Selling insurance – an update on hawking

Treasury has set 30 June 2020 as the date for introducing legislation into Parliament to make the anti-hawking changes recommended by the Royal Commission¹. Given that it might not pass until after that date, it is likely to be around a year before the changes commence. However, that should not be taken as a reason for inaction. We already know most of what we need in order to respond to the Royal Commission's recommendations and to prepare for the changes when they come.

What will the changes look like?

There already exists an outright prohibition on offering financial products for issue or sale during unsolicited meetings with retail clients. That will remain, unchanged.

A similar prohibition exists with respect to unsolicited telephone calls to retail clients, however that is currently subject to an exception that allows such calls where prescribed timing, disclosure and other requirements are met. The Royal Commission's recommendation is that that exception be removed.

The Royal Commission also recommended that a formal definition of "unsolicited" be established, to improve the clarity of that important term. Commissioner Hayne's view was that that definition "might usefully be based" on ASIC's existing guidance².

So, for those product providers which are not currently using the exception to make outbound telephone calls, it does not look like there will be very much change at all. Meetings and calls can be had provided they are not "unsolicited" and ASIC's guidance, or something similar, will continue to apply in determining whether that is so.

However, I'd suggest there is value in delving a little deeper. There is a good deal that can be taken out of the Royal Commission's findings and ASIC guidance to help determine whether the letter and intent of the anti-hawking requirements are being met today and to prepare well for the future.

What is a "solicited" meeting or call?

As stated above, the Royal Commission referred favourably to ASIC's guidance on the meaning of the word "unsolicited". While that guidance has always been important, it now carries additional weight and will likely form part of the amended legislation when it comes. Let's look carefully, then, at what it says.

ASIC states that a meeting or telephone call will be unsolicited unless it takes place in response to a "positive, clear and informed" request from the customer.

For a request to be "positive", there must be a "conscious decision" and an "active step" by the customer. ASIC points out, quite naturally, that an opt-out approach will not normally achieve this. It also states that, where a request is sought through a document, that should be done in a way that clearly brings the request to the customer's attention. A standalone request will be the safest approach to achieving this. It is also possible to obtain requests through a document or transaction which also deals with other matters - for instance, where the customer is asked whether they would like a meeting or call to discuss other products as part of an online transaction or application form – however those will need to be treated with particular care.

In relation to ASIC's requirement that a request be "clear", there needs to be some specificity about the products the customer wishes to discuss. ASIC's guidance states that customers should be encouraged to identify the products they are interested in. Commissioner Hayne's comments, that a meeting to discuss one type of product may not be used for the unsolicited offering of some other type of product, emphasise the point. Product providers should not, therefore, be inviting customers to make a general request to discuss all products. Instead, they need to approach the matter in a way which allows the customer to specify particular products or product classes they are interested in. This will be easier to do in some contexts than others.

The third part of ASIC's test is that the request must be "informed". For that to be the case, the customer needs to be given enough information to allow them to "carefully consider" whether to request the meeting. This might be relatively easy to achieve online, where summaries of cover and Product Disclosure Statements can be made available, but may be more challenging in other contexts.

Once a "positive, clear and informed" request has been made, the product provider will need to make sure that the meeting or call remains within the scope of the request. That scope will depend principally on the terms of the request made and, as ASIC states, what a reasonable person would expect to be discussed having regard to those terms.

ASIC goes on, however, to state that regard may also be given to "any previous dealings" between the product provider and the customer. It illustrates its point by providing examples of how that might work. Most relevantly, it states that the offer by a doctor of an insurance product during a medical examination would generally be "unsolicited", however that the offer of travel insurance by a travel agent during a meeting to organise an overseas holiday would generally be acceptable. That conclusion is presumably based on the view that a reasonable person would expect travel insurance to be raised during such a meeting, despite it not having been specifically mentioned in the request.

While the surrounding circumstances of a meeting or call will be relevant to determining whether a meeting or call has been solicited, I think reliance on "previous dealings" should be treated with caution. If there is any doubt at all, it will be safer for the product provider to have a process in place to check with the customer before going ahead; to make sure that they have demonstrably received a "positive, clear and informed" request.

What other factors should be considered in meeting the hawking requirements?

The anti-hawking prohibition exists to protect customers from the vulnerability that can arise in the case of unsolicited meetings and calls; or as Commissioner Hayne puts it, an "asymmetry or power and information". In considering how to meet the requirement, therefore, there will be value in having regard to the concerns identified as underlying the need for the anti-hawking change. Responding to those concerns will also be relevant to meeting AFS licensee obligation to provide financial services "efficiently, honestly and fairly".

Providing the customer with an opportunity to prepare for the meeting or call

The Royal Commission considered the root of the problem with unsolicited sales to be that a customer who is not expecting a call will be unprepared for it. They will not, for instance, have had an opportunity to consider the product beforehand, whether it is suitable for their own personal circumstances, or whether there are other products available which might be more suitable. They will not necessarily know what questions to ask and they may not be well placed to judge the merit of the offer or to verify the truth of what is being said.

In applying ASIC's guidance, therefore, it will be valuable to consider whether the process being put in place allows the customer a real opportunity to consider the product concerned, their need for it and alternatives, before a sale is made.

Avoiding pressure selling

Another key concern raised in the Royal Commission was the high incidence of pressure selling found to have taken place in unsolicited calls. ASIC's direct life insurance review³, for instance, found offers being made of promotional items, the creation of a sense of urgency, the use of "objection handling" techniques and the use of other tactics aimed at reducing informed decision making. While such sales practices should be avoided as a matter of course (at the very least to meet the fairness obligation), that they could be practised is likely to be a useful red flag that the intent of the anti-hawking prohibition has not been met. A customer that has made a "positive, clear and informed" request for a meeting or call should be less prone to such influence.

Considering product complexity

The Royal Commission observed that customers often received inadequate explanations of the product during unsolicited meetings and calls, particularly as to its exclusions. An appropriately "informed" customer attending a solicited meeting or call should be less exposed to that risk. Commissioner Hayne also expressed the view that some products are just too complicated to sell during a single meeting or telephone call. Product providers should therefore consider which of their products are appropriate for sales during meetings and telephone calls and, for those products, whether any precautions should be taken to help the customer understand the scope of cover provided. The requirements of the incoming Product Design and Distribution legislation⁴ will also be relevant to this area.

Applying these principles

The application of these principles will obviously need to have regard to the circumstances of each provider, including their customer base, the products being sold, the nature of meetings and calls they wish to hold and the means available for seeking a compliant request. In each case, though, it will be prudent to review whether the provider's meetings and calls comply, having regard to both today's understanding of the word "unsolicited" and also to the other factors referred to above.

For more information on the hawking requirements as they apply to insurance products, please contact insurance advisory principal, Mathew Kaley.

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¹ Treasury "Restoring Trust in Australia's Financial System, Financial Services Royal Commission Implementation Roadmap", 19 August 2019
² As set out in ASIC Regulatory Guide 38
³ ASIC Report 587, The sale of direct life insurance
⁴ Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019