The royal commission: the lowdown for insurance brokers

Advisr asked Compliance & Governance Specialist Paul Muir to break down the findings of the royal commission in terms of how it relates to and might affect insurance brokers. While the commission was mainly focussed on the big banks rather than brokers, some of the report findings is likely to affect how brokers operate.

Commissioner Hayne succinctly summarises the purpose and findings in the introduction to his final report. The purpose of the Commission was to inquire into, and report on, whether any conduct of financial services entities might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations. The conduct identified includes conduct by many entities that has taken place over many years causing substantial loss to many customers but yielding substantial profit to the entities concerned. Very often, the conduct has broken the law. And if it has not broken the law, the conduct has fallen short of the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them.

Whilst the Royal Commission focused upon banking, financial advice, superannuation and insurance (and industry regulators) the main focus and certainly media attention was on the misconduct of the big 4 banks and AMP. Having said that, a number of horrendous case studies were told at the insurance public hearings. As an aside, most attention of the Final Report of the Commission has been focused upon Volume 1 of the report containing the 76 recommendations. Volume 2 examines the case studies with Hayne providing his view on what the case study showed and his conclusions. Volume 2 should be read by all to industry participants to understand how certain behaviours and conduct can cause customer detriment. Volume 2 is insightful.

Insurance was included within the Commissions Terms of Reference under the generic heading of financial services. Initially the Commissioner wrote to 61 financial services entities (including insurers) asking questions on issues of misconduct. The Commissioner also invited regulators and members of the public to make submissions. The Commission proceeded on the basis of case studies through a series of public hearings between February and November 2018. The public hearing into insurance was conducted between 10 and 21 September 2018. The Terms of reference and subsequent public hearings did not specifically focus upon insurance brokers.

It is important to understand this was a Royal Commission into misconduct in the financial services industry. It was not a Royal Commission into the financial services Industry per se and the focus was not on good conduct. Due to the absence of specific reference to insurance brokers it can be accepted that there was nothing in the submissions that required the Commission to specifically call out insurance brokers for misconduct of a nature that other sectors of the industry engaged in. That could be interpreted as a good outcome.

It is important to understand this was a Royal Commission into misconduct in the financial services industry. It was not a Royal Commission into the financial services Industry per se and the focus was not on good conduct. Due to the absence of specific reference to insurance brokers it can be accepted that there was nothing in the submissions that required the Commission to specifically call out insurance brokers for misconduct of a nature that other sectors of the industry engaged in. That could be interpreted as a good outcome.

In the 76 Commission recommendations there was no specific reference to insurance brokers however that does not mean they are untouched by the recommendations. There are a number of recommendations that touch upon the activities of insurance brokers. The most obvious is recommendation 2.6 where, by 2022, a Government review should consider whether the general insurance exemption on conflicted remuneration is justified. Hayne adopts a strong position on conflicted remuneration. He states this in terms of his sixth norm of conduct ''when acting for another, act in the best interests of that other.'' The Government in their written response has agreed with this recommendation. In context of those recommendations applying to financial planners and mortgage brokers it appears this is a clear message to general insurance brokers that they have 3 years to develop a fairer remuneration model. The challenge will be to develop a model where independent and affordable insurance advice is provided to retail clients excluding commissions. Other recommendations potentially having impact upon insurance brokers are recommendations 4.5 (pre-contractual non-disclosure and misrepresentations); 4.7 (Unfair contract terms); 4.8 (claims handling) and 4.6 (External dispute resolution). As an AFSL holder, insurance brokers should be aware of the heightened scrutiny of the industry by ASIC especially recommendation 6.2 where in its approach to enforcement ASIC's starting point will be to consider whether a court should determine the consequences of a contravention.

I'm going to consider this question from a different perspective. All 76 recommendations are proposed to be implemented through either existing laws or industry codes. We already have a strong regulatory framework so more needs to be done rather than simply complying with black letter law. Insurance brokers and other financial services entities need to consider how they will meet community standards and expectations through their behaviours and conduct not just compliance with black letter law. This requires a conduct and behavioural change approach utilising existing compliance frameworks. Its worth repeating Hayne's 6 norms of conduct as guiding principles in meeting community standards and expectations: 1. Obey the law; 2. Do not mislead or deceive; 3. Act fairly; 4. Provide services that are fit for purpose; 5. Deliver services with reasonable care and skill; and 6. When acting for another, act in the best interests of that other. In short those recommendations that achieve the 6 norms of conduct should be adopted.

It will take time for recommendations to flow through to regulatory change. However, Insurers and insurance brokers should already be acting in a manner that embraces the principles underlying the recommendations. They need to develop positions and business models that adequately manage issues such as conflicted remuneration adopting solutions that recognise the inherent conflict and is in the best interests of consumers. Boards and senior executives need to drive the tone from the top in setting expectations of desired conduct and behaviours. The organisations purpose needs to permeate through all levels of the business with remuneration rewarding good behaviour. Industry Codes need to be considered and amended to reflect community standards and expectations.

Act fairly from the customers perspective of fairness and deliver fairness through products, services and conduct and do so consistently. At an individual level act ethically and with regard to professional standards of conduct and call out those who do not, without fear or favour. We are all custodians of the reputation of our industry.

The insurance industry is complex and the proposed regulatory change will only add additional layers of complexity. External experts such as myself bring a wealth of experience (in my case 35 years) together with independence to assist businesses to respond in a customer focused manner. A deep understanding of the insurance ecosystem enables a quick response to the changing landscape tailored to the unique customer value proposition of the business.