How to Safely Navigate Insurance Sales Regulations
If you’ve ever been to Paris, you’d be familiar with the craziness that is the roundabout that encircles the Arc de Triomphe. Dubbed Europe’s largest (and most dangerous) roundabout, there are twelve multi-lane avenues leading onto (and away from) the roundabout, which itself has no lane markings and regularly has up to ten impromptu lanes of cars edging around the historical monument at its centre. It’s so notorious many car insurers refuse to cover any damage that occurs while travelling on it.
I bring this up because right now many people in the insurance industry are probably feeling like they’re on this roundabout, trying to navigate all the incoming, interconnected regulatory change.
Here are some tips to help steer yourself into the clear…
What is it?
Designed to prevent pressure selling of financial products and provide consumers with greater decision-making powers, the enhanced anti-hawking provisions will prevent the unsolicited marketing and sale of the majority of financial products (including insurance) to retail clients.
‘Unsolicited contact’ is contact made by telephone call, face to face meetings, or any other real-time interaction, discussion or conversation, that a consumer did not consent to. In order for a consumer to have consented, they must make a positive, voluntary and clear request to be contacted about the financial product. Some basic banking products will be exempt from the anti-hawking provisions, as announced by the Treasurer on 8th July.
The new rules come into effect from 5th October.
What to watch out for
Firstly, if a customer does consent to the contact, the consent is only valid for six weeks from the time the contact is initiated. This means businesses will probably need to keep records that prove the customer’s consent is ‘positive, clear and informed’ and that the contact was actioned within the timeframe allowed.
Secondly, providers will be prohibited from requesting or inviting a consumer to ask or apply for or purchase a financial product. In other words, this prevents sneaky operators from getting around the prohibitions by asking a customer to request a financial product or fill in an application.
Where things become really tricky, however, is in relation to how businesses, particularly insurance brokers, attract new clients. For example, if the majority of your customers are sourced through a referral system (from, say, a mortgage broker), then the initial referrer must take appropriate steps to illicit consent from the customer to receive an offer (call/meeting) from you, the insurance provider or distributor.
There may also be some ambiguity in relation to brokers operating under a general advice model when dealing with customers who ask for one type of product but are actually in need of another. Because providers are not permitted to offer a product to a customer unless they have expressly consented to receive that offer, it may be difficult to steer a customer towards the correct product without asking for personal financial information, thus contravening the terms of the AFS license.
How you can prepare
Take a close look at the way you currently recruit new customers and identify whether there are any potential risks of unsolicited sales occurring. Make sure your review includes your distributors and other third parties involved in your sales process as they may also be subject to the regulations.
ASIC has released Consultation Paper CP 346, which covers the updates that will be made to Regulatory Guide 38 The hawking prohibitions to capture the reforms. Businesses should review this paper (even if they do not intend to provide feedback) as it will help them prepare for the new regime.
Deferred sales model for add-on insurance
What is it?
5th October 2021 also marks the commencement of the deferred sales model for add-on insurance. Under the deferred sales model, providers of add-on insurance must wait four days after the customer has acquired the primary product before they can offer them the add-on insurance.
The provisions also apply to third-party providers, such as brokers, who have a relationship with a principal product provider. There is an exemption for financial advisers, but not for mortgage brokers or insurance brokers.
Add-on insurance is any product that is sold incidentally to another product or service, such as a mobile phone or a plane ticket. The insurance can be provided by the same person/business as the product, or by a third-party provider.
What to watch out for
Firstly, there are a number of products which are exempt from the deferred sales model, including: comprehensive motor insurance, compulsory third party (CTP) insurance for motor vehicles; comprehensive insurance for boats, motorcycles, motorhomes, caravans, and trucks; home and contents insurance; insurance sold within superannuation (including group life insurance); and products recommended by financial advisers in a personal advice situation. The regulations that will implement these exceptions are currently open for industry consultation. More information can be found here.
For products that are captured within the regulatory framework, there are, in fact, three periods to take not of in the deferred sales model:
- Pre-deferral period – begins when a customer indicates an intention to acquire a specific principal product. During this period, no sales can occur, however both written and verbal offers, requests and invitations to apply for an add-on insurance product can be made to a customer.
- Deferral period – triggered when a customer agrees to the offer of sale and is provided with the ‘Customer Information’ for the insurance. This is the 4 day deferral period, during which there can be no sales (to give the customer a chance to determine if they want to go through with the insurance purchase). It is also important to note that verbal invitations to apply for an add-on insurance product can only be made during this period if the customer initiates the contact. Written offers can still occur.
- Post-deferral period – starts at the end of the 4 day deferral period and runs for 6 weeks. During this period, the sale can be completed. Written offers to apply for the add-on insurance product can still occur but verbal invitations can only be made if the customer initiates the contact.
ASIC has prescribed the format that the ‘Customer Information’ must take (see: ASIC (Information under the Deferred Sales Model for Add-on Insurance) Instrument 2021/632). Essentially, the document reiterates to the potential customer that the insurance they are being offered is not compulsory and that they can opt-out of being contacted by the insurance provider. While electronic communication is preferred, ASIC will allow a hard copy of the Customer Information to be provided.
How you can prepare
On 28th July, ASIC released Regulatory Guide 275 The deferred sales model for add-on insurance (RG 275), which contains detailed information about how it will oversee the provisions, and a number of specific examples to help providers understand the model. The critical step that all businesses involved in the sale of add-on insurance should take is to gain a thorough understanding of the regulations by reviewing this guidance and, where applicable, mapping a process for the business to ensure transactions are compliant with the new rules from 5th October.
Managing your compliance responsibilities
The reforms summarised above are just two of the regulatory changes that commence on 5th October. There are also the new breach reporting obligations and information checking protocols which start a few days earlier on 1st October.
You can view our roadmap of the incoming changes here.
Complete an audit to determine which regulations will impact your business. Not all products or services are captured under each piece of legislation.
Then, look for ways that your business can streamline your processes to administer linked compliance requirements (for example, you may benefit from creating one system to manage both the distribution records that need to be kept for DDO along with your deferred sales and anti-hawking contact records).
Finally, it is vital that all your staff are up to date with their responsibilities and the best way to achieve this is through training. Talk to us about how we can tailor a program specific to your needs.
With all this change taking place in a very short timeframe, the compliance roundabout is going to get crowded very quickly. Planning ahead and preparing your compliance resources will be critical to navigating your path to success.
With October presenting a regulatory labyrinth for organisations, Financial Education Professionals has created a bundle of CPD topics to clarify the why, what, when and how for you.
Our online CPD suite includes:
- Deferred sales model for add-on insurance (RG 275)
- Anti-hawking provisions for insurance
- Design and Distribution Obligations
- Complaints Handling and dispute resolution (RG271)
- Breach Reporting
Let us share the load and help you prepare your compliance resources. Find out more
This article originally appeared on Financial Education Professionals Blog and has been published here with permission.
Advisr does not provide advice and does not hold a financial service license (AFSL). All information above has been provided by Financial Education Professionals.