General Insurance Regulatory Reforms – COVID-19 impact
Originally Published by Mathew Kaley on Tuesday, March 24, 2020 8:47:14 AM
As Australia heads into a COVID-19 lockdown, and the insurance industry and its regulators move to remote working, what does it all mean for the incoming raft of regulatory reforms?
Statements made by the government and regulators in the last week indicate that some of the incoming regulatory reforms may need to be delayed. That is likely to be a great relief to those in the insurance industry who are currently working hard to implement the changes and wondering how they will be delivered in a COVID-19 environment. The information currently available, though, provides little detail and no certainty on which changes will be made. Further guidance would be of significant value. As that becomes available, industry participants will need to carefully re-calibrate their implementation plans to reflect the changes, while paying close regard to the interdependencies involved.
While Parliament has been sitting this week, the position after that is uncertain. Officially, Parliament is not scheduled to sit again until 12 May. That, of course, may change - noting that the Budget has already been deferred until October.
The May dates and the subsequent sittings set down for June were presumably targeted for passing the swathe of draft legislation that Treasury released for consultation in January. The extent to which that will still happen with depend on what can be done in the meantime; by the government, regulators and the industry.
Treasury is key to much of this work. It has, quite understandably, applied its focus to the country's economic response to the virus and to liaising closely with business regarding its impacts. It is hard to imagine that, in those circumstances, it will also be able to meet the significant workload involved in reviewing submissions received on the draft legislation released in January and finalising its content.
We have seen no clear statement from Treasury on its current views on this work, though the Council of Financial Regulators, which is made up of Treasury, the Reserve Bank, ASIC and APRA, did make the following statement last week:
Statements made by the government and regulators in the last week indicate that some of the incoming regulatory reforms may need to be delayed. That is likely to be a great relief to those in the insurance industry who are currently working hard to implement the changes and wondering how they will be delivered in a COVID-19 environment. The information currently available, though, provides little detail and no certainty on which changes will be made. Further guidance would be of significant value. As that becomes available, industry participants will need to carefully re-calibrate their implementation plans to reflect the changes, while paying close regard to the interdependencies involved.
The situation
Government and Treasury
While Parliament has been sitting this week, the position after that is uncertain. Officially, Parliament is not scheduled to sit again until 12 May. That, of course, may change - noting that the Budget has already been deferred until October.
The May dates and the subsequent sittings set down for June were presumably targeted for passing the swathe of draft legislation that Treasury released for consultation in January. The extent to which that will still happen with depend on what can be done in the meantime; by the government, regulators and the industry.
Treasury is key to much of this work. It has, quite understandably, applied its focus to the country's economic response to the virus and to liaising closely with business regarding its impacts. It is hard to imagine that, in those circumstances, it will also be able to meet the significant workload involved in reviewing submissions received on the draft legislation released in January and finalising its content.
We have seen no clear statement from Treasury on its current views on this work, though the Council of Financial Regulators, which is made up of Treasury, the Reserve Bank, ASIC and APRA, did make the following statement last week:
Given the disruption being caused by COVID-19, Council members are examining how the timing of regulatory initiatives might be adjusted to allow financial institutions to concentrate on their businesses and assist their customers.
So, we should stay tuned for more on this shortly.
ASIC also has a significant part to play. It currently has a raft of regulatory related matters it is consulting on and a good deal more on which it will need to provide guidance (see below). In that regard, it announced yesterday that it has:
ASIC
ASIC also has a significant part to play. It currently has a raft of regulatory related matters it is consulting on and a good deal more on which it will need to provide guidance (see below). In that regard, it announced yesterday that it has:
immediately suspended a number of near-term activities which are not time-critical. These include consultation, regulatory reports and reviews, such as the ASIC report on executive remuneration, updated internal dispute resolution guidance and a consultation paper on managed discretionary accounts. Stakeholders will shortly be notified of deferred consultation and publications relevant to them.
It is likely that at least a few of ASIC's projects will be regarded as time-critical. Its Regulatory Guide on Design & Distribution Obligations, for instance, may be one. As for Treasury, more information should be provided shortly.
APRA also issued a brief release yesterday, which included a statement that it would be "suspending all substantive public consultations and actions to finalise revisions to the prudential framework". While it says it will keep the situation under review, it stated that it does not currently expect to re-commence consultation on "non-essential" matters before 30 September 2020 – a full 6 months away.
For general insurers, APRA's work will include its finalisation of Prudential Standard CPS 511 and its close involvement in developing the Financial Accountability Regime. An early clarification on whether all of that is to be delayed would be valuable.
The impacts for those in the Insurance Industry tasked with implementing regulatory reform will be obvious to most readers of this article. Given the priorities currently being afforded to running the core business during this challenging time, it can be expected that companies' focus on regulatory reform projects will be impacted.
Remote working will undoubtedly have an effect. However good the technology, the regular project meetings and interactions needed to implement such complex change will be more difficult to hold. There's also the potential for suppliers and advisers to become less accessible or to cause delays. This could be particularly pronounced when it comes to the implementation of IT changes.
While no express relief has yet been provided, it seems that these strains are being recognised.
Having regard to these points, following is a quick snapshot of where the key regulatory reforms relevant to the general insurance industry currently stand and what still needs to be done.
Next week will mark the half-way point in the two-year transition period allowed for meeting the Design & Distribution Obligations, which will commence on 5 April 2021. There is little standing in the way of its path, though the finalisation by ASIC of its Regulatory Guidance, which was released for consultation in December 2019 will be very important.
Legislation extending the application of Unfair Contract Terms to insurance contracts was passed on 6 February 2020 and is scheduled to commence at the same time as the Design & Distribution Obligations on 5 April 2021. Given its focus on product terms and customer outcomes, its commencement at the same time as the Design & Distribution Obligations is likely to be given a priority.
On this topic, it is worth noting that Treasury initiated a separate consultation process in December 2019 on some potential broad reaching changes to the overall Unfair Contract Terms regime. These include the possibility of introducing penalties for breaches and a broader range of remedies. Although the consultation period for that work concludes this week, it is not essential to the matters referred to above so may not be given the same priority. If so, the risk of the existing Unfair Contract Terms provisions being altered before next year would likely fall away.
Signatories to the General Insurance Code of Practice are preparing to comply with the revised Code from 1 January 2021 and to have a family violence policy in place by 30 June 2020. We have seen nothing to suggest that this will change.
As to the proposal that some the Code provisions be enforceable under the Corporations Act, consultation has closed on the draft legislation released by Treasury in January 2020. If passed, that will allow ASIC to designate Code provisions as "enforceable", as part of its Code approval process, so as to attract civil penalties for their breach. The legislation remains to be finalised and ASIC has also indicated that it will be issuing guidance on its approach. Delays in this regard will not affect insurers' obligations to meet the revised Code requirements, though would defer the application of heavier regulatory outcomes for breach.
ASIC has not yet finalised its Regulatory Guide for use of the Product Intervention Power, which it consulted on in June 2019. While important, that will not prevent it from using the Power where it considers it appropriate to do so.
Businesses with a minimum annual consolidated revenue of $100 million are due to report on the risks of modern slavery in their operations and supply chain, along with the steps taken to respond to those risks, within 6 months of the end of their financial year. That's 31 December 2020 for entities with a 30 June financial year and 6 months later for those working to a calendar year. The report, of course, is only the last piece of the work involved. The risk assessment, review of supplier arrangements, making any necessary changes to those arrangements, training and associated actions will all need to be completed ahead of time. This is unlikely to change.
The Proposals paper released by Treasury in January 2020 envisages a significant role for APRA and ASIC in prescribing and providing guidance on a wide range of matters. That will include the content of accountability maps and statements, detail regarding the classification of entities, the responsibilities of accountable persons and notification timeframes and the criteria for seeking exemptions. Having regard to this, progress on the FAR seems heavily dependent on the regulators ability to give it continued priority. Further information on this significant reform would be valuable.
APRA commenced its consultation on proposed Prudential Standard CPS 511 on Remuneration in July 2019. It stated in January that it planned to finalise the Prudential Standard before 30 June 2020 with a view to its commencement on 1 July 2021. That process now looks particularly exposed to delay, though is likely to follow a similar path the FAR.
The draft Bill for extending financial services laws to insurance claims handling received a broad range of submissions, which are likely to result in some changes being made. ASIC guidance, for instance to clarify who is required to apply for an AFS Licence or authorisation, the process for applications and practical aspects of meeting the new obligations, will also be a very important component for an effective implementation. The proposed transition period, which requires licence applications and authorisations by 31 December 2020, has already raised concerns. That may now come under more pressure.
Consultation has closed on Treasury's draft Bill for introducing a Deferred Sales Model to Add-on insurance. That attracted strong submissions from a number of quarters and, accordingly, remains uncertain. ASIC will also need to provide guidance on these reforms, in particular regarding the proposed Information Statement to be provided to clients and the process relating to obtaining product exemptions. In the current circumstances, this looks like a lot of work still to do.
If the legislation is delayed, it may still be the case that a Deferred Sales Model will be applied to the motor dealer channel. ASIC proposed using its Product Intervention Power to do so, with respect to Add-on insurance and warranty products, in October 2019. It is possible that that will go ahead in the meantime.
Consultation on draft legislation to ban the hawking of financial products closed on 28 February 2020. The proposal to have the legislation commence on 1 July 2020, which has already been the subject of strong submissions, now looks particularly challenging given that questions that remain on some key points.
The draft Bill to give ASIC the power to set caps on commissions paid on insurance and warranty products distributed through the motor dealer and novated lease channels is also waiting on the next step from Treasury. That legislation needs guidance from ASIC on how it intends to exercise its new power, and it can be expected to consult on that. If the legislation does pass, it will have no effect until ASIC actually uses its power.
ASIC's consultation in May 2019 on changes to Regulatory Guide 165, regarding complaints handling and internal dispute resolution, remains subject to finalisation. The proposed changes, particularly to broaden the definition of a complaint and to reduce the timeframe for a response, have the potential to require a good deal of preparation, including in relation to IT systems.
ASIC originally proposed that most of the changes would commence on 30 June 2020, which was beginning to look unrealistic in any case. Its media release yesterday identified this reform as an example of matters that it has suspended. Complaint handling will, though, remain an important part of other reforms, most notably as a core component of implementing the Design & Distribution Obligations.
Consultation has also closed on draft legislation to replace the current duty of disclosure applicable to eligible contracts of insurance with the new duty to take reasonable care not to make a misrepresentation. While a few key elements of the change remain to be finalised, its scope is reasonably clear. Treasury has proposed that the new duty would apply from 5 April 2021, to align with the commencement of the Design & Distribution Obligations and the application of Unfair Contract Terms to insurance. While there are benefits in having these changes commence on that date, it does not seem to be critical that that occur.
Finally, the consultation period for draft legislation to reform the breach reporting obligations under the Corporations Act has also closed. Concerns had already been raised with meeting the proposed commencement on 1 April 2021, given the complexity of the new test. That pressure is likely to be exacerbated in the current circumstances.
For more information on insurance regulatory reforms, please contact insurance advisory principal, Mathew Kaley.
APRA
APRA also issued a brief release yesterday, which included a statement that it would be "suspending all substantive public consultations and actions to finalise revisions to the prudential framework". While it says it will keep the situation under review, it stated that it does not currently expect to re-commence consultation on "non-essential" matters before 30 September 2020 – a full 6 months away.
For general insurers, APRA's work will include its finalisation of Prudential Standard CPS 511 and its close involvement in developing the Financial Accountability Regime. An early clarification on whether all of that is to be delayed would be valuable.
Business
The impacts for those in the Insurance Industry tasked with implementing regulatory reform will be obvious to most readers of this article. Given the priorities currently being afforded to running the core business during this challenging time, it can be expected that companies' focus on regulatory reform projects will be impacted.
Remote working will undoubtedly have an effect. However good the technology, the regular project meetings and interactions needed to implement such complex change will be more difficult to hold. There's also the potential for suppliers and advisers to become less accessible or to cause delays. This could be particularly pronounced when it comes to the implementation of IT changes.
While no express relief has yet been provided, it seems that these strains are being recognised.
Having regard to these points, following is a quick snapshot of where the key regulatory reforms relevant to the general insurance industry currently stand and what still needs to be done.
Reforms already in transition
Design & Distribution Obligations
Next week will mark the half-way point in the two-year transition period allowed for meeting the Design & Distribution Obligations, which will commence on 5 April 2021. There is little standing in the way of its path, though the finalisation by ASIC of its Regulatory Guidance, which was released for consultation in December 2019 will be very important.
Unfair Contract Terms
Legislation extending the application of Unfair Contract Terms to insurance contracts was passed on 6 February 2020 and is scheduled to commence at the same time as the Design & Distribution Obligations on 5 April 2021. Given its focus on product terms and customer outcomes, its commencement at the same time as the Design & Distribution Obligations is likely to be given a priority.
On this topic, it is worth noting that Treasury initiated a separate consultation process in December 2019 on some potential broad reaching changes to the overall Unfair Contract Terms regime. These include the possibility of introducing penalties for breaches and a broader range of remedies. Although the consultation period for that work concludes this week, it is not essential to the matters referred to above so may not be given the same priority. If so, the risk of the existing Unfair Contract Terms provisions being altered before next year would likely fall away.
General Insurance Code of Practice
Signatories to the General Insurance Code of Practice are preparing to comply with the revised Code from 1 January 2021 and to have a family violence policy in place by 30 June 2020. We have seen nothing to suggest that this will change.
As to the proposal that some the Code provisions be enforceable under the Corporations Act, consultation has closed on the draft legislation released by Treasury in January 2020. If passed, that will allow ASIC to designate Code provisions as "enforceable", as part of its Code approval process, so as to attract civil penalties for their breach. The legislation remains to be finalised and ASIC has also indicated that it will be issuing guidance on its approach. Delays in this regard will not affect insurers' obligations to meet the revised Code requirements, though would defer the application of heavier regulatory outcomes for breach.
Product Intervention Power
ASIC has not yet finalised its Regulatory Guide for use of the Product Intervention Power, which it consulted on in June 2019. While important, that will not prevent it from using the Power where it considers it appropriate to do so.
Modern Slavery
Businesses with a minimum annual consolidated revenue of $100 million are due to report on the risks of modern slavery in their operations and supply chain, along with the steps taken to respond to those risks, within 6 months of the end of their financial year. That's 31 December 2020 for entities with a 30 June financial year and 6 months later for those working to a calendar year. The report, of course, is only the last piece of the work involved. The risk assessment, review of supplier arrangements, making any necessary changes to those arrangements, training and associated actions will all need to be completed ahead of time. This is unlikely to change.
Expected changes
Financial Accountability Regime (FAR)
The Proposals paper released by Treasury in January 2020 envisages a significant role for APRA and ASIC in prescribing and providing guidance on a wide range of matters. That will include the content of accountability maps and statements, detail regarding the classification of entities, the responsibilities of accountable persons and notification timeframes and the criteria for seeking exemptions. Having regard to this, progress on the FAR seems heavily dependent on the regulators ability to give it continued priority. Further information on this significant reform would be valuable.
Prudential Standard CPS 511
APRA commenced its consultation on proposed Prudential Standard CPS 511 on Remuneration in July 2019. It stated in January that it planned to finalise the Prudential Standard before 30 June 2020 with a view to its commencement on 1 July 2021. That process now looks particularly exposed to delay, though is likely to follow a similar path the FAR.
Claims handling as a financial service
The draft Bill for extending financial services laws to insurance claims handling received a broad range of submissions, which are likely to result in some changes being made. ASIC guidance, for instance to clarify who is required to apply for an AFS Licence or authorisation, the process for applications and practical aspects of meeting the new obligations, will also be a very important component for an effective implementation. The proposed transition period, which requires licence applications and authorisations by 31 December 2020, has already raised concerns. That may now come under more pressure.
Deferred Sales Model
Consultation has closed on Treasury's draft Bill for introducing a Deferred Sales Model to Add-on insurance. That attracted strong submissions from a number of quarters and, accordingly, remains uncertain. ASIC will also need to provide guidance on these reforms, in particular regarding the proposed Information Statement to be provided to clients and the process relating to obtaining product exemptions. In the current circumstances, this looks like a lot of work still to do.
If the legislation is delayed, it may still be the case that a Deferred Sales Model will be applied to the motor dealer channel. ASIC proposed using its Product Intervention Power to do so, with respect to Add-on insurance and warranty products, in October 2019. It is possible that that will go ahead in the meantime.
Anti-Hawking
Consultation on draft legislation to ban the hawking of financial products closed on 28 February 2020. The proposal to have the legislation commence on 1 July 2020, which has already been the subject of strong submissions, now looks particularly challenging given that questions that remain on some key points.
Commission caps
The draft Bill to give ASIC the power to set caps on commissions paid on insurance and warranty products distributed through the motor dealer and novated lease channels is also waiting on the next step from Treasury. That legislation needs guidance from ASIC on how it intends to exercise its new power, and it can be expected to consult on that. If the legislation does pass, it will have no effect until ASIC actually uses its power.
Internal dispute resolution
ASIC's consultation in May 2019 on changes to Regulatory Guide 165, regarding complaints handling and internal dispute resolution, remains subject to finalisation. The proposed changes, particularly to broaden the definition of a complaint and to reduce the timeframe for a response, have the potential to require a good deal of preparation, including in relation to IT systems.
ASIC originally proposed that most of the changes would commence on 30 June 2020, which was beginning to look unrealistic in any case. Its media release yesterday identified this reform as an example of matters that it has suspended. Complaint handling will, though, remain an important part of other reforms, most notably as a core component of implementing the Design & Distribution Obligations.
Duty to take reasonable care not to make a misrepresentation
Consultation has also closed on draft legislation to replace the current duty of disclosure applicable to eligible contracts of insurance with the new duty to take reasonable care not to make a misrepresentation. While a few key elements of the change remain to be finalised, its scope is reasonably clear. Treasury has proposed that the new duty would apply from 5 April 2021, to align with the commencement of the Design & Distribution Obligations and the application of Unfair Contract Terms to insurance. While there are benefits in having these changes commence on that date, it does not seem to be critical that that occur.
Breach reporting
Finally, the consultation period for draft legislation to reform the breach reporting obligations under the Corporations Act has also closed. Concerns had already been raised with meeting the proposed commencement on 1 April 2021, given the complexity of the new test. That pressure is likely to be exacerbated in the current circumstances.
For more information on insurance regulatory reforms, please contact insurance advisory principal, Mathew Kaley.