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 6 - Use of terms "insurance" and "insurer" (additional commitment in response to recommendation 4.2)

Outline of chapter

6.1 Schedule 6 to the Bill amends the Insurance Act 1973 to restrict the ability of persons to use the terms 'insurance' and 'insurer' to only those persons that have a legitimate interest to do so.

Context of amendments

6.2 There are a number of legislative restrictions on the use of certain words and phrases to prevent confusion and protect consumers. For example, there are currently restrictions on the use of the term 'bank' and similar terms in the Banking Act 1959.

6.3 As part of the response to recommendation 4.2 of the Financial Services Royal Commission, the Government announced it would restrict the ability of persons to use the terms 'insurance' and 'insurer' to only those persons that have a legitimate interest to do so.

6.4 The objective of this change is to avoid confusion for consumers as to the nature of the products they are purchasing.

Summary of new law

6.5 Schedule 6 amends the Insurance Act 1973 so that a strict liability offence will arise for a person that uses the term 'insurance' to describe a product or service that they purport to offer as insurance, if:

the product or service is not insurance; and
it is likely that the product or service could mistakenly be believed to be insurance.

6.6 A strict liability offence will also arise for a person that uses the term 'insurer' to describe themselves if the person could mistakenly be believed to offer insurance, and either:

the product is not insurance; or
the person is not appropriately registered or authorised under the:

-
Insurance Act 1973;
-
Life Insurance Act 1995; or
-
Private Health Insurance (Prudential Supervision) Act 2015.

6.7 The offences do not apply to government entities, State insurance, products or services prescribed by the regulations, or entities exempted by ASIC.

Comparison of key features of new law and current law

New law Current law
It is a strict liability offence for a person to use the term 'insurance' to describe a product or service the person offers as insurance, if the product or service is not insurance, in circumstances where it is likely that the product or service could mistakenly be believed to be insurance. No equivalent.
It is a strict liability offence for a person to use the term 'insurer' to describe themselves if the person could mistakenly be believed to offer insurance and either the product is not insurance or the person is not appropriately registered or authorised under the:

Insurance Act 1973;
Life Insurance Act 1995; or
Private Health Insurance (Prudential Supervision) Act 2015.

No equivalent.

Detailed explanation of new law

6.8 Schedule 6 creates two new strict liability offences: one offence relating to the use of the term 'insurance' and another offence relating to the use of the term 'insurer'.

Restricting the use of the term 'insurance'

6.9 A strict liability offence will arise for a person that uses the term 'insurance' if:

the person carries on a business or is proposing to carry on a business;
the person uses the word 'insurance' to describe (expressly or by implication) a product or service that the person supplies or proposes to supply as part of carrying on that business;
the product or service is not insurance; and
it is likely in all the circumstances that the product or service could be mistakenly believed to be insurance.

[Schedule 6, item 5, sections 114(1) and (8) of the Insurance Act 1973]

6.10 The offence operates to restrict a person from using the word 'insurance' to describe a product or service they are supplying in instances where the product or service is not insurance. The offence does not operate to restrict a person using the word 'insurance' to describe a product or service that another person is supplying.

6.11 The term 'insurance' takes on its ordinary meaning. This will ensure it remains fit for purpose and can be interpreted in a way that achieves the intent of these reforms.

6.12 The maximum penalty for the offence is 50 penalty units in the case of an individual and 500 penalty units in the case of a body corporate. [Schedule 6, item 5, section 114(1) of the Insurance Act 1973]

6.13 The maximum penalty of 50 penalty units for an individual is consistent with the Guide to Framing Commonwealth Offences, which suggests that an appropriate maximum penalty for a strict liability offence is 60 penalty units for an individual. Also consistent with the Guide to Framing Commonwealth Offences, imprisonment is not a penalty for committing the strict liability offence.

6.14 The offence specifies a maximum penalty amount of 500 penalty units for a body corporate. This exceeds the amount considered appropriate in the Guide to Framing Commonwealth Offences, which is 300 penalty units for bodies corporate. The higher penalty for a body corporate reflects the seriousness of the offence and acts as a sufficient deterrent to ensure a body corporate is not able to view the penalty as a cost of doing business.

6.15 The new offence will protect consumers from businesses that do not have a legitimate interest in using the term and ensures businesses are able to pay out legitimate claims. Consumers generally place trust in businesses that brand their products as insurance and expect those businesses to pay out claims that might arise. Breaching this trust has serious consumer detriments. For example, consumers could be faced with large or even catastrophic losses if a financial institution refuses or is unable to pay out claims.

6.16 Financial services businesses have the potential to make large profits due to the specialist nature of their products and services. Additionally, bodies corporate can be well resourced and often can, in the corporate and financial sector, have significant financial value and resources. To ensure financial penalties act as an adequate deterrent, punish illegal behaviour, are proportionate to the size and capacity of a body corporate, and are not viewed as a cost of doing business, the higher maximum penalty is appropriate.

6.17 Additionally, the penalty is a maximum amount and courts continue to have a discretion when sentencing to ensure the appropriate penalty is given in the circumstances.

Example 6.1 : Using the term 'insurance' by implication Aidan is interested in purchasing a flight to Nigeria. He contacts Kathryn, who works at a travel agency. Kathryn finds a flight that suits Aidan's needs. Aidan is not ready to purchase the flight just yet and inquires about the ability to lock in the price. Kathryn's travel agency provides Aidan with a brochure entitled "Airfare insurance - lock in your price now" that lists five products of varying degrees that Aidan can purchase to lock in the price of the airfare.However, the products listed in the brochure are all price guarantees that are underwritten by Kathryn's travel agency. Kathryn's travel agency has used the term 'insurance' to describe price guarantee products as insurance and would therefore contravene the new strict liability offence.

Example 6.2 : Not using the term 'insurance' Fred has just purchased a mobile phone from a retailer when the salesperson Cosimo asks him whether he would like to purchase an extended warranty for the phone. Cosimo explains that the warranty provides coverage against the risk of accidental damage of the phone, requires a payment of $300 for three years' coverage and that an excess of $50 would need to be paid for each claim.Cosimo has not committed an offence because he has not used the term 'insurance' to describe the product that he is selling.

Restricting the use of the term 'insurer'

6.18 A strict liability offence will also arise for a person that uses the term 'insurer' if:

the person carries on a business or is proposing to carry on a business;
the person uses the word 'insurer' to describe themselves in connection with a product or service that they supply or are proposing to supply as part of carrying on that business;
it is likely in all the circumstances that the product or service that they are supplying or proposing to supply could be mistakenly believed to be insurance; and
either:

-
the product or service is not insurance; or
-
the product is insurance and the person would be in breach of relevant provisions in the Insurance Act 1973, the Life Insurance Act 1995 or the Private Health Insurance (Prudential Supervision) Act 2015 if they supplied the product or service as part of their business.

[Schedule 6, item 5, sections 114(2), (3) and (8) of the Insurance Act 1973]

6.19 The maximum penalty for the offence is 50 penalty units in the case of an individual and 500 penalty units in the case of a body corporate. [Schedule 6, item 5, section 114(2) of the Insurance Act 1973]

6.20 As noted above, the higher penalty for a body corporate reflects the seriousness of the offence and acts as a sufficient deterrent to ensure a body corporate does not view the penalty as a cost of doing business.

6.21 Bodies corporate can be well resourced and often can, in the corporate and financial sector, have significant financial value and resources. To ensure financial penalties act as an adequate deterrent, punish illegal behaviour, are proportionate to the size and capacity of a body corporate, and are not viewed as a cost of doing business, the higher maximum penalty is appropriate.

6.22 The new strict liability offences will enhance the integrity of the regulatory regime. The Financial Services Royal Commission uncovered the harm caused by poor value insurance products and the sale of such products to particularly vulnerable groups. Describing a financial product as 'insurance', or the person offering the product as an 'insurer', tends to suggest that the person is prudentially supervised by APRA. If the person is not in fact prudentially supervised, consumers could be misled into having a higher degree of confidence in the safety and soundness of the person and the products the person sells than is justified.

6.23 Having strict liability offences as part of this regulatory regime will reduce such risks by strengthening the enforceability of the provisions by regulators, thereby discouraging disreputable practices and effectively deterring inappropriate uses of the terms.

Exceptions to the offences

6.24 The offences do not apply to government entities. Government entities are not prudentially regulated by APRA. Products issued by government entities, which are generally supported by Government, do not suffer from the same vulnerability as products issued by the private sector. As a result, it is less likely that products issued by government entities will cause confusion. [Schedule 6, item 5, section 114(4) of the Insurance Act 1973]

6.25 An entity is a government entity if it is:

a Department of State of the Commonwealth, a State, or a Territory;
a Department of the Parliament;
an Executive or Statutory Agency; or
an entity that is established for a public purpose by a law of the Commonwealth, a State or a Territory.

[Schedule 6, items 1 and 5, the definition of 'government entity' in sections 3(1) and 114(5) of the Insurance Act 1973]

6.26 ASIC may, by legislative instrument, determine that the offences do not apply to a specific person or a class of persons. The terms 'insurance' and 'insurer' are used in relation to a wide variety of products in various circumstances. ASIC, being the corporate regulator and the regulator that will administer this regime, is in the best position to obtain and consider information from businesses and determine whether it is appropriate that a person or a class of persons be excluded from the restrictions. [Schedule 6, item 5, sections 114(4) and (6) of the Insurance Act 1973]

6.27 A determination made by ASIC to exempt a specific person or class of persons from the offences may be subject to conditions. ASIC may revoke or vary the determination. However, ASIC must not revoke or vary a determination in relation to a specific person unless ASIC has notified the person in writing that it is considering revoking or varying the determination. [Schedule 6, item 5, sections 114(6) and (7) of the Insurance Act 1973]

6.28 The regulations may prescribe that the offences do not apply to certain products and services. [Schedule 6, item 5, section 114(4) of the Insurance Act 1973]

6.29 The terms 'insurance' and 'insurer' are used in relation to a wide variety of products in various circumstances. Regulations may be made to exclude products and services that are not vulnerable to the same risks as the products and services that are the target of this regime from the restrictions. The exemption of a certain type of product or service has broader consequences than the exemption of a specific person or class of persons. Therefore, it is appropriate for an exemption of types of products or services to be made by regulations.

6.30 The offences do not apply to State insurance products that do not apply outside that State (within the meaning of section 51(xiv) of the Constitution). [Schedule 6, item 5, section 114(4) of the Insurance Act 1973]

6.31 A person who wishes to rely on the exceptions to the offences bears the evidential burden in relation to the matters in the exception. This is consistent with section 13.3(3) of the Criminal Code. An evidential burden requires the person to provide evidence that suggests the reasonable possibility that the exception applies.

6.32 A reversal of the evidential burden is justified where the matters are peculiarly within the knowledge of the defendant, and it would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter.

6.33 The reversal of the evidential burden in this instance is limited to reliance on an exception.

6.34 In respect of coverage by a determination and a product or service being of a kind in the regulations, key information about a product or service a person provides and whether it is covered by a determination or the regulations, would reside with the person and would be peculiarly within the knowledge of the person.

6.35 While it is not expected that the prosecution would commence proceedings against a person covered by a determination or the regulations, it would not be burdensome for the person to produce information about the person's organisation and the products or services they provide.

6.36 In contrast, obtaining information about an organisation's ownership structure or its products or services, and whether they are covered by an exception, may require the prosecution to undertake difficult and costly investigative exercises to obtain evidence or review a large volume of information which would be readily accessible to the organisation itself. Overall, it would be significantly more difficult, costly and (often) redundant for the prosecution to have to disprove each of the matters in proposed section 114(4) of the Insurance Act 1973 than it would be for the defendant to provide or point to evidence that suggests a reasonable possibility that a matter exists.

Administration of the provisions

6.37 Amendments are made to the administration of the Insurance Act 1973 to make ASIC responsible for the enforcement of the new offences as they are consumer protection measures. [Schedule 6, items 2 to 4, section 8 of the Insurance Act 1973]

Commencement provisions

6.38 The amendments commence on the later of 1 January 2021 and the day after Royal Assent. [Clause 2]


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