ASIC clarifies deferred sales rules for add-on insurance

The Australian Securities and Investments Commission (ASIC) has released a new regulatory guide – RG 275 – to detail how it will implement the new deferred sales model for add-on insurance.

The new regime, which will commence on 5 October 2021, requires a clear four-day pause between when a customer enters a commitment to acquire a principal product or service, and when they are offered or sold an add-on insurance product.

It aims to help promote “informed purchasing decisions by consumers in add-on insurance markets”.

The model has been brought in following the banking royal commission, which found numerous issues in the add-on insurance market, including poor-value products, unfair sales practices and outcomes, and worse claims outcomes than in other insurance markets.

For example, ASIC has previously found that Comprehensive Credit Insurance (CCI) is poor value, with CCI sold by lenders only resulting in 19 cents recovered in claims for every premium dollar paid, while other lenders may have mis-sold or mislead consumers over CCI.

In its new guide, ASIC explains its interpretation of the requirements that apply to issuers and distributors of add-on insurance products under the deferred sales model for add-on insurance – and provides guidance on how to comply with those requirements. 

CCI and home loans

RG 275 outlines that credit facilities such as home loans might be offered with consumer credit insurance (which cover the risk of default on a loan) but this would be one of the products that would require the four-day wait period before being sold.

For loans, including mortgages, the point at which a consumer is deemed to have entered into a commitment is when the consumer is informed in writing of the approval of the credit facility.

Therefore add-on insurances can only be sold four days after this time.

ASIC provides the following example to outline its approach in this instance.

A lender may provide a home loan product to a customer and, under an arrangement, give the customer’s contact details to an issuer of consumer credit insurance.

If the issuer of the insurance contacts the customer three weeks later, the offer will still be ‘in connection with’ the customer acquiring the principal product (because the opportunity to sell the insurance arose because the customer acquired the home loan and the lender passed the customer’s details on to the issuer of consumer credit insurance). 

The issuer of the insurance will commit an offence if they have not complied with the deferred sales model before selling the add-on insurance product. 

Similarly, if a customer is given complimentary insurance cover from the time of the principal purchase but has to provide their credit card details upfront and billing starts later automatically upon expiry of the complimentary period, this will constitute the sale of the add-on product at the earlier time and will be in breach of the deferred sales model provisions. 

Moreover, ASIC states that in occasions where the purchase of a product is subject to finance (for example, if a customer buys a car with a loan), there will be two separate time periods to consider:

(a) for the car – when the customer places the order for the car, subject to finance; and
(b) for the loan – when the customer is informed in writing that the loan has been approved.

However, ASIC clarified that an insurance product is not sold ‘in connection with’ a principal product or service if the customer buys the insurance product on the standalone market, even if the seller of the insurance also sells insurance as an add-on insurance product. 

Speaking after releasing the guidance, deputy chair Karen Chester said: “This is a key government reform aimed squarely at improving consumer outcomes in the add-on insurance market. The pause in the sales process will give people time to consider the insurance they’ve been offered, and compare it with alternatives. It will reduce the risk of people buying insurance on the spot that is poor value or just not right for them.”

Ms Chester continued: “ASIC’s work will help businesses prepare for the new sales model. The input we’ve received from industry and consumer representatives has been invaluable. It has enhanced our regulatory guidance and the customer information requirements.

“The deferred sales model is part of a suite of government reforms in the insurance sector, which aim to improve how insurance products are designed and sold, and how claims are managed.”

ASIC said it will continue to engage with industry in the lead-up to the new laws commencing in October.

Earlier this month, the government announced that a number of classes of add-on insurance products would be exempt from the deferred sales model – including home building insurance and home and contents insurance.

You can read RG 275 here.

[Related: CCI failings to cost lenders $160m]