Claims management providers, loss assessors, investigators and collection agents may soon need an AFS licence

“There can be no basis in principle or in practice to say that obliging an insurer to handle claims efficiently, honestly and fairly is to impose on the individual insurer, or the industry more generally, a burden it should not bear”—Commissioner Hayne 2019.

Insurance claims handling has been under scrutiny in recent months in three high profile public reports with the Royal Commission (RC), Treasury Consultation Paper Disclosure in General Insurance: Improving Consumer Understanding and now Treasury Consultation Paper: Insurance claims handling: Taking action of recommendation 4.8 of the Banking, Superannuation and Financial Services Commission released 1 March 2019.

Treasury’s most recent Consultation Paper raises the potential for introducing a new form of financial service impacting on all existing Australian Financial Services (AFS) licensees as well as extending licensing requirements to a range of third party representatives of insurers referred to as “claims handling service providers”. Specifically mentioned are investigators, loss adjusters, loss assessors, collection agents as well as the claims management services and even trustees of superannuation funds and certain persons acting on behalf of insurers, such as medical practitioners. Also discussed is the potential extension of AFS licensing to financial services providers presently exempt from of licensing.

Treasury is exploring a range of options, which include the requirements to an AFS licence with a specific authorisation as a provider of insurance claims handling services with no distinction being made between retail or wholesale clients. Due to a specific exemption in the Corporations Act 2001 (Cth), there are presently no regulatory or licensing obligations imposed on companies providing claims handling services for general and life insurance claims. This exemption has meant that the Australian Securities and Investments Commission (ASIC) has no direct authority over providers of claims handling services.

Specific activities considered to be exempt claims-related activities include negotiations on settlement amounts; interpretation of relevant policy provisions; estimates of loss or damage or repair, recommendations on mitigation of loss; recommendations, in the course of handling or settling a claim, made on increases in limits or different cover options to protect against the same loss in the future, and claims strategy, such as the making of claims under alternate policies.

The Commissioner has recommended that the handling and settlement of insurance claims, or potential insurance claims, lose the exclusion from the definition of a financial service. The RC noted the failure by insurers to process claims in a timely manner, to collect and use evidence, to adequately communicate the refusal of claims and to inform consumers of their rights to dispute resolution.

Treasury has raised the potential for the general obligations under s 912A of the Corporations Act to be applied to all insurance claims handling conduct:

• ensuring that AFS licensees are required to act efficiently, honestly and fairly when handling an insurance claim, potentially enabling ASIC to take action to address systemic misconduct, such as delaying decisions on claims
• requiring AFS licensees to have adequate measures in place to manage conflicts between representatives’ own interests in refusing claims, and legal obligations owed to clients (including obligations under s 912A, the contract terms or industry Codes of Conduct), and
• requiring AFS licensees to adequately supervise claims handling conduct engaged in by their representatives and ensure that representatives are adequately trained and competent to engage in those services. If RC Recommendation 4.8 is accepted and the exemption removed, third party representatives providing a claims handling service on behalf of an insurer will become financial service and providers subject to the Corporations Act and subject to the “financial services laws”, which is a very broadly defined and specific term and includes the Insurance Contracts Act 1984 (Cth). Claims related to insurance products sold to retail clients involve additional service obligations, such internal and external dispute resolution processes, as well as compliance with industry codes of conduct, such as the General Insurance Code of Practice. The additional obligations associated with retail clients is touched on only briefly by Treasury.

Based on the issues raised by Treasury, even discussions between loss assessors and insureds, for example, could be considered personal advice and claims personnel within insurance companies and claims management companies considered financial advisors.

Treasury’s Consultation Paper goes beyond the issues raised by the RC to consider trustees of super funds as engaging in insurance claims, even though they are not acting on the insurer’s behalf.

Both political parties have committed to the introduction of the reforms and while the Federal election will delay implementation, the removal of the claims exemption can be done relatively quickly. This means the issue of AFS licensing is a very real prospect for the claims management industry. Entities with their own AFS licence may have a competitive advantage over those without, given the six to nine-month delay in ASIC’s AFS licence processing. The Treasury Consultation Paper has raised the stakes by questioning whether all existing AFS licensees require a variation of licence. With the present ASIC backlogs within ASIC and the lack of any discussion of grandfathering clauses in the Consultation Paper, there are grounds for concern.

The claims industry is likely to experience change over the next 12 months with the Treasury Proposals calling for standardised definitions and exclusion clauses in insurance contracts as well as additional disclosures, such as component pricing.

As an indicator of things to come, on 19 February 2019 ASIC issued its planned timetable for the implementation of the RC recommendations, noting it had advocated for (and supported the extension of) ASIC’s role to cover insurance claims handling and the application of unfair contract terms laws to insurance.

This ASIC response coincided with the passage of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018, which increases maximum prison penalties and significantly increases civil penalties for companies—now to be capped at $525 million with maximum civil penalties for individuals increasing to $1.05 million.

Significantly, for the first time the Bill also introduces a civil penalty (capped at $525 million) for breaches of the primary obligation that banks and other financial services (and credit licensees) owe to all of their customers, that is “to do all things necessary to ensure the financial services covered by the licence are provided efficiently, honestly and fairly”. This new obligation will track through to third party outsourcing service providers as financial services and credit providers seek to include these obligations in the terms of the outsourcing contracts.

Going forward

While there is no suggestion that the RC specifically considered the role of specialist claims handling entities when looking at claims-related conduct, there is no carve out for this industry sector in the recommendations under consideration. Treasury’s Consultation Paper extends the concept of claims specialist well beyond the areas that the industry would traditionally have assumed as being a financial service and, if adopted, which will extend ASIC’s regulatory reach to an large section of what, to date, has been unregulated conduct.

Specific questions raised by Treasury are:

• Are there additional issues that have not been identified? If so, are there potential options for addressing them within the proposal?
• Are there other approaches that can be taken in designing the legislative amendments that would further improve consumer outcomes (including by reducing compliance costs)?
• Are there any obligations, besides the existing AFS licensing obligations, that would provide further useful consumer protections for claims handling activities and so should also apply to them?
• How could the activity of handling or settling an insurance claim (for life and general insurance products) be defined as a financial service for the purposes of the Corporations Act?
• What penalties should apply to insurers breaching the general obligations of s 912A in the specific instance of insurance claims handling? Should the penalties attaching to insurance claims handling, be the same that attach to other financial services?

Industry associations and groups that may be impacted by the need to have an AFS licence for claims handling in the future or which may become the subject to regulation even without licensing  have until 29 March 2019 to lodge submissions.

Given the impact that these reforms could potentially have to the larger claims representative community, this is a time when submissions could be of great importance in raising concerns about the practical implications and costs associated with the potential reforms. These range from potential conflict of interest and conflicted remuneration issues, to training and disclosure requirements and the issue of transitional grandfathering, given ASIC long delays with licensing.

We are able to assist in the preparation of such submissions and from past experience can say that submissions can make an impact, especially when they address unforeseen consequences. This was the reason the exemption carve out for claims handling and settlements was made in the first place.

Combined with the Government’s commitment to claims reforms, which are likely to be matched by the Opposition, there is a real possibility that significant change is going to occur in this industry.