conduct issues in Australia and New Zealand. Here new sales are virtually nil and the in-force book is shrinking fast. 


The challenges of agreements as you look towards CoFI

Even a cursory glance at an agency agreement shows a number of problems against expected oversight requirements under proposed new Conduct of Financial Institutions law. In fact, most agency agreements, with a few notable exceptions, lack the tools to be really effective today, let alone in the new environment. Common problems include: 

  • Insufficient detail on what exactly is expected of the agency-holder
  • Vague and indistinct ideas about the role of 'advice' in the relationship, usually agency holders are required to be advisers, but they are not required to give advice, and most other performance obligations don't appear to relate to that service
  • Speaking of service: it is sometime a vague requirement, but it is rarely defined, and frankly cannot be defined really well without cutting across the variation in business models that is a vital part of the adviser ecosystem
  • A mixture of tightly defined things - such as a requirement to meet certain legal standards - which often do not need to be in the contract with a complete absence of some other rules, such as brand use and privacy provisions which are common agency relationship issues suited to being dealt with in the agency contract
  • Inadequate dispute mechanisms coupled with the sanction for any breach usually being termination of the agreement. That sanction is rarely used, so the agreement rarely mirrors how the agency relationship actually works

In the new environment there is more complexity, not less. The starting point should be clarity on who the parties are likely to be and what you expect of each other. Defining that in business relationship terms first may give you a smoother path to producing the new document. Chatswood has an agency terms comparison checklist for those of you that might want to have a discussion about this. 


Advisers minimise chances of poor claim outcomes

Tower CEO Richard Harding detailed that research showed confidence in the industry is at an all-time low. Harding revealed that although general insurers often claim 99.9 per cent of claims are paid, instead approximately one in five claims were withdrawn by policyholders. Although there are many reasons a policyholder could withdraw a claim, including pressure from the insurer, fear, dishonesty and non-disclosure, having an adviser reduces chances of withdrawals. Clients with advisers are better informed and make fewer pointless claims. In effect, his comments were a big endorsement of having an adviser involved. By implication, however, they raise questions about direct insurance. Click here to read more


RBNZ: Insurance sector must evolve in line with increased public expectations and changing risks

Adrian Orr, Governor from RBNZ delivered a speech at the Insurance Council of New Zealand Conference today about building confidence and reducing risks in the insurance sector. You can read his full speech here.

Here are some key points that I really enjoyed:

  • There are significant information-asymmetries between an insurance provider and their customer, and the risks of providing poor or outdated information run in both directions. ‘Who is good for what, and when?’.
  • ...often there is a long period of time after a customer-relationship has been established. In very difficult circumstances, a customer may find that they do not have the coverage they believed would be available to them. And, on the other side of the ledger, insurers rely on accurate information from customers about their own circumstances.
  • Orderly and well-articulated changes in insurance and pricing strategies are needed, so that all participants in the financial sector – and wider economy - can adapt their behaviour without creating unintended outcomes.
  • How a firm monitors and addresses conduct and culture issues will be a part of our ongoing ‘business as usual’ supervision with all insurers. We will also monitor insurers to make sure their planned actions are implemented effectively.
  • The public is demanding that both insurers and regulators play a part in providing greater confidence in the health and conduct of the sector. The Reserve Bank’s insurance agenda for the coming year (or years) is thus very full.

The section on three disciplines, which is too big to quote, is also well worth a look.

I liked the comment about changes in insurance and pricing strategies. I think that this is probably about the more visible marketplace - general insurance - and the role it has in affecting decisions that people make about where they live and the buildings in which they live, and also what buildings get built and where. But it could equally well apply to the marketplace for income protection too, which is in a product design and pricing crisis that has some similar features to insuring buildings in earthquake and flood prone areas. Both life and property insurers have efficiency challenges. The point about information asymmetries cannot be made strongly enough and needs to be remembered in the insurance contract law review process. It is a comfort to insurers (and should be to consumers as well, although they don't tend to be) that officials are signalling that they understand these fundamental concepts. 

 


Tony Vidler: doubts that insurance churn is such a big issue

Here is an article from Tony Vidler discussing the churn of life and health insurance in NZ, and why he feels it is not as bad as everyone makes it out to be. There are some well-made points in here - for example, there are big trends towards more choice and greater consumer propensity to switch in all sorts of products (cars, houses, even once very stable banking relationships are more open to change). 


Reflections on the interactions between likely conduct law and the Financial Services Legislation Amendment Act

Following a recent speech by Kris Faafoi, Minister of Commerce and Consumer Affairs, my compliance consultant and I exchanged views on the interactions between the proposed conduct law and the other parts of the financial services legal and regulatory regime.

It is hard to envisage circumstances where the conduct requirements under the regime proposed for banks, insurers and NBDT entities will not be introduced into the new Licensed FAP regime. It is clear that FAPs will need to meet at least broadly equivalent conduct requirements. A product provider bound by a conduct law would have to require a FAP, perhaps an agent of the product provider, to meet standards if the standards were not going to be extended to the FAP.

Then consider this situation: There is the issue of those FAPs that provide advice on the products of licensed conduct entities where there is no commercial relationship between the FAP and the conduct licensed product provider. Take ABC Advice Ltd charging client fees direct and receiving no remuneration from XYZ Insurer Ltd with ABC Advice Ltd providing advice on XYZ Insurer Ltd products, with or without the knowledge of XYZ Insurer Ltd that ABC Advice Ltd is doing so. XYZ Insurer Ltd will still have conduct obligations to a consumer who is also a client of XYZ Insurer Ltd and ABC Advice Ltd, even in the absence of any contractual relationship between XYZ Insurer Ltd and ABC Advice Ltd. 

Separately to that issue, as the conduct licence is separate from the other licences required by banks, insurers and NBDTs, what does it mean if a conduct licence is withdrawn? It would seem likely that the loss of a conduct licence will be sufficient to put the total entity out of business. That raises so many questions about sanctions short of withdrawal of the licence, and also the need for a process to manage the extreme circumstance of licence removal and how to protect the interests of clients during that period of time.

 


Fake medical studies, conflicts of interest, and rationalisations

According to Dr Andrew Klein, a UK anaesthetist and editor-in-chief of the journal Anaesthesia, fake medical data is on the rise. He believes that there is about one fake medical study for every 40 papers submitted for publication. There is a data-pattern analysis technique they use to detect this and although they find the odd mistake they believe "nine times out of 10 people have clearly made their data up or changed their data. A lot of articles that we might have published before are now not going into the journal.” Click here to read more. 

I am going to file this under 'we are all subject to conflicts' and point out that even when the conflict is not about money - it may be solely about prestige, or pride, or just winning an argument - it can influence behaviour. Everyone is subject to these kinds of pressures - and what's interesting is that the people submitting articles to Klein's journal probably did not think they were doing anything wrong, or perhaps, not very wrong. Sometimes you hear people talk about what everyone 'everyone knows'. Then they get a set of data that doesn't fit the pattern, and they could think 'that can't be right' and instead of holding on to the question, they moved a data point or two...

Which is a caution to us all, to look at the data, not look for how the data supports the story we are already telling ourselves. 


Conduct issues example: Mobile trader 'signed up mental health unit patients to unreasonable phone contracts'

This article on Stuff relates to the general unfair contract law changes proposed, not just the changes likely to arise from financial services conduct review going on.

As I read it I found myself wondering: don't we already have laws against this kind of idiotic behaviour? Remember this case highlighted by the Hayne Commission: insurance sold to an intellectually handicapped young man. I always thought that none of us want this to happen, and if some fool from a call centre has done this to hit a target it was always - sooner or later - going to get discovered and reversed. 

But on the other hand, has this kind of behaviour got more common? If so, then why?

Setting aside people with more severe limitations, we may all be cognitively stressed at times, and can be vulnerable to a pushy sales pitch which is exploiting some fundamental information asymmetry. I suspect that this is more common with any service (not just financial) when several of these factors combine:

  • Complex services
  • Information asymmetry
  • Subscription or regular payments
  • Hard to compare features
  • Presence of a sales incentive
  • Distant call-centre sales process
  • Reduced or limited competition
  • Infrequent purchase events, for ‘set-and-forget’ services

So, the Government has announced its intention to do the following:

  • Prohibit unconscionable conduct in connection with the supply or acquisition of goods and services
  • Extend the existing protections against unfair contract terms in standard form consumer contract terms to also apply to standard form business contracts with a value below $250,000.

That's probably understandable if this is become more widespread because more and more services have features like those above. You can find more information about the decisions here: https://www.mbie.govt.nz/business-and-employment/consumer-protection/review-of-consumer-law/protecting-businesses-and-consumers-from-unfair-commercial-practices/

Note, that is quite separate (but related to) the work going on that is specific to financial services. This is the context which is helpful to consider when you are looking at draft law (soon, we hope) of COFI, Insurance Contract Law, and considering the expanded remit of the FMA.


Summary of proposed new conduct regime for financial institutions

A series of announcements today provide us with the expected update on the proposed new conduct regime for financial institutions. Here are the important links. Summary is below.

https://www.fma.govt.nz/news-and-resources/media-releases/fma-welcomes-government-announcement-on-expanded-remit/

https://www.beehive.govt.nz/release/new-financial-conduct-regime-makes-banks-and-insurers-treat-their-customers-fairly

https://www.mbie.govt.nz/business-and-employment/business/financial-markets-regulation/conduct-of-financial-institutions-review/

In summary, the regime will involve the following:

  • Create a licensing regime for banks, insurers and non-bank deposit takers (such as credit unions) regarding their general conduct. These institutions will be licensed by the Financial Markets Authority.
  • Require licensed institutions to meet a fair treatment standard (for example, to pay due regard to the needs and interests of customers and treat them fairly)
  • Require licensed institutions to implement, effective policies, processes, systems and controls to meet the fair treatment standard. Regulations will specify what these policies, processes, systems and controls must include.
  • Outline what obligations financial institutions have in relation to remuneration and any other sales incentives, and how they must manage the risks those incentives create.
  • Prohibit sales incentives based on volume or value targets (e.g. soft commissions such as overseas trips, bonuses for selling a certain number of financial products, leader boards, and performance management based on the volume of sales). This prohibition will apply to banks, insurers, non-bank deposit takers and their intermediaries.
  • Make licensed entities accountable for sales to consumers by the entities contracted intermediaries who are not financial advice providers (non-adviser intermediaries include car dealers, retailers selling add-on finance and insurance, and travel agents or airlines selling travel insurance).

FMA-RBNZ report update part of the process towards new conduct law

The FMA-RBNZ update on the review of conduct in the life insurance sector requires further discussion and commentary - but for now it obviously deserves at least this link to the full media release

Areas of particular note include: 

  • The treatment of existing customers - references to 75,000 issues must relate to them. 
  • Sales incentives and commissions - in particular the comment in this review about high up-front commissions.

Legal and regulatory uncertainty is headwind, as are concerns about what levels of commissions are likely to be acceptable.That explains, if not excuses, some insurers' challenges in responding to these issues. I will write more for subscribers to the quarterly life and health sector review.