House of Representatives

Financial Sector Reform (Hayne Royal Commission Response) Bill 2020

Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020

Corporations (Fees) Amendment (Hayne Royal Commission Response) Act 2020

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 3 - Deferred sales model for add-on insurance and the Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 (recommendation 4.3)

Outline of chapter

3.1 Schedule 3 to the Bill amends the ASIC Act to implement an industry-wide deferred sales model for the sale of add-on insurance products. These amendments give effect to recommendation 4.3 of the Financial Services Royal Commission.

3.2 The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 amends the Corporations (Fees) Act 2001 to allow ASIC to charge a fee for an application by an entity to be exempted from the deferred sales model.

Context of amendments

3.3 Add-on insurance products are insurance products that are sold alongside, or in relation to, a principal good or service. Examples of add-on insurance products include:

consumer credit insurance sold alongside the sale of a credit facility;
travel insurance sold alongside the sale of flights or a trip; and
mobile phone screen protection insurance sold alongside the sale of a mobile phone.

3.4 The Financial Services Royal Commission found that:

add-on insurance products represent poor value for consumers;
insurers commonly pay more in commissions than in claims;
consumer claim outcomes are considerably worse than in markets where there is meaningful competition; and
consumers are at risk of unfair sales and adverse outcomes.

3.5 Previous work by ASIC and the Productivity Commission has also highlighted widespread issues in add-on insurance markets. In 2016, ASIC released three reports covering its review of the sale of add-on insurance through car dealers:

Report 470 - Buying add-on insurance in car yards: Why it can be hard to say no;
Report 471 - The sale of life insurance through car dealers: Taking consumers for a ride; and
Report 492 - A market that is failing consumers: The sale of add-on insurance through car dealers.

3.6 The reports found that car-yard add-on insurance is expensive, is of poor value and often provides consumers little or no benefit.

3.7 The Productivity Commission also found weak competition in the broader add-on insurance market in its inquiry report titled Competition in the Australian Financial System Report, released in 2018.

3.8 The Financial Services Royal Commission recommended that:

a Treasury-led working group should develop an industry-wide deferred sales model for the sale of any add-on insurance products (except policies of comprehensive car insurance); and
the model be implemented as soon as is reasonably practicable.

3.9 In its response to the Financial Services Royal Commission, the Government agreed to implement an industry-wide deferred sales model, tasking Treasury to develop an appropriate model.

3.10 On 9 September 2019, Treasury released a proposal paper titled Reforms to the sale of add-on insurance products. The paper outlined the Government's proposed approach to implementing a deferred sales model and sought feedback from stakeholders. Exposure draft legislation was released for a public consultation on 31 January 2020.

3.11 These amendments have been developed taking into account the views expressed during those consultations.

Summary of new law

3.12 Schedule 3 implements an industry-wide deferred sales model for the sale of add-on insurance products.

3.13 Broadly, an add-on insurance product is an insurance product which is sold to cover risks associated with the offer or sale of a principal product or service either by the provider of the principal product or service or by a related party.

3.14 The deferred sales model separates the sale of an add-on insurance product from that of the principal product or service, and applies across all sales channels - including in-person and online. 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.

3.15 The deferred sales model does not apply to:

products that are the subject of an ASIC product intervention order which imposes a deferred sales period;
comprehensive car insurance;
products exempted by regulations;
persons that ASIC exempts by notifiable instrument; and
products recommended by financial advisers.

3.16 The add-on insurance deferral period is the period of time that:

begins at the later of:

-
the time the customer enters into the commitment to acquire the principal product or service to which the add-on insurance product relates; or
-
the time the customer is given information about the product as prescribed by ASIC; and

ends four days later.

3.17 During the add-on insurance deferral period, a series of prohibitions apply in relation to:

the sale of an add-on insurance product; and
communicating with customers in relation to an add-on insurance product.

3.18 These prohibitions apply to both the principal provider and related third parties who sell add-on insurance products.

3.19 In the six week period after the beginning of the add-on insurance deferral period, add-on insurance products may be sold to customers. However, communication with the customer in forms other than writing is restricted.

3.20 Six weeks after the beginning of the add-on insurance deferral period, the deferred sales model ends. After that time, any contact made by the principal provider or a third party with the customer will be subject to the anti-hawking obligations.

3.21 The add-on insurance pre-deferral period is the period that:

begins when the customer indicates an intention to acquire the principal product or service; and
if there is an add-on insurance deferral period in relation to the add-on insurance product, ends immediately before the start of the add-on insurance deferral period, or otherwise does not end.

3.22 During the add-on insurance pre-deferral period, any party can communicate with a customer about an add-on insurance product, but is prohibited from selling the add-on insurance product to the customer.

3.23 At any stage during the deferred sales model periods, both the principal provider and a third party may respond to customer inquiries. This recognises instances where the customer has queries about the product or its features after reviewing the prescribed information.

3.24 At any stage during the deferred sales model periods, a customer can inform either the principal provider or a related third party that they no longer wish to receive offers, requests or invitations to purchase or apply for an add-on insurance product. Once a customer has made such a request, it is an offence for the principal provider or a third party to offer, request or invite a customer to purchase or apply for an add-on insurance product.

3.25 The Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020 amends the Corporations (Fees) Act 2001 to allow ASIC to charge a fee for an application by an entity to be exempted from the deferred sales model.

Diagram 3.1: Outline of the deferred sales model for add-on insurance

Comparison of key features of new law and current law

New law Current law
It is an offence to sell an add-on insurance product before the end of the add-on insurance deferral period. No specific restrictions apply in relation to selling add-on insurance products.
An add-on insurance product may be sold to the customer after the end of the add-on insurance deferral period. No specific restrictions apply in relation to selling add-on insurance products.
It is an offence for the principal provider to offer, request or invite the customer to ask for, apply for, or purchase an add-on insurance product during the add-on insurance deferral period, other than in writing.

It is an offence for a third party provider to offer, request or invite the customer to ask for, apply for, or purchase an add-on insurance product during the add-on insurance deferral period, other than in writing.

No specific restrictions apply in relation to offering to sell add-on insurance products.
It is an offence for the principal provider to offer, request or invite the customer to ask for, apply for, or purchase an add-on insurance product between the end of the add-on insurance deferral period and six weeks after the beginning of the add-on insurance deferral period, other than in writing.

It is an offence for a third party provider to offer, request or invite the customer to ask for, apply for, or purchase an add-on insurance product between the end of the add-on insurance deferral period and six weeks after the beginning of the add-on insurance deferral period, other than in writing.

No specific restrictions apply in relation to offering to sell add-on insurance products.
If either the principal provider or a third party provider is contacted by the customer during the add-on insurance deferral period, either provider may respond to the customer's inquiry using any method of communication, as long as the response relates only to the purpose for which the customer initiated the contact. Parties selling add-on insurance products may respond to customer inquiries at any stage using any method of communication.
If either the principal provider or a third party provider is contacted by the customer after the end of the add-on insurance deferral period but before six weeks after the beginning of the add-on insurance deferral period, either provider may respond to the customer's inquiry using any method of communication. Parties selling add-on insurance products may respond to customer inquiries at any stage using any method of communication.
The principal provider commits an offence if they offer, request or invite the customer to purchase or apply for an add-on insurance product after the customer informs them that they no longer want to receive offers, requests or invitations to apply for or purchase the add-on insurance product.

A third party provider commits an offence if they offer, request or invite the customer to purchase or apply for an add-on insurance product after the customer informs the principal provider that they do not want to receive offers, requests or invitations to apply for or purchase the add-on insurance product.

Parties selling add-on insurance products may offer to sell add-on insurance products at any time, as long as the offer is not a breach of the anti-hawking obligations.

Detailed explanation of new law

3.26 The deferred sales model applies to add-on insurance products. An add-on insurance product is a financial product that:

is offered or sold to a customer in connection with the customer entering into a commitment to acquire a product or service;
is offered or sold by:

-
the person who sold the principal product or service; or
-
a third party who has an arrangement with that person which covers the add-on insurance product;

manages financial risk related to the principal product or service; and
is either a contract of insurance or a benefit under a contract of insurance.

[Schedule 3, items 1 and 3, the definition of 'add-on insurance product' in sections 12BA and 12DO of the ASIC Act]

3.27 Insurance offered by a third party as a result of a referral by a principal provider could be considered add-on insurance.

3.28 Add-on insurance may be provided to customers under group arrangements where the customer stands to benefit from an insurance contract between the add-on product provider and an insurer.

3.29 Insurance that is provided complimentary with a product or service (regardless of whether the insurance covers the risks associated with that product or service or another unrelated product or service) is generally not an add-on insurance product. Such insurance is unlikely to be caught by the deferred sales model as it is generally not offered nor sold to a customer.

3.30 An insurance product offered or sold on the standalone market is not an add-on insurance product. For an insurance product to be an add-on insurance product, there needs to be a connection between the offering and selling of the add-on insurance product and the principal product or service. Products purchased on the standalone market lack this connection. Such insurance products are not captured under the deferred sales model.

Example 3.1 : Insurance product offered by a third party Wendy arranges a mortgage with a bank, Bank Ltd. Bank Ltd asks Wendy if she would like to purchase mortgage protection insurance, to which Wendy agrees. Bank Ltd is party to an arrangement with an insurer, Insurer Ltd. Bank Ltd provides Insurer Ltd with Wendy's details. Using these details, Insurer Ltd calls Wendy to offer mortgage protection insurance.The mortgage protection insurance offered to Wendy is add-on insurance because:

it is offered by a person other than the provider of the principal product in accordance with an arrangement that Bank Ltd is a party to; and
it is offered in connection with Wendy acquiring the mortgage.

Example 3.2 : Insurance product purchased on standalone market Annie purchases a second-hand car for $7,000 from Ben, a car dealer. Ben asks Annie if she has considered third-party property insurance for the car and says he has an arrangement with an insurer he could refer Annie to. Annie declines the offer. She researches other options for third-party property insurance and finds a suitable different product on the standalone market. The product is underwritten by the same insurer which Ben has an arrangement with.The product that Annie purchased was not sold as an add-on insurance product as it was not offered or sold by the insurer in connection with Annie's purchase of the car. Rather, Annie approached the insurer on the standalone market, and sought to purchase one of their insurance products on her own accord.

Example 3.3 : Complimentary travel insurance Aisling's credit card comes with complimentary travel insurance, which does not cost any extra and cannot be separated from the credit card product. The travel insurance is automatically triggered when Aisling purchases a flight for an overseas holiday with her credit card.The complimentary travel insurance is not an add-on insurance product. It was not an additional insurance product offered or sold to Aisling in connection with her being approved for her credit card and does not manage risks relating to the credit card.

3.31 A contract of insurance includes contracts that contain an insurance arrangement, but also contain other contractual terms that do not relate to insurance. Including such contracts in the definition of contracts of insurance, is the standard approach under the Insurance Contracts Act. [Schedule 3, item 3, section 12DO of the ASIC Act]

The add-on insurance pre-deferral period

3.32 The add-on insurance pre-deferral period is the period that:

begins when the customer indicates an intention to acquire the principal product or service; and
if there is an add-on insurance deferral period in relation to the add-on insurance product, ends immediately before the start of the deferral period, or otherwise does not end.

[Schedule 3, items 1 and 3, the definition of 'add-on insurance pre-deferral period' in sections 12BA and 12DP of the ASIC Act]

3.33 The purpose of the add-on insurance pre-deferral period is to enable sales people to discuss add-on insurance products with customers before the primary product or service is sold, without triggering the anti-hawking obligations.

3.34 During the add-on insurance pre-deferral period, the principal provider or a third party provider may not sell add-on insurance products to customers. [Schedule 3, item 3, section 12DQ of the ASIC Act]

3.35 Whether a customer has indicated an intention to acquire a principal product or service will depend on the circumstances. A customer may indicate an intention to acquire a product or service by, for example:

making a statement that they are considering purchasing a product or service; or
asking questions about a product or service.

3.36 A customer entering a shop and asking questions about a product or service would not generally be indicative of a customer indicating an intention to acquire that product or service.

The add-on insurance deferral period

3.37 The add-on insurance deferral period begins at the later of:

the time when the customer enters into a commitment to acquire, or acquires, the principal product or service to which the add-on insurance product relates; and
the time when the customer is given the information prescribed by ASIC relating to the add-on insurance product.

[Schedule 3, items 1 and 3, the definition of 'add-on insurance deferral period' in sections 12BA and 12DP of the ASIC Act]

3.38 The add-on insurance deferral period ends four days after the day it begins. [Schedule 3, item 3, section 12DP of the ASIC Act]

3.39 The four day deferral period provides the customer with an opportunity to consider the suitability of the add-on insurance product being offered and alternative products, while reducing the likelihood of the customer disengaging entirely from the decision about whether to purchase the add-on insurance product.

Example 3.4 : The add-on insurance deferral period Caroline purchases a new mobile phone and is given the prescribed information relating to screen protection insurance for the mobile phone on Sunday, 1 January. The deferral period for the insurance product offered to Caroline ends at 11.59pm on Thursday, 5 January.

3.40 The add-on insurance deferral period creates a separation between the customer's decision to acquire the principal product or service and the decision to acquire add-on insurance. This is to enable the customer to consider the merits of add-on insurance independently of the principal product or service and to reduce the likelihood that their decision to acquire add-on insurance is unduly influenced by pressure from the principal provider or a related third party.

3.41 Whether a customer has entered into a commitment to acquire the principal product or service will depend on the circumstances. A commitment is generally a firm decision by the customer to acquire the principal product or service, such as:

making a payment for the product or service; or
entering into an agreement for the product or service which might allow payment over a period of time or at a later date.

3.42 The customer would generally know what they have purchased and would have a risk to manage in respect of the purchase. A customer expressing a preference for a product or service does not amount to a commitment. The time at which a commitment has been entered into would depend on the circumstances of each case.

Example 3.5 : A commitment to acquire the principal product Nik is interested in purchasing a season ticket to the theatre. Before the season program is released, Nik pays a 50 per cent deposit for the season ticket online. The payment of the deposit would be considered a commitment to acquire the principal product or service.

Example 3.6 : Not a commitment to acquire the principal product Maddie is in an electronics store looking at mobile phones. She has a discussion with the salesperson and states a clear preference for a particular handset. Maddie tells the salesperson that she will return to the store at a later date to purchase the phone if that is the phone that she ultimately decides to purchase. Maddie's stated intention to possibly return to purchase the phone does not represent a commitment to acquire the phone.

3.43 The regulations may specify when a customer is taken to have entered into a commitment to acquire a principal product or service. The regulation making power is required due to the diversity of add-on insurance products available in the market and the need to ensure the regime achieves the intended policy outcome for all classes of add-on insurance products. [Schedule 3, item 3, section 12DO of the ASIC Act]

3.44 ASIC can, by legislative instrument, prescribe that certain information may be given to a customer in relation to an add-on insurance product, and the way in which the information must be given, for the add-on insurance deferral period to begin. [Schedule 3, item 3, section 12DP of the ASIC Act]

3.45 The add-on insurance deferral period does not begin if this information has not been given to the customer in the way that ASIC prescribes. [Schedule 3, item 3, section 12DP of the ASIC Act]

3.46 The information ASIC prescribes must include information that the customer may inform the principal provider or a third party provider that the customer does not want to receive any further offers, requests or invitations for add-on insurance products. This gives the customer the ability to opt-out of further contact relating to add-on insurance products. [Schedule 3, item 3, section 12DP of the ASIC Act]

Prohibitions on the principal provider

3.47 The prohibitions under the deferred sales model may apply if a customer acquires, or enters into a commitment to acquire, a principal product or service from a person, and then the same person offers or sells the customer add-on insurance product.

3.48 In certain circumstances, it is both a criminal offence and civil penalty to sell or offer an add-on insurance product to a customer before the end of the add-on insurance deferral period.

Prohibitions on selling add-on insurance products

3.49 The provider of the principal product or service commits an offence if they sell an add-on insurance product to a customer, except if that sale is after the end of the add-on insurance deferral period. [Schedule 3, item 3, section 12DQ of the ASIC Act]

3.50 The principal provider also commits an offence if:

there is an arrangement between the principal provider and a third party provider that relates to the provision of add-on insurance products in relation to products or services offered by the principal provider to a customer; and
the third party provider sells an add-on insurance product to the customer, except after the end of the add-on insurance deferral period.

[Schedule 3, item 3, section 12DQ of the ASIC Act]

3.51 An add-on insurance product is taken to be sold no later than at the first time at which no further action is required from the customer for the sale to occur. This is the case even if the sale does not actually occur until a later time. [Schedule 3, item 3, section 12DQ of the ASIC Act]

Example 3.7 : When an add-on insurance product has been sold Kevin purchases a car from Ben, a car dealer. Ben subsequently raises windscreen protection insurance as a potential add-on purchase. Before giving the prescribed information about the add-on insurance product to Kevin, Ben explains the insurance product to Kevin and invites him to fill out the paperwork to apply for the insurance product.Kevin fills out the application form including his credit card information to pay the insurance premium. Kevin is then given the prescribed information about the insurance. Kevin does not need to do anything more for the application to be processed.Ben waits until the end of the add-on insurance deferral period and processes Kevin's application. The premium is then charged to Kevin's credit card.Ben has committed an offence by selling the add-on insurance product before the add-on insurance deferral period began.In substance, Kevin and Ben agreed that he would purchase the insurance policy before the add-on insurance deferral period was triggered. Kevin agreed to purchase the insurance policy by providing the completed form, with his payment details, before being given the prescribed information. This is the case even though the application was not processed until after the end of the add-on insurance deferral period.

3.52 An exception to the offence exists if there is an add-on insurance deferral period, and the add-on insurance product is sold to the customer after the end of that period. To rely on the exception, a defendant bears the evidential burden in relation to those matters. The defendant has the burden to adduce or point to evidence to establish a matter exists, or does not exist, in relation to those matters.

3.53 Reversing the evidential burden in this case is reasonable because the information relating to the matters contained in the exception would be peculiarly within the knowledge of the provider.

3.54 As a matter of good business practice, and to comply with general business recording keeping obligations, the defendant should keep records relating to:

the add-on insurance product that was sold and when it was sold;
the circumstances in which it was sold, such as whether it was sold in connection with the acquisition of a primary product or service, and whether an add-on deferral period applies; and
when the add-on deferral period ended.

Prohibitions on offering add-on insurance products

3.55 A principal provider commits an offence if they offer an add-on insurance product for issue or sale to the customer (or if they request or invite the customer to ask for, apply for, or purchase an add-on insurance product) in certain circumstances.

3.56 A principal provider commits an offence where the offer, request or invitation is not in writing, except:

during the add-on insurance pre-deferral period; or
after the end of the add-on insurance deferral period.

[Schedule 3, item 3, section 12DR of the ASIC Act]

3.57 However, an offence will not arise if the offer, request or invitation is made in response to contact initiated by the customer. [Schedule 3, item 3, section 12DR of the ASIC Act]

3.58 If a principal provider seeks to prove that the offer was made during the add-on insurance pre-deferral, or after the end of the add-on insurance deferral period, they will have the evidential burden relating to those matters.

3.59 This reversal of the onus of proof is appropriate as the time at which the principal provider makes an offer, request or invitation should be recorded by the principal provider as a matter of good business practice. Therefore, this information is peculiarly within the knowledge of the defendant. Otherwise costly and difficult investigations by the regulator would be required to enforce this regime.

3.60 A principal provider commits an offence if, before the offer, request or invitation is made, the customer informs the principal provider that they do not want to receive such offers, requests or invitations. [Schedule 3, item 3, section 12DS of the ASIC Act]

3.61 A principal provider commits an offence if:

before the offer (or request or invitation) is made, the customer informs any person with whom the principal provider has an arrangement which covers the add-on insurance product that they do not want to receive such offers, requests or invitations; and
the principal provider is reckless as to that fact.

[Schedule 3, items 3 and 10, sections 12DS and 12GBCN of the ASIC Act]

3.62 Recklessness is the fault element that applies to the physical element relating to a customer informing of an opt-out. The fault element of recklessness is appropriate in this situation as the principal provider may not be privy to circumstances in which the customer opts-out. The fault element of recklessness also needs to be established for this physical element in civil penalty proceedings. [Schedule 3, item 10, section 12GBCN of the ASIC Act]

3.63 A person is reckless to a fact if the person is aware of a substantial risk that the fact exists and, having regard to the circumstances known to the person, it is unjustifiable to take the risk. [Schedule 3, item 10, section 12GBCN of the ASIC Act]

Prohibitions on third party providers

3.64 Prohibitions may also apply to a third party provider if there is an arrangement between the principal provider and the third party provider that relates to the provision of add-on insurance products.

3.65 Broadly, the same restrictions apply to third party providers as principal providers, except that certain physical elements have the fault element of recklessness for the civil offence.

3.66 It is appropriate that the fault element of recklessness applies to these physical elements because a third party provider tends to be removed from the selling of the principal product or service. Broadly, a third party provider commits a civil offence only if they are reckless as to these facts.

3.67 Further, to rely on a defence to these offences, the third party provider will have an evidential burden in relation to those matters.

3.68 This reversal of the onus of proof is appropriate as the time at which the principal provider makes an offer, request or invitation should be recorded by the principal provider as a matter of good business practice and is therefore peculiarly within the knowledge of the defendant. Otherwise costly and difficult investigations by the regulator would be required to enforce this regime.

Prohibitions on selling add-on insurance products

3.69 A third party provider commits an offence if they sell an add-on insurance product to the customer where either of the following applies and the third party provider is reckless as to whether it applies:

there is no add-on insurance deferral period; or
the third party provider sells the add-on insurance product to the customer before the end of the add-on insurance deferral period.

[Schedule 3, items 3 and 10, section 12DQ and 12GBCN of the ASIC Act]

Example 3.8 : Third party selling of add-on insurance during the add-on insurance deferral period Roger hires a car from Car Hire Ltd, a car hire company. Car Hire Ltd emails Roger's contact details to Insurer Ltd, a third party insurer with whom Car Hire Ltd has an arrangement to sell excess reduction insurance. The arrangement between Car Hire Ltd and Insurer Ltd is well established and includes the process for Insurer Ltd to sell add-on insurance in compliance with the deferred sales model.Insurer Ltd receives Roger's details and proceeds to offer excess reduction insurance during the add-on insurance deferral period. Roger buys the excess reduction insurance during the deferral period.Insurer Ltd has committed an offence by selling the excess reduction insurance before the end of the add-on insurance deferral period.

Prohibitions on offering add-on insurance products

3.70 A third party provider may commit an offence if they offer an add-on insurance product for issue or sale to the customer (or requests or invites the customer to ask for, apply for or purchase an add-on insurance product).

3.71 A third party provider commits an offence where:

the offer, request or invitation is not in writing; and
both of the following apply and the third party provider is reckless as to whether they apply:

-
there is an add-on insurance deferral period; and
-
the offer, request or invitation is made during the period of six weeks beginning on the first day of the add-on insurance deferral period.

[Schedule 3, items 3 and 10, section 12DR and 12GBCN of the ASIC Act]

3.72 The offence will not arise if the offer, request or invitation is made in response to contact initiated by the customer (see paragraphs 3.75 to 3.80). [Schedule 3, item 3, section 12DR of the ASIC Act]

3.73 A third party provider commits an offence if, before the offer, request or invitation is made, the customer informs the third party provider that they do not want to receive such offers, requests or invitations. [Schedule 3, item 3, section 12DS of the ASIC Act]

3.74 A third party provider commits an offence if:

before the offer, request or invitation is made, the customer informs either of the following parties that they do not want to receive such offers, requests or invitations and the third party is reckless as to that fact:

-
the principal provider; or
-
any person with whom the principal provider has an arrangement which covers the add-on insurance product; and

the third party provider is reckless as to that fact.

[Schedule 3, item 3, section 12DS and section 12GBCH of the ASIC Act]

Responding to customer-initiated contact

3.75 Both the principal provider and a third party provider can respond to customer inquiries during and after the add-on insurance deferral period.

3.76 During the add-on insurance deferral period, if either the principal provider or a third party provider is contacted by the customer, either party may respond to the customer's inquiry using any method of communication if:

the offer, request or invitation is made in response to contact initiated by the customer; and
the offer, request or invitation relates only to the purposes for which the customer initiated the contact.

[Schedule 3, item 3, section 12DR of the ASIC Act]

3.77 Responses to customer-initiated contact during the deferral period are permitted because they may assist customers to make informed decisions about add-on insurance products and allow for comparisons with products available on the standalone market.

3.78 However, to avoid committing an offence, any offer, request or invitation to a customer to apply for an add-on insurance product must relate only to the purposes for which the customer initiated the contact. This is to prevent providers of add-on insurance from using contact initiated by the customer for other purposes as an opportunity to pressure customers and undermine the deferred sales model.

3.79 There is an onus on providers of add-on insurance products to show that the offer, request or invitation to a customer relates only to the purpose for which the customer has initiated the contact. Providers could show this by, for example, maintaining records of phone calls showing that contact was only made by customers and the offer, request or invitation relates only to the purpose of that contact.

3.80 After the add-on insurance deferral period, if either the principal provider or third party provider is contacted by the customer, either party may respond to the customer's inquiry using any method of communication if the offer, request or invitation is made in response to contact initiated by the customer. [Schedule 3, item 3, section 12DR of the ASIC Act]

Example 3.9 : Responding to customer-initiated contact Angus purchases new glasses lenses from an optometrist. The optometrist offers Angus add-on insurance to cover damage to the lenses and provides the prescribed information about the insurance.During the add-on insurance deferral period, Angus calls the optometrist requesting more information about the claims ratio for the lens insurance. The optometrist provides further information about the claims ratio over the phone.The optometrist has not committed an offence because the communication was initiated by Angus and related only to the purpose for which he initiated the contact.

Example 3.10 : Responding to customer-initiated contact Frank buys a mobile phone. He discusses with the retailer the possibility of purchasing mobile phone insurance. The retailer provides Frank with the prescribed information.The retailer receives a phone call from Frank during the add-on insurance deferral period in which Frank asks for additional information about the mobile phone insurance product but he does not ask to purchase the add-on insurance product. The retailer provides that information but then offers to sell Frank the mobile phone insurance.The retailer has committed an offence because:

they have offered to sell the add-on insurance product during the add-on insurance deferral period; and
the defence of responding to Frank's inquiry does not apply as the response was not limited to the purposes for which Frank initiated the contact.

Customer requests no further contact

3.81 At any stage a customer can inform the principal provider or a third party provider that they no longer wish to receive offers, requests or invitations to purchase or apply for add-on insurance products.

3.82 A principal provider or a third party provider commits an offence if they offer an add-on insurance product for issue or sale (or requests or invites the customer to ask for, apply for, or purchase an add-on insurance product), after the customer has informed them that they no longer wish to receive such offers, requests or invitations.

3.83 In this regard, a principal provider commits an offence if, before the offer, request or invitation is made, the customer informs the principal provider that they do not want to receive such offers, requests or invitations. [Schedule 3, item 3, section 12DS of the ASIC Act]

3.84 A principal provider also commits an offence if:

before the offer (or request or invitation) is made, the customer informs any person with whom the principal provider has an arrangement which covers the add-on insurance product that they do not want to receive such offers, requests or invitations; and
the principal provider is reckless as to that fact.

[Schedule 3, items 3 and 10, sections 12DS and 12GBCN of the ASIC Act]

3.85 A third party provider commits an offence if, before the offer, request or invitation is made, the customer informs the third party provider that they do not want to receive such offers, requests or invitations. [Schedule 3, item 3, section 12DS of the ASIC Act]

3.86 A third party provider also commits an offence if:

before the offer, request or invitation is made, the customer informs either of the following parties that they do not want to receive such offers, requests or invitations and the third party is reckless as to that fact:

-
the principal provider; or
-
any person with whom the principal provider has an arrangement which covers the add-on insurance product; and

the third party provider is reckless as to that fact.

[Schedule 3, item 3, section 12DS and section 12GBCH of the ASIC Act]

Example 3.11 : Customer requests no further contact Jamie applies for a loan. She discusses with the lender the possibility of purchasing consumer credit insurance in relation to the loan. Three days later, Jamie rings the lender and states that she no longer wishes to be contacted about the consumer credit insurance product.The lender contacts Jamie three weeks later, by email, to invite her to apply for the consumer credit insurance product.The lender has committed an offence as they have offered an add-on insurance product to Jamie after she has informed them that she does not wish to receive such offers.

Summary of prohibitions in the deferred sales model

3.87 Table 3.1 summarises the various prohibitions in the deferred sales model which apply in each time period. Table 3.1 - Summary of the deferred sales model provisions

Period Prohibitions Exceptions
Add-on insurance pre-deferral period A principal provider and a third party provider cannot sell an add-on insurance product to the customer (section 12DQ of the ASIC Act). None
A principal provider and a third party can offer an add-on insurance product for sale (section 12DR of the ASIC Act).

None
Add-on insurance deferral period A principal provider and a third party cannot sell an add-on insurance product to the customer (section 12DQ of the ASIC Act). None
A principal provider and a third party cannot offer an add-on insurance product for sale, other than in writing (section 12DR of the ASIC Act).

If the customer has indicated that they no longer wish to receive offers for the add-on insurance product, the principal provider and a third party cannot offer the add-on insurance product for sale (section 12DS of the ASIC Act).

If a principal provider or a third party is contacted by the customer, either party may respond to the customer's inquiry using any method of communication, as long as the response relates only to the purpose for which the customer initiated the contact (section 12DR of the ASIC Act).
After the deferral period and before the anti-hawking obligations apply A principal provider and a third party can sell an add-on insurance product to the customer (section 12DQ of the ASIC Act).
A principal provider and a third party cannot offer an add-on insurance product, other than in writing (section 12DR of the ASIC Act).

If the customer has indicated that they no longer wish to receive offers for the add-on insurance product, the principal provider and a third party cannot offer the add-on insurance product for sale (section 12DS of the ASIC Act).

If a principal provider or a third party is contacted by the customer, either party may respond to the customer's inquiry (section 12DR of the ASIC Act).
After the deferral period and after the anti-hawking obligations apply Any contact made by a principal provider or a third party will be considered unsolicited, and the anti-hawking obligations will apply in relation to the add-on insurance product.

Exclusions from the deferred sales model

3.88 The deferred sales model will not apply where another regime already gives appropriate consumer protection in relation to the sale or offer of add-on insurance products.

3.89 Financial advisers providing personal advice are exempted from the deferred sales model as they are already subject to a range of obligations under the Corporations Act. The deferred sales model does not apply to advice given by a person who is required under Division 2 of Part 7.7A of the Corporations Act to act in the best interests of the client in relation to that advice where:

the advice recommends a principal product the adviser is authorised to provide; and
the add-on insurance product relates to the principal product.

[Schedule 3, item 3, section 12DU of the ASIC Act]

3.90 The deferred sales model does not apply to products which are covered by a product intervention order under Part 7.9A of the Corporations Act which provides for a period during which the product must not be sold or offered. This ensures the two legislative regimes operate consistently in instances where ASIC identifies consumer detriment requiring the exercise of its powers. [Schedule 3, item 3, section 12DV of the ASIC Act]

3.91 The deferred sales model does not apply to comprehensive motor vehicle insurance sold as an add-on insurance product. Add-on comprehensive motor vehicle insurance is defined as an add-on insurance product that:

provides cover to an individual who either wholly or partly owns a motor vehicle or has the use of a motor vehicle under a lease of at least four months duration; and
provides cover for loss of or damage to:

-
the insured's vehicle resulting from an accident;
-
property of another person resulting from an accident in which the insured's motor vehicle is involved; and
-
the insured's vehicle caused by fire, theft or malicious acts.

[Schedule 3, item 3, section 12DW of the ASIC Act]

3.92 To rely on one of the above exclusions from the deferred sales model, the defendant will have the evidential burden in relation to those matters.

3.93 This reversal of the onus of proof is appropriate as matters relating to the nature of the product or service a person provides and whether the product or service would be covered under any exceptions would be peculiarly in the knowledge of the person. The reversal is also required to avoid costly and difficult investigations by the regulator to enforce this regime as specific information relating to products or services a person offers would be peculiarly in the knowledge of the defendant.

3.94 If an exemption from the deferred sales model applies in relation to a person, a class of add-on insurance products sold by a person, or a class of add-on insurance products generally, that person, product or class of products may still be subject to the anti-hawking rules. Whether this is the case will depend on the specific application of the anti-hawking rules to that person, product or class.

Exemptions from the deferred sales model by regulations

3.95 The regulations may exempt a class of add-on insurance products from the deferred sales model. [Schedule 3, item 3, section 12DX of the ASIC Act]

3.96 An exemption in the regulations for a class of add-on insurance products may be subject to conditions. Contravention of a condition of an exemption is an offence. [Schedule 3, item 3, sections 12DX and 12DZA of the ASIC Act]

3.97 An exemption under the regulations does not apply to an add-on insurance product to which a product intervention order is in force under Part 7.9 of the Corporations Act which provides for a period during which the add-on insurance must not be sold. [Schedule 3, item 3, section 12DZ of the ASIC Act]

3.98 An exemption by making regulations will only be granted in exceptional circumstances and will be considered against other policy considerations of the Government. An exemption might be granted when, for example, subjecting a class of add-on insurance products to the deferred sales model would produce perverse policy outcomes.

Exemptions from the deferred sales model by ASIC

3.99 ASIC has the power to exempt certain persons from the deferred sales model.

3.100 ASIC may, by notifiable instrument, exempt an add-on insurance product or a class of add-on insurance products sold by a specific person. [Schedule 3, item 3, section 12DY of the ASIC Act]

3.101 In considering whether to make an exemption, ASIC must have regard to certain matters. [Schedule 3, item 3, section 12DY of the ASIC Act]

3.102 One of the matters to which ASIC must have regard is whether or not, in the absence of an exemption, there is a high risk of underinsurance or non-insurance. The intention of this criterion is for ASIC to consider the likelihood and impact of a claim occurring during the deferral period (rather than considering the impact of an insurer leaving the add-on insurance market or an intermediary ceasing to sell the product if they are not operating under an exemption).

3.103 ASIC can also have regard to any other matters that ASIC considers relevant in considering whether to make an exemption. A relevant matter might include, for example, whether insurance is required by law.

3.104 ASIC may place conditions on an exemption. Contravention of a condition of an exemption is an offence. [Schedule 3, item 3, sections 12DY and 12DZA of the ASIC Act]

3.105 The following decisions are reviewable by the Administrative Appeals Tribunal:

a decision by ASIC to refuse to exempt an add-on insurance product, or a class of add-on insurance products sold by a specific person; and
a decision by ASIC to vary or revoke such an exemption, or to impose or vary a condition on such an exemption.

[Schedule 3, item 17, section 244 of the ASIC Act]

Penalties for breaching the deferred sales model

3.106 The prohibitions in the deferred sales model are ordinary offences under section 12GB of the ASIC Act and carry a maximum penalty of 2,000 penalty units for individuals. [Schedule 3, items 5 to 8, section 12GB of the ASIC Act]

3.107 Section 93E of the ASIC Act outlines the penalty applicable to an offence where the offence is committed by a body corporate. In accordance with that provision, the maximum penalty for a body corporate is 10 times the penalty specified for the offence for individuals. Therefore for the prohibitions in the deferred sales model, the maximum penalty for a body corporate is 20,000 penalty units.

3.108 Each offence in the deferred sales model is also a civil penalty provision. [Schedule 3, item 9, section 12GBA of the ASIC Act]

3.109 If ASIC believes on reasonable grounds that a person has committed an offence under the deferred sales model, ASIC may give the person an infringement notice for the alleged contravention. [Schedule 3, item 16, section 12GXA of the ASIC Act]

3.110 The penalty under an infringement notice is 12 penalty units for a person who is not a body corporate and 60 penalty units for a body corporate. This is consistent with the Guide to Framing Commonwealth Offences which suggests that amounts payable under an infringement notice should not exceed 12 penalty units for a natural person or 60 penalty units for a body corporate. [Schedule 3, item 17, section 12GXB of the ASIC Act]

3.111 Infringement notices are an administrative tool that ASIC can use to punish misconduct in relation to the deferred sales model and can act as an alternative to criminal or civil proceedings. The use of infringement notices will deter providers from contravening the deferred sales model and acts as an immediate regulatory response to misconduct that could have significant financial detriments for customers.

3.112 If an infringement notice is complied with, including payment of the penalty, no further action will be taken against the person and the payment is not considered an admission of guilt. However, if the infringement notice is not complied with, ASIC may pursue criminal or civil penalties. The infringement notice regime does not mean an infringement notice needs to be issued for an alleged contravention. It is one of the regulatory tools ASIC may decide to use.

Right of return and refund for customers

3.113 The customer has the right of return and refund when a principal provider or third party provider sells an add-on insurance product to the customer during the add-on insurance deferral period. The right of return and refund is exercisable at any time during the period starting when the product was sold and ending:

one month after the end of the period in which a customer has a right to return the product under section 1019B of the Corporations Act; or
one month and 14 days after the product was sold.

[Schedule 3, item 3, section 12DT of the ASIC Act]

3.114 The refund amount to be paid to a customer in relation to their add-on insurance product must be the entire amount paid for the product. However, this amount may be reduced if a customer has made a claim under the product. [Schedule 3, item 3, section 12DT of the ASIC Act]

3.115 If an add-on insurance product creates a legal relationship between the customer and any other person, at the time the product is returned the legal relationship is terminated without penalty to the customer. Additionally, any contract for the acquisition of the product by the customer is terminated at the time of return with no penalty to the customer. [Schedule 3, item 3, section 12DT of the ASIC Act]

3.116 The right of return and refund applies along with any other penalties for or in relation to a provider or third party provider selling add-on insurance during the deferral period. [Schedule 3, item 3, section 12DT of the ASIC Act]

Consequential amendments

Amendments to the Corporations (Fees) Act 2001

3.117 Consequential amendments are made to amend the definition of chargeable matter in section 4(1) of the Corporations (Fees) Act 2001 to allow ASIC to charge a fee for an application by an entity to be exempted from the deferred sales model. [Schedule 1 to the Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020, items 1 and 2, sections 4 and 7 of the Corporations (Fees) Act 2001]

Amendments to the ASIC Act

3.118 A series of consequential amendments to the ASIC Act are made to ensure the deferred sales model draws on general provisions that form part of the unconscionable conduct and consumer protection provisions in Division 2 of Part 2 of the ASIC Act. These general provisions include:

the savings of other laws and remedies;
actions for damages;
general criminal defences;
the making of non-punitive orders; and
the making of orders prohibiting the payment or transfer of money or other property.

[Schedule 3, items 4 and 11 to 15, sections 12AE, 12GF, 12GI, 12GLA and 12GN of the ASIC Act]

Interaction with anti-hawking obligations for insurance products

3.119 Unsolicited offers for the sale of financial products are generally prohibited by the anti-hawking obligations (see section 992A of the Corporations Act).

3.120 Amendments to the Corporations Act ensure that the deferred sales model replaces the anti-hawking obligations with respect to add-on insurance products. Therefore, providers of insurance will generally be subject to either the deferred sales model or the anti-hawking obligations, but not both at the same time. In circumstances where there are no requirements under the deferred sales model, or an exemption from the deferred sales model applies, the anti-hawking obligations will generally apply.

3.121 The hawking prohibitions do not apply to offers of, or requests or invitations relating to, an add-on insurance product. [Schedule 3, items 21 and 22, section 992A of the Corporations Act 2001]

3.122 Add-on insurance product has the same meaning in the Corporations Act as it does under the deferred sales model being established in the ASIC Act. [Schedule 3, item 20, the definition of 'add-on insurance product' in section 9 of the Corporations Act 2001]

3.123 However, the hawking prohibitions do apply to offers, requests or invitations to apply for add-on insurance products if they are made six weeks after either:

the day the add-on insurance deferral period begins; or
if there is no add-on insurance deferral period, the day on which the customer indicates an intention to purchase a principal product to which an add-on insurance product relates.

[Schedule 3, item 23, section 992A of the Corporations Act 2001]

3.124 The hawking prohibitions will apply to offers, requests or invitations relating to an add-on insurance product if one of the following exemptions from the deferred sales model applies:

the exemption for comprehensive motor vehicle insurance;
an exemption by regulations; and
an exemption by ASIC.

[Schedule 3, item 23, section 992A of the Corporations Act 2001]

3.125 The hawking prohibitions may apply in relation to add-on insurance products covered by a product intervention order in force under Part 7.9A of the Corporations Act which provides for a period during which the add-on insurance product must not be sold. Whether the hawking prohibitions apply will depend on the nature and scope of the product intervention order. [Schedule 3, item 23, section 992A of the Corporations Act 2001]

3.126 It is unlikely that the hawking prohibitions will apply to an add-on insurance product covered by the exemption for financial advisers under the deferred sales model. A broader exemption to the anti-hawking rules exists for financial advisers than under the deferred sales model. [Schedule 3, item 23, section 992A of the Corporations Act 2001]

Application and transitional provisions

3.127 The amendments in Schedule 3 commence immediately after the amendments in Schedule 5 commence. The amendments in Schedule 5 commence on the later of 5 October 2021 and the day after the Bill receives Royal Assent. [Clause 2]

3.128 The deferred sales model will apply to commitments to acquire principal products and services entered into on or after the commencement of the amendments. [Schedule 3, item 19, section 329 of the ASIC Act]


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