Compliance: Theory and Practice in the Financial Services Industry

13. Insurance, Superannuation and RSAs

IMPORTANT NOTE: These slides have been provided primarily for the use and benefit of students taking the "Compliance: Theory and Practice in the Financial Services Industry" course at Sydney University Law School. They are a summary only of the subject matter covered and are not intended to be, nor should they be relied upon as, a substitute for legal or other professional advice. In particular, it should be noted that the slides are not always verbatim quotes from the underlying source material and that material may have been abridged or paraphrased for presentational purposes. There also may have been legislative, regulatory or other developments since these slides were last updated that are not incorporated.

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Outline

	Definitions
	Overview of Insurance Act 1973
	Overview of Life Insurance Act 1995
	Overview of Insurance Contracts Act 1984
	Overview of Superannuation Industry (Supervision) Act 1993
	Overview of Retirement Savings Account Act 1997
	Marketing Insurance and Superannuation Products
	Insurance Agents and Brokers
	Insurance Premiums
	Industry Codes of Practice
	The Superannuation Complaints Tribunal

Definitions

These products are defined in s761A to be "general insurance products", "life risk insurance products", "investment life insurance products", "superannuation products" and "RSA products" respectively.

Excluded from (d), (e) and (f) above are contracts of insurance that: (i) provide for a benefit to be provided by an association of employees that is an organisation within the meaning of the Workplace Relations Act 1996 for a member of the organisation or a dependant of a member; (ii) provide for benefits, pensions or payments described in s11(3)(c) of the Life Insurance Act 1995 (superannuation benefits, pensions or payments to employees or their dependants (and not to any other persons) on retirement, disability or death are provided by an employer or by employees, or by both, wholly through an organisation established by the employer or employees or by both); (iii) provide for the provision of a funeral benefit; or (iv) are issued by an employer to an employee of the employer. The exclusions in (i), (ii) and (iv) are further reinforced by specific provisions to similar effect in CA s765A(1)(u), (v) and (w).

Also excluded by CAs765A(1) are: (c) health insurance provided as part of a health insurance business (as defined in Division 121 of the Private Health Insurance Act 2007); (ca) insurance provided as part of a health-related business (as defined by s131-15 of that Act) that is conducted through a health benefits fund (as defined by s131-10 of that Act); (d) insurance provided by the Commonwealth; (e) State insurance or Northern Territory insurance, including insurance entered into by a State or the Northern Territory and some other insurer as joint insurers; (f) insurance entered into by the Export Finance and Insurance Corporation, other than a short-term insurance contract within the meaning of the Export Finance and Insurance Corporation Act 1991; and (g) reinsurance.

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Overview of Insurance Act 1973

Click here for a copy of the Insurance Act 1973.

In The Barclay MIS Group of Companies Pty Ltd v ASIC [2002] FCA 1606, the Federal Court held that certain risk management products aimed at protecting landlords against loss of rent and damage to property caused by tenants were insurance contracts and that the issuer of the products was therefore required to be registered as a general insurer under the Insurance Act 1973 and to have a financial services licence under the Corporations Act.

ICA s3A provides that the regulations may also specify things that are not "insurance business" for the purposes of the Act.

Under IA s12(3), APRA may refuse to grant an authority to a body corporate under s12 to carry on insurance business in Australia if it is a subsidiary of another body corporate and that other body corporate is not an authorised NOHC.

IA s3(1) defines "NOHC" or "non‑operating holding company", in relation to a body corporate, to mean a body corporate: (a) of which the first body corporate is a subsidiary; (b) that does not carry on a business (other than a business consisting of the ownership or control of other bodies corporate); and (c) that is incorporated in Australia.

IA s18 establishes a regime for APRA to grant authorisation for a body corporate to be a NOHC for a general insurer.

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Overview of Life Insurance Act 1995

Click here for a copy of the Life Insurance Act 1995.

LIA s9(2) excludes a contract that provides for the payment of money on the death of a person if the duration of the contract is to be not more than one year and payment is only to be made in the event of death by accident or death resulting from a specified sickness.

"Continuous disability policy" is defined in s9A. "Investment account benefits" and "investment-linked benefits" are defined in s14.

LIA s234(2) provides a safe harbour for life companies that were carrying on general insurance business before the commencement of the Act.

The Dictionary in the Schedule to the LIA defines "sinking fund business" to mean business that consists of: (a) the issuing of sinking fund policies or the undertaking of liability under sinking fund policies; or (b) any related business. It defines "sinking fund policy" to mean a contract under which: (a) the company issuing the policy undertakes to pay money on one or more specified dates; and (b) neither the payment of that money nor the payment of premiums is dependent on the death or survival of the person to whom the policy is issued or of any other person.

LIA s12 divides life insurance business into two classes: (1) ordinary business; and (2) superannuation business. The Dictionary in the Schedule to the LIA defines "ordinary business" to mean life insurance business other than superannuation business and "superannuation business" to mean life business that consists of: (a) the issuing of superannuation policies or the undertaking of liability under superannuation policies; or (b) any related business. It further defines "superannuation policy" to mean: (a) a life policy that is maintained for the purposes of a superannuation or retirement scheme and is owned by the trustee under the scheme; or (b) a life policy of a kind prescribed by the regulations for these purposes.

Superannuation business is also governed by Superannuation Industry (Supervision) Act. Effectively, if a life company is going to offer superannuation products to its customers, it must set up a superannuation fund with a corporate trustee (usually a related body corporate). The trustee then invests in life policies offered by the life company on behalf of the customers. It may also offer other retail superannuation investment products that do not use life insurance policies as the underlying investments of the fund.

A person cannot be made liable both under this section and under s50 in respect of the same act or omission of a life company (s48(10)).

A person cannot be made liable both under this section and under Division 2 of Part 4 in respect of the same contravention (s188(4)).

Note that there are a number of provisions in LIA Part 10 (ss198-230) regulating life insurance contracts in general. These include provisions regulating the capacity of persons under 18 to obtain life insurance; assignments and mortgages; surrender and forfeiture; protection of policy proceeds from the claims of creditors; payment of policy proceeds; lost or destroyed policy documents; the effect of suicide and the like. We don't need to go into that level of detail for the purposes of this course.

Failure to comply with a direction under s230B is a criminal offence (s230F). APRA may also prescribe prudential rules for the purposes of the Act that operate in the same manner as regulations under the Act (s252).

Click here for a copy of the Life Insurance Regulations.

LIR r4.00A operates as an exception to LIA s38(3), which prohibits a life company from mortgaging or charging any of the assets of a statutory fund except: (a) to secure a bank overdraft; (b) in connection with the undertaking of a major development project and in accordance with s40; or (c) for such other purposes, and subject to such other conditions, as are prescribed by the regulations. It is needed because many derivatives and futures exchanges require clients or their brokers to lodge margin which is charged in favour of the relevant exchange or clearing house to secure performance of the client's obligations under the derivative contract.

LIR r4.00A(2) and schedule 7 define "approved body" to include various stock and futures exchanges including the ASX, SFE and their associated clearing houses. It also defines "derivative" as meaning a financial asset or liability the value of which depends on, or is derived from, other assets, liabilities or indices and "derivatives contract" as meaning an option contract or futures contract relating to any right, liability or thing.

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Overview of Insurance Contracts Act 1984

Click here for a copy of the Insurance Contracts Act 1984.

The ICA applies to both general insurance and life insurance. It contains a number of modifications to the common law relating to insurance contracts (eg it removes the  requirement for an insurable interest, removes the right of an insurer to be subrogated to rights of insured in certain circumstances where the action is against an employee of the insured or a family member of the insured) and regulates the contents of certain policies, procedures for their cancellation, payment of claims, rights of contribution etc. It is beyond the scope of this course to consider these provisions in detail.

ICA s11A provides that ASIC is responsible for the general administration of the ICA.

In Permanent Trustee Australia Limited v FAI General Insurance Company Limited (in Liq) [2003] HCA 25, the majority of the High Court found that an insured's disclosure obligations under ICA s21 relate only to those matters which the insured knows, or a reasonable person in the circumstance could be expected to know, are relevant to the insurer's assessment of risk. It does not extend to matters of a commercial nature, such as whether the insured intends to renew the insurance with that insurer in the future.

ICA s21A further qualifies the duty of disclosure for "eligible contracts of insurance". This is defined in Insurance Contracts Regulations r2B to include those insurance contracts declared for the purposes of Part V Division 1 of the ICA (ie those insurance contracts subject to prescribed minimum standards of cover, being motor vehicle property damage, home buildings, home contents, sickness and accident, consumer credit and travel insurance - see below) where the contract is for new business. It also includes any other type of insurance contract where the contract is for new business and the insurer, before the contract is entered into, gives to the insured: (i) a written notice in accordance with the form set out in Part 3 of Schedule 1; (ii) an oral notice in accordance with the words set out in Schedule 2; or (iii) a notice otherwise complying with ICA s22(1) of the Act clearly informing the insured of the general nature and effect of the duty of disclosure and the general nature and effect of ICA s21A.

Under ICA s21A, for eligible contracts of insurance, the insurer is taken to have waived compliance with the duty of disclosure in relation to the contract unless before the contract is entered into: (1) the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (2) both: (a) the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; and (b) the insurer expressly requests the insured to disclose each exceptional circumstance that: (i) is known to the insured; (ii) the insured knows, or a reasonable person in the circumstances could be expected to know, is a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; (iii) is not a matter that the insurer could reasonably be expected to make the subject of a question under para (a); and (iv) is not a matter covered by s21(2) (ICA ss21A(3) and (4)).

If the insurer does the first of these things and, in answer to each question, the insured discloses each matter that is known to the insured and a reasonable person in the circumstances could be expected to have disclosed in answer to that question, the insured is taken to have complied with the duty of disclosure in relation to the contract (ICA s21A(6)).

If the insurer does the second of these things and, in answer to each question referred to in para (a) above, the insured discloses each matter that is known to the insured and a reasonable person in the circumstances could be expected to have disclosed in answer to that question and the insured also complies with the request referred to in para (b) above, the insured is taken to have complied with the duty of disclosure in relation to the contract (ICA s21A(7)). The onus of proving that a matter is an exceptional circumstance covered by para (b)(iii) above lies on the insurer (ICA s21A(8)).

If the insurer does either of these things and also asks the insured to disclose any other matters that would be covered by the duty of disclosure in relation to the contract, the insurer is taken to have waived compliance with the duty of disclosure in relation to those matters (ICA s21A(5)).

ICR r3(1) prescribes a form to be used for the purposes of s22(2) but it is not mandatory. Under ICR r3(1), the form of writing that may be used to inform an insured of the matters mentioned in ICA s22(1) is: (a) for a contract of general insurance that is not an eligible contract of insurance (see above), the form set out in Part 1 of ICR Schedule 1; (b) for a contract of life insurance, the form set out in Part 2 of ICR Schedule 1; and (c) for an eligible contract of insurance, the form set out in Part 3 of ICR Schedule 1.

Under ICR r3(2), the words that may be used to inform an insured orally of the matters mentioned in s22(1) for an eligible contract of insurance are set out in ICR Schedule 2. ICA s69 provides for the circumstances in which information that is required by other provisions of the Act to be given in writing may be given orally.

This stops insurers bootstrapping representations into warranties in or conditions of a contract which, if breached, might otherwise entitle the insurer to terminate the contract.

Under ICA s26(3), this extends to the provision of insurance cover in respect of a person who is seeking to become a member of a superannuation or retirement scheme or who is a holder, or is applying to become a holder, of an RSA.

ICA s28(3) provides that if the insurer is not entitled to avoid the contract or, being entitled to avoid the contract has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.

ICA s33 provides that these rights are exclusive and that the insurer has no other rights in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into and in respect of a misrepresentation or incorrect statement.

ICA s29(4) provides that if the insurer has not avoided the contract, it may, by notice in writing given to the insured before the expiration of 3 years after the contract was entered into, vary the contract by substituting for the sum insured (including any bonuses) a sum that is not less than the sum ascertained in accordance with the formula specified in that section.

ICA s30 provides a formula for reduction in the amount of cover where there has been a misstatement as to the age of a life insured.

Again, ICA s33 provides that these rights are exclusive and that the insurer has no other rights in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into and in respect of a misrepresentation or incorrect statement.

Note this is not an exhaustive list of ICA obligations.

In relation to the first bullet point (ICA s35), the prescribed minimum standards of cover can be found in Part II (rr5-29) of the Insurance Contracts Regulations.

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Overview of Superannuation Industry (Supervision) Act 1993

Significant taxation concessions (in the form of a 15% tax rate) are available for exempt public sector superannuation funds and for resident regulated superannuation funds, self managed superannuation funds, ADFs and PSTs that have a certificate from APRA confirming their compliance with SISA (see SISA ss40-44). Private sector funds and non-exempt public sector super funds that want to receive the tax concessions therefore have to comply with s19 and either have a corporate trustee or limit themselves to providing old-age pensions. That then gives the federal government the capacity to regulate their activities, using its power to legislate with respect to corporations (s51(xx) of the Constitution) and old-age pensions (s51(xxiii) of the Constitution). In this way, the Federal government has been able to substantively regulate the provision of superannuation benefits even though it does not have direct legislative power to do so.

Groups of individuals and bodies corporate that are not a "constitutional corporation" cannot apply for a licence that would allow them to act as the trustee of a public offer fund (s29C).

An RSE licensee must ensure that the number of its RSE licence or its ABN is included in each document it gives to APRA in its capacity as RSE licensee and any other document in which it identifies itself as an RSE licensee or as the trustee of a registrable superannuation entity (s 29DC, as modified by Modification Declaration No 4 dated 3 December 2007). It must also ensure that a registered superannuation entity's registration number or its ABN is included in each document it gives to APRA that relates to the entity and any other document in which it identifies itself as the licensee or trustee of the entity (s29MB, as modified by Modification Declaration No 4 dated 3 December 2007).

Under SISA s29H, a RSE licensee's risk management strategy must set out reasonable measures and procedures that the trustee is to apply to identify, monitor and manage risks that arise in relation to its activities, or proposed activities, as an RSE licensee and in relation to all its other activities, or proposed activities, to the extent that they are relevant to its activities, or proposed activities, as an RSE licensee. This includes: (i) the risks associated with governance and decision-making processes; (ii) the risks that arise as a result of entering into outsourcing arrangements (other than arrangements that relate only to a particular registrable superannuation entity); (iii) the risks arising from any changes to the RSE licensee law; and (iv) the risks of potential fraud and theft. It also includes the circumstances in which an audit of the risks referred to in s29H is to be undertaken and such other matters as are prescribed by the regulations.

Under SISA s29P, a superannuation entity's risk management plan must set out reasonable measures and procedures that the RSE licensee of the entity is to apply to identify, monitor and manage the risks that arise in operating the entity. This includes: (i) the risks to the investment strategy relevant to the entity; (ii) the risks to the entity's financial position; and (iii) the risks from entering into outsourcing arrangements relating to the entity. It also includes the circumstances in which an audit of the risks referred to in s29P is to be undertaken and such other matters as are prescribed by the regulations.

These risk management strategies and plans must be signed by the trustee and may incorporate other documents by reference, provided they are made available free of charge to members of the public (eg a fund's risk management plan may incorporate by reference provisions from the trustee's risk management strategy and vice versa). They must also be kept up to date and reviewed at least yearly (ss29HA and 29PA).

SISR r4.07A requires the risk management strategy for an RSE licensee to assess each "material risk" relevant to the licensee and SISR r4.07B requires the risk management plan for a superannuation entity to assess each "material risk" relevant to the entity. In each case, they must take into account the likelihood of the risk being realised and the consequences if it is, and specify the way in which the trustee proposes to treat that risk. This includes its risk response strategy  and the measures and procedures it will apply to address the risk, as well as an assessment of any residual risk. It also must include a statement of the proposed arrangements for internal oversight, implementation and reporting in relation to the management of material risks by the trustee. For these purposes, "material risk": (a) in relation to an RSE licensee, means a risk that has the potential to adversely affect the interests of members or beneficiaries of the registrable superannuation entities for which the trustee is the RSE licensee or have a significant impact on the business operations, reputation, rate of return, profitability or net assets of the trustee; and (b) a superannuation entity, means a risk that has the potential to adversely affect the interests of members or beneficiaries of the entity or have a significant impact on the business operations, reputation, rate of return, profitability or net assets of the entity.

Of course, the fact that superannuation entities are required by SISA to be structured as trusts with trustees imports all of the common law duties of trustees. We considered these duties in lecture 10 when we looked at the common law fiduciary duties of REs of managed investment schemes. Many of these statutory covenants replicate and codify those common law duties.

Under SISA s55(1), a person must not contravene a covenant contained, or taken to be contained, in the governing rules of a superannuation entity. A contravention of s55(1) is not an offence and does not result in the invalidity of a transaction (s55(2)). However, a person who suffers loss or damage as a result of conduct by another person in contravention of s55(1), may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention (s55(3)). Such an action may be begun at any time within 6 years after the day on which the cause of action arose (s55(4)).

It is a defence to an action for loss or damage suffered by a person as a result of the making of an investment by or on behalf of the trustee of a superannuation entity if the defendant establishes that the investment was made in accordance with an investment strategy formulated under a covenant referred to in s52(2)(f) (s52(5)). It is a defence to an action for loss or damage suffered by a person as a result of the management of any reserves by the trustee of a superannuation entity if the defendant establishes that the management of the reserves was in accordance with a covenant referred to in s52(2)(g) (s52(6)). These defences apply in relation to any action for loss or damage, whether brought under s55(3) or otherwise (s52(7)).

It seems reasonably clear that ss55 (1) and (3) also operate in relation to the deemed covenants by the directors of a corporate trustee under s52(8). Accordingly, such directors can be personally liable to members if the trustee does not comply with its covenants and they did not exercise a reasonable degree of care and skill to prevent that occurring.

Click here for a copy of the Superannuation Industry (Supervision) Regulations.

SISR r4.09 substantially repeats the covenant deemed to be contained in the governing rules of all superannuation entities under s52(2)(f). This is expressed to operate as a standard applicable to the operation of all superannuation entities. Making it an operating standard as well as a covenant means that a person who breaches it intentionally or recklessly commits a criminal offence as well as being potentially liable for civil damages.

The obligation to "give effect to" the investment strategy thus creates additional compliance obligations to ensure that fund investment activities accord with that strategy.

"Investment manager" is defined in SISA s10 to mean a person appointed by the trustee of a fund or trust to invest on behalf of the trustee. These provisions need to be borne in mind if you are ever negotiating an investment management agreement between the trustee of a super fund and an investment manager.

Note IFSA has a standard investment management agreement, which can be accessed from the IFSA web site, which serves as a useful starting point for commercial negotiations between a superannuation trustee and fund manager. The agreement sets out the duties and powers of the manager, including compliance with the investment instructions provided by the trustee, and regular reporting on investment performance.

The persons referred to in s101(1A) are: (a) a beneficiary or former beneficiary; (b) the executor or administrator of the estate of a former beneficiary; and (c) a person who has an interest in a death benefit or who claims to be, or to be entitled to death benefits through, such a person.

SISA s155(3) provides that if the trustee issues or redeems the interest at such a price, the trustee is taken to have acted in accordance with the governing rules of the entity. A contravention of s155 is not an offence, but it may give rise to civil liability under s156.

Click here for a copy of the Superannuation Industry (Supervision) Regulations.

SISR r13.15A operates as an exception to SISR r13.14, which prescribes as a standard applicable to the operation of all RSFs and ADFs that the trustee of a fund must not give a charge over, or in relation to, an asset of the fund. Again, it is needed because many derivatives and futures exchanges require clients or their brokers to lodge margin which is charged in favour of the relevant exchange or clearing house to secure performance of the client's obligations under the derivative contract.

SISR r13.15A(2) and schedule 4 define "approved body" to include various stock and futures exchanges including the ASX, SFE and their associated clearing houses. SISR r13.15A(2) also defines "derivative" as meaning a financial asset or liability the value of which depends on, or is derived from, other assets, liabilities or indices and "derivatives contract" as meaning an option contract or futures contract relating to any right, liability or thing.

Click here for a copy of Superannuation Circular II.D.7 – Derivatives.

Following amendments to SISR r13.15A in 2006, references to a Risk Management Statement or RMS in the above Circular are now read as references to a derivative risk statement.

Appendix 1 to Circular II.D.7 contains guidelines for trustees of superannuation funds to prepare an RMS. It is divided into 2 parts. Part A is a 'Fund Reference RMS' which sets the framework for derivative investment and links it to the fund's investment strategy. Part B is a detailed RMS which covers all detailed aspects of derivatives use and control by the party responsible for implementation of derivative investment decisions. Where a trustee has employed the services of an external investment manager, the trustee prepares Part A and the investment manager prepares Part B. Usually an investment manager will prepare a generic Part B for all portfolios it manages using the same risk management practices.

Note that the approved form of audit report under SISA s113 (see Superannuation Circular IV.A.4 – Responsibilities of the Approved Auditor, August 1999) requires the auditor to state that s/he has conducted tests in accordance with Australian Auditing Standards as necessary to provide reasonable assurance whether the trustee of the fund has in all material respects adhered to the guidelines for preparing risk management statements issued by APRA in Circular II.D.7 on Derivatives.

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Overview of Retirement Savings Account Act 1997

Click here for a copy of the Retirement Savings Account Act 1997.

RSAs are intended to be simple, low cost capital-guaranteed alternatives to superannuation. RSAs are subject to concessional rules under income tax and social security law.

An RSA can only be provided by a life insurance company as a policy (s8(2)).

No financial institutions have been prescribed for the purposes of s11(2).

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Marketing Insurance and Superannuation Products

This basically means that the wealthy/sophisticated investor exclusion does not apply to most general insurance products.

Note that you don't need a financial services licence just to handle or settle an insurance claim on behalf of a client (CR r7.1.33).

Again, this basically means that the wealthy/sophisticated investor exclusion does not apply to superannuation or RSA products.

CA s1010B(2)(b) provides that the issue of any superannuation product is taken to occur in the course of a business of issuing financial products, ensuring that a PDS is always required for the issue of a superannuation product.

It should be noted that there are substantial modifications of, or embellishments to, these requirements in the Corporations Regulations.

By way of example, under CR r7.7.10, it is no longer necessary for an SOA to be given in relation to general insurance products other than sickness and accident insurance or consumer credit insurance.

CR r7.7.08A also permits a combined FSG and PDS to be issued as a single document for general insurance and life risk insurance products if the providing entity is a representative or a related body corporate of the product issuer. Note that CR r7.7.08A does not apply to a superannuation product to which Subdivision 4.2B of Division 4 of Part 7.9 applies (r7.7.08A(1B)). The reason is that the Government wants to ensure that the consumer is provided with a short and simple PDS for superannuation products (see below), and combining the PDS with other documents is not consistent with this objective.

By way of further example, there are modifications to the PDS and application form requirements for employer sponsored and successor funds in CR rr7.9.12, 7.9.13 and schedule 10A. CR r7.9.14 also modifies the right to return a superannuation or RSA interest that has been issued or sold in contravention of s1016E where it is subject to preservation rules or cashing restrictions.

In ASIC v PFS Business Development Group Pty Ltd [2006] VSC 192, the Supreme Court of Victoria held that companies engaged in establishing and marketing self-managed superannuation funds were carrying on a "financial services business" that required the holding of an Australian financial services licence.

Some of the problems that marketing life insurance can give rise to are highlighted in ASIC's 2005/06 investigation into insurance advice provided by GE Money. Following a review of over 150 customers files, ASIC became concerned about a number of GE Money insurance sales practices, including: (1) GE Money had a practice of advising customers to take out consumer credit insurance life cover (which would pay out the GE Money loan on their death) as well as a term life policy (which would pay a lump sum on death to the customer's estate) when it would have been cheaper for the customer to take out one term life policy to achieve the same result; (2) GE Money routinely advised customers, who were single and had no dependants, to take out life insurance to pay out the loan to GE Money when it was not clear that it was in the customer's interests to do so; (3) GE Money might have recommended that customers take out more life insurance than they needed because GE Money: (a) routinely did not take into account the level of customers' superannuation savings; (b) sometimes did not take into account life insurance cover that was part of customers' superannuation; and (c) sometimes recommended a higher level of insurance cover than the customer records suggested they needed; and (4) where an existing customer sought further credit, GE Money's practice was to provide a new loan package (incorporating the existing loan balance) and replace the existing CCI life policy with a new one. These customers were not told about the potential problems with this approach, including that if a health condition arose before the issue of the replacement policy, they might not be able to make a claim. GE Money ultimately gave enforceable undertakings to ASIC that it would: (1) stop recommending that customers take both CCI life and term life policies; (2) stop advising single customers with no dependants to take out life insurance to pay the GE Money loan unless there is a clear benefit to the customer; (3) undertake a review, both internally and by an independent compliance expert, of its sales practices; and (4) offer compensation to affected consumers. See ASIC Media Release 06-080.

Subdivision 4.2B of Division 4 of Part 7.9 applies to all superannuation products, other than those that consist solely of an interest in a defined benefits fund or a pension product (CR r7.9.11K). Combined accumulation/pension products and combined accumulation/defined benefits products, as well as pure risk products, are still included in the regime. However, a person is able to apply to ASIC, on a case-by-case basis or on a product-wide basis, for relevant relief from these requirements, where appropriate.

The modified PDS requirements for superannuation products in CR schedule 10D are quite prescriptive. For example, the length of a PDS (not including any matter in writing that is applied, adopted or incorporated by the PDS) for must not exceed: (a) 8 pages if it is printed on A4; (b) 16 pages if it is printed on A5; or (c) 24 pages if it is printed on DL. The minimum font size for text in the PDS is 8 points for the name, address, ABN, ACN and AFSL of the person giving the PDS and 9 points for all other text.

The PDS must include sections which must be numbered and titled as follows:

1. About [name of superannuation product]

2. How super works

3. Benefits of investing with [name of superannuation product]

4. Risks of super

5. How we invest your money

6. Fees and costs

7. How super is taxed

8. Insurance in your super

9. How to open an account.

The PDS may include additional sections after sections 1 to 9 and may include other information, provided it does not contravene the limitations on length and font size mentioned above. The regulations contain further requirements as to what can and can't be included in each section mentioned above.

The Government has published a sample PDS for a superannuation product for guidance.

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Insurance Agents and Brokers

Note that the Insurance (Agents and Brokers) Act 1974 was repealed as part of the FSR reforms, although many of the provisions in the Act were simply carried across to the Corporations Act or Corporations Regulations.

Binders and commission arrangements have a flavour of acting for both sides and raise conflict issues to which brokers need to be sensitive.

A particularly egregious example of this emerged in October 2004, when NY Attorney General Eliot Spitzer announced that he was suing the leading US insurance brokerage firm, Marsh & McLennan, alleging that it steered unsuspecting clients to insurers with whom it had lucrative payoff agreements and that the firm solicited rigged bids for insurance contracts (see http://www.oag.state.ny.us/media_center/2004/oct/oct14a_04.html and http://www.oag.state.ny.us/media_center/2004/oct/oct14a_04_attach1.pdf). The accompanying civil complaint alleged that for years Marsh received special payments from insurance companies that were above and beyond normal sales commissions. These payments, known as "contingent commissions", were characterized as compensation for "market services" but were, in fact, rewards for the business that Marsh and its independent brokers steered and allocated to the insurance companies. The complaint also alleged that Marsh occasionally solicited fake bids to deceive its customers into thinking that true competition had taken place for their insurance business. The complaint culminated in a settlement agreement under which Marsh & McLennan agreed to pay US$850 million in restitution to its policyholders, to adopt a new business model designed to avoid conflicts of interest and to issue a public statement apologising for "unlawful" and "shameful" conduct (see http://www.oag.state.ny.us/media_center/2005/jan/marshsettlement_pr.pdf).

Subsequently, ASIC conducted a review of the remuneration practices of general insurance brokers in Australia. The review did not find any evidence of the kind of systemic abuses uncovered in the US. ASIC did, however, identify some deficiencies in relation to Australian brokers' management of conflicts of interest and disclosure of remuneration. The review also highlighted the inherent conflict in the practice of paying volume bonuses or other types of contingent remuneration to brokers. In particular, ASIC found that more than half the brokers reviewed had contingent remuneration arrangements in place and most of those brokers placed a significant proportion of their business with insurers that paid extra commissions based on the volume of business placed with them. A copy of the review can be downloaded from: http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/IBRA_report_2005.pdf/$file/IBRA_report_2005.pdf.

CA s916D generally prohibits an AFSL holder from acting as an authorised representative for another licensee. S916E(1) provides an exception to that rule for a licensee acting under a binder given by an insurer.

S916E(2) makes it clear that when the broker is purporting to act under a binder, the broker is acting as agent for the insurer (reversing the common law position that a broker is the agent of the insured). This is so even if the broker actually exceeds their authority under the binder.

The FSG used by a broker which acts under a binder must identify the services provided under the binder, state that they are provided under a binder and explain the significance of the services being provided under a binder (see s942B(2)(i) and 942C(2)(j)).

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Insurance Premiums

The effect of this regulation is to require the licensee to make good any shortfall in its trust account. The insurer and insured are still entitled to amounts even if they have been withdrawn from the trust account and invested (r7.8.02(6A) and (6B)). ASIC has power to waive this minimum balance requirement (r7.8.02(6C)).

This repeats provisions that used to be found in s14 of the Insurance (Agents and Brokers) Act and reverses the position that would otherwise apply at common law because the broker acts as agent for the insured and not the insurer. The common law position was that payment of an insurance premium by the insured to the broker did not discharge the liability of the insured to the insurer for the premium so that if the broker became insolvent without accounting for the money to the insurer, the insurer could still recover the premium from the insured (Con-Stan Industries (Aust) Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226). Now payment to the broker is a good discharge to the insured.

Note that this section applies whether or not there is a binder in place between the insurer and the licensee.

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Industry Codes of Practice

The General Insurance Code covers all general insurance products except workers compensation, marine insurance, medical indemnity insurance, and compulsory third party insurance including where there is linked driver protection cover. It does not cover reinsurance. It does not apply to life and health insurance products issued by: a) life insurers; or b) registered health insurers.

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The Superannuation Complaints Tribunal

Click here for a copy of the Superannuation (Resolution of Complaints) Act 1993.

The Superannuation (Resolution of Complaints) Act establishes the Superannuation Complaints Tribunal. It is funded by a levy on trustees of regulated superannuation funds.

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