The consumer protections that currently apply to life insurance are substantially weaker than the consumer protections that apply to other financial and non-financial services and other products sold together with life insurance. This leads to confusion for consumers in understanding and asserting their rights, says a report issued last week by the Joint Parliamentary Committee (JPC) on Corporations and Financial Services.
The committee also considers that the inconsistent application of consumer protection law also creates inappropriate incentives for industry participants that are subject to weaker consumer protections. The committee therefore recommends that consumer protections for financial products including life insurance be aligned with Australian Consumer Law.
This recommendation includes removing a number of exemptions that the life insurance industry currently enjoys compared to other financial services. To ensure that life insurance industry participants are treated fairly, the committee is recommending that the changes uniformly cover all types of life insurance, all sectors (direct, retail and group), and all industry participants.
The JPC was established to inquire in the life insurance industry following scandals over the past several years that saw legitimate claims denied.
The committee's report focusses on areas where substantial changes are required to ensure the life insurance industry is held to account in relation to:
- effective consumer protections and industry codes of practice;
- the transparency of remuneration, commissions, payments and fees;
- the provision of advice in the best interests of consumers;
- group life insurance arrangements that do not disadvantage certain groups of consumers;
- appropriate access to personal medical and genetic information; and
- fair claims handling practices.
Some other highlights of the report are:
Codes of practice
The JPC says that it welcomes the recent development of two codes of practice in the life insurance industry. However, it is not convinced that a self-regulatory approach is sufficient. The committee is therefore recommending that the co-regulatory approach be adopted across the financial services sector including the life insurance industry. The committee also encourages the implementation of one single combined code of practice.
At a minimum, the coregulatory approach should require codes to be registered with ASIC, be mandatory for all industry participants, give the code compliance committees the power to determine whether breaches have occurred, give the Australian Financial Complaints Authority the power to enforce compliance through determinations, and provide genuine remedies for breaches of the code, including financial remedies, thereby creating an incentive for compliance. It is recognised that any enforceable code with regards to insurance in superannuation would need to expressly permit trustees to act in members' best interests.
As a matter of practice, ASIC focusses its activities on systemic and systematic misconduct. However, under the proposed co-regulatory arrangements, ASIC may not have the power to undertake enforcement action for systemic and systematic code breaches. This would result in a very significant gap in consumer protections. The committee is therefore also recommending that ASIC be given the power to undertake enforcement action in relation to systemic or systematic breaches of codes of practice in the financial services sector, including in the life insurance industry.
The committee notes that the rules banning conflicted remuneration have been introduced specifically in order to mitigate some of the risks around conflicts of interest in the life insurance industry. However, evidence particularly from ASIC indicates that a plethora of hidden payments including commissions, fees, performance-related payments, soft dollar benefits, and nonfinancial benefits still exist within the various structures of the life insurance industry. These money flows continue to exist to varying degrees across all three sectors: retail, direct, and group. The wrong type of financial incentives have contributed significantly to a range of poor practices and misconduct in the financial services industry including misleading advice and mis-selling with poor outcomes for customers. The committee therefore recommends that ASIC and APRA conduct detailed examinations of all payments, benefits, and fees across all sectors of the life insurance industry and that the government consider further regulation following the results of those examinations.
Retail life insurance and approved product lists
The JPC also finds that the way that Approved Product Lists (APLs) are currently constructed can lack transparency and generate conflicts of interest that lead to selling life insurance on the basis of misleading advice that herds customers to products from insurers that pay the most to be on the APL. The committee therefore recommends that the life insurance industry should have, as a matter of urgency, a balance of affiliated and non-affiliated products on their APLs, and if affiliated products are recommended, the affiliation should be disclosed, and the customer should be offered a comparison with non-affiliated products. Beyond this, the committee further recommends that the industry transition to open APLs.
Group life insurance
In addition, the JPC finds that the mechanism for opting out of life insurance held within group superannuation does not appear to be straightforward. The committee views the current dearth of action by superannuation trustees and life insurers to fix the problem of duplicate insurance within group superannuation as completely unacceptable. The committee is therefore recommending that superannuation funds, superannuation trustees, and life insurers be more proactive in informing customers about the status of group life insurance accounts.
Access to medical information
Life insurers request authorisation to access a consumer's medical information. This request for authorisation may occur at the time a consumer acquires a life insurance policy and also at the time of making a claim. The amount and type of medical information a consumer authorises a life insurer to access and share is typically broad, particularly at the time of policy acquisition. The committee is also very concerned about evidence provided that patients are reluctant to seek necessary treatment, particularly for mental ill health, due to concerns over life insurers having access to their full medical record and then using such information to limit or deny coverage or a claim. The committee is firmly of the view that life insurers should only have access to targeted medical information. The committee therefore recommends that the Financial Services Council and the Royal Australian College of General Practitioners collaborate to prepare and implement agreed protocols and standards for:
- requesting and providing relevant medical information only, not complete medical files;
- uniform authorisation forms for access to medical information;
- appropriate storage of medical information; and
- real-time disclosure to consumer about the progress of their claim, including requests for medical records.