ASIC Consults on Refining the Financial Services Regulations - International Law Office

Background
Refining Authorization Obligations of General Insurers' Agents
Requirements for Relief
Comment

Background

On May 2 2005 the federal government released a proposal outlining 25 refinements to improve the practical operation of the financial services regulation introduced by the Financial Services Reform Act 2001. The paper, "Refinements to Financial Services Regulation", has special interest for insurers.

The plan aims to help reduce the compliance burden on the financial services industry. The paper includes proposals to:

• refine and simplify financial services guides (Refinement Proposals 1.1 and 1.2);
  
  
• streamline product disclosure statements as they relate to general insurance products (Refinement Proposals 7.1 and 7.2);
  
  
• simplify oral disclosure requirements (Refinement Proposal 4); and
  
  
• provide further relief and/or guidance for authorized representatives of general insurers (Refinement Proposal 12.2).

So far there is little to report on in respect of the specific refinement proposals noted here, other than Refinement Proposal 12.2 (which is considered in the Australian Securities and Investments Commission (ASIC) consultation paper), as the federal government has indicated that the refinement proposals will be addressed or clarified by amending legislation. The federal government has recently announced that it intends to release draft legislation for public comment with a view to having the final regulations in place before the end of the year.

Refining Authorization Obligations of General Insurers' Agents

The federal government proposed that ASIC provide further guidance on and relief from compliance requirements for agents arranging for the issue of general insurance products of a general insurer that accepts responsibility for the conduct of those agents. The intended outcome of this refinement proposal is to encourage wider access to general insurance products for consumers, while ensuring that consumers still receive the same protection as they would if they were buying their insurance product in an office of an Australian general insurer. ASIC's consultation paper sets out its proposals for such relief. It intends to publish its final position in October 2005.

Overall, the scope of relief offered is very narrow and will likely apply only in very limited circumstances if the current proposals are adopted as final. Notably, the proposals do not extend to life insurance products. This update outlines how ASIC proposes that the relief will apply and some of the issues that general insurers and their agents will need to consider in assessing whether they meet the requirements to benefit from the proposed class order relief.

Requirements for Relief

ASIC intends that, in certain circumstances, distributors of a general insurer can arrange for the issue of general insurance products without the need to be appointed as authorized representatives under the Corporations Act 2001. Those circumstances are narrow and will essentially require that a general insurer (or its authorized licensee) agree to be responsible and accountable for the conduct of a distributor which it appoints in writing to provide financial services that consist only of the arranging for the issue of retail general insurance products. A distributor cannot be a licensee, an authorized representative or employee or director of a licensee, or a disqualified person.

The insurer must also take reasonable steps to establish and maintain a publicly available register containing the details of all those distributors that have been engaged to act on its behalf. It must also ensure that, before a distributor provides financial services to a customer, the distributor draws to the customer's specific attention the availability of the insurer's dispute resolution system and how to access it. If the customer does not receive a financial services guide from the insurer, the distributor must give the customer information in writing covering:

• the capacity in which the distributor is acting;
  
  
• the remuneration it will receive; and
  
  
• how that remuneration is calculated.

A key question for insurers that currently have arrangements of a similar nature in place is whether the relief will apply retrospectively. If so, what unintended consequences might the relief have for current arrangements that might automatically fall within its scope? For example, how will an insurer's obligation to be responsible and accountable for the conduct of the distributor operate? Will this be governed as a matter of applicable law or will the insurer be required to acknowledge and confirm its accountability for the distributor in the written engagement of the distributor? May the general insurer obtain the benefit of indemnities from a distributor for the consequences that may flow from a distributor's conduct?

ASIC does not propose to require insurers to consent before a distributor engaged by those insurers can act as a distributor for other insurers. Although nothing prevents parties from agreeing to limitations being placed on the distributor's ability to act on behalf of other insurers, a requirement for the principal insurer's consent to cross-endorsement as a matter of law would be consistent with the existing cross-endorsement regime for agents under the Financial Services Reform Act.

The relief applies to the distribution of retail general insurance products only, which creates an anomalous situation as it does not appear that the relief will apply in circumstances where a distributor arranges for the issue of wholesale products. ASIC has stated that it is limiting the relief to retail general insurance products because these product types are relatively well understood and generally subject to standard terms and conditions. It would seem from this approach that there is no reason not to extend the relief to a broader class of insurance products in order to include wholesale products.

The most difficult issue facing insurers and distributors in the context of the proposed relief is this limited approach that allows the distributor to provide only financial services arranging for the issue of general insurance products. The ASIC paper acknowledges the practical and technical difficulties in defining exactly what some distributors do and seeks comment from the industry in respect of whether there are other dealing activities that should be covered by the relief. Many distributors of general insurance products will be or will need to be authorized to provide financial product advice - this suggests that the practical application of the relief will be very limited.

On this basis there are unlikely to be significant opportunities where the relief proposed by ASIC will offer insurers and distributors real scope to broaden the types of distribution of insurance products outside their current distribution arrangements and networks, or by using the existing exemptions available under the Corporations Act (eg, the clerks and cashiers exemption).

Comment

The refinement project is designed to help reduce the compliance burden on the industry and to clarify the intent of the regulatory framework that applies to it, while ensuring that consumers are appropriately protected and receive the information relevant to their needs. The refinement proposal for the authorization of agents of general insurers is intended to promote access to general insurance products for consumers, while ensuring that they receive the same protection as if they were dealing with the office of a general insurer.

The impact of any relief and refinement can be accurately assessed only once the final proposals are published. However, if the scope of financial services is confirmed narrowly to apply only to arranging, it is likely that the situations and circumstances in which the refinement proposal will apply will also be limited.

For further information on this topic please contact Dean Carrigan or Claire Machin at Allens Arthur Robinson by telephone (+61 2 9230 4000) or by fax (+61 2 9230 5333) or by email (dean.carrigan@aar.com.au or claire.machin@aar.com.au).