Achieving product rationalisation for managed investment schemes and life insurance products
Treasury has released a proposals paper for consultation about a proposed product rationalisation framework for managed investment schemes and life insurance products. Product rationalisation is a process of converting or consolidating products of a similar nature into a single product with equivalent features and benefits. Its main purpose in this context is to remove outdated, so-called 'legacy' products by transferring investors into newer, more efficient products.
Submissions close on 26 February 2010.
Citigroup responds to ASIC consumer credit insurance concerns
Citigroup Pty Ltd (‘Citigroup’) has responded to ASIC concerns that some telephone sales of consumer credit insurance products between August 2008 and January 2009 may have been misleading, or likely to mislead consumers.
Citigroup received complaints from customers about the sale and promotion of its consumer credit insurance products known as ‘CreditShield’ and ‘CreditShield Plus’ (together known as ‘Creditshield’). Citigroup was selling Creditshield during calls placed by cardholders to activate new or replacement credit cards (‘activation calls’).
Of the total complaints Citigroup received, 174 cardholders complained about selling practices. In addition, a large number of cardholders cancelled their Creditshield policies during this period.
ASIC reviewed randomly selected recordings of direct marketing calls selected from Citigroup’s complaints register.
ASIC’s review of the activation calls revealed the following issues:
- The sale of Creditshield to cardholders who had not agreed to purchase it
- The use of potentially misleading or ambiguous phrases by Citigroup during the activation calls
- Telephone operators persisting with selling Creditshield to callers, despite the cardholder saying ‘No’ more than once – on some occasions in calls reviewed by ASIC, the cardholder said ‘No’ on three or more occasions.
- The practice of telephone operators to keep cardholders ‘captive’ on the telephone call by waiting to tell cardholders that their credit cards had been activated only after Creditshield sales (or attempted sales) had been completed.
Prior to ASIC raising its concerns with Citigroup, Citigroup had already acted to terminate some telephone sales agents.
In order to address ASIC’s concerns and resolve the issues identified, Citigroup has implemented a number of changes to the calling script for its telephone operators.
Some of the changes include the following:
- The initial purpose of the call (the card activation) is concluded before cardholders are asked if they wish to hear about another product (such as Creditshield);
- Words such as ‘enrol’ and ‘activate’ have been replaced by ‘purchase’ when operators are referring to Creditshield;
- The provision of a general advice warning at the commencement of the call;
- The removal of representations regarding Creditshield being ‘free if you have paid your bills’; and
- The introduction of a clear approach to handling customer objections during Creditshield telephone sales.
Citigroup is also now in the process of writing to all customers (other than those that have already made a claim on their policies) who purchased Creditshield while activating their card between August 2008 and January 2009 to ensure that they are aware that they purchased Creditshield, and that they are aware of Creditshield’s terms and conditions.
Customers who believe they were not made aware of their purchase of Creditshield or its terms and conditions are being asked to contact Citigroup in order for Citigroup to promptly address and resolve customers’ concerns including potentially refunding affected customers in the appropriate circumstances.
Reviewing APRA decisions
Not every decision of a regulator such as APRA is reviewable but 2 recent judgments relating to APRA decisions are noteworthy.
In Porter v Australian Prudential Regulations Authority  FCA 1148 the Federal Court ordered that APRA pay the costs of a solicitor and her client relating to a notice by APRA to the solicitor to produce a computer hard drive relating to an insurance company regulated by APRA.
In reviewing the facts Judge Perram concluded that "the proceedings were, as a matter of substance, initiated by APRA and that Ms Shand and Mr Porter were compelled to protect themselves from the issue and service of a notice which I have found, respectively, to be unreasonable and reprehensible". With reference to the timing of the notice the Judge said "this is one of those cases where the failure by the decision maker to give any reasons for the decision permits the inference to be drawn that he had no good reason for it".
In Stitt and Australian Prudential Regulation Authority  AATA 601 the Administrative Appeals Tribunal set aside a decision by a delegate of the Australian Prudential Regulation Authority (APRA) to disqualify Robert Reginald Stitt from being or acting as the holder of a senior insurance role pursuant to s 25A(1) of the Insurance Act. The delegate decided that Mr Stitt was not a fit and proper person to be or act as a director or senior manager of a general insurer under s 24(1) of the Act. Mr Stitt was a non-executive director of HIH Insurance Limited.
The Tribunal was "not persuaded that any contravention of the standard of diligence, competence and experience has been made out."
ASIC's approach to insurance telephone marketing
ASIC has published details of the resolution of its concerns with AEGON Direct Marketing Services Australia Pty Ltd (ADMS) that some telephone sales of life risk insurance products may have been misleading, or likely to mislead consumers.
ASIC was concerned that the direct marketing calls may have created the impression that customers were not being asked to make a decision to purchase the insurance product immediately over the phone and in certain circumstances, customers were told that they would be sent policy documents so that they could review and make a decision whether to purchase during the cooling-off period.
ASIC also had concerns with telephone sales representatives using the words ‘enrol’, ‘activate’, ‘start’, or ‘issue’ when referring to purchase of an insurance product which may not have made it sufficiently clear to consumers that they were purchasing insurance products.
In response, ADMS has implemented, or is in the process of implementing, a number of changes to its calling script. Some of the changes include the following:
- The word ‘enrol’ has been replaced by ‘purchase’.
- The removal of the phrase, ‘you don't have to make a decision today’.
- The customer is asked to confirm their understanding that they are ‘purchasing’ an insurance product.
- The provision of an expanded general advice warning towards the start of the direct marketing call.
- Overall, more wording has been made mandatory for telephone sales representatives to follow.
To supplement the latest script change, it intends to circulate a written reminder to telephone sales representatives every three months, highlighting the importance of observing the script during each call, and is designing an ongoing training plan for its Quality Assurance and Sales Verification teams.
It is also taking steps to ensure that all customers receive a second billing reminder letter before the end of the cooling-off period.
Financial Ombudsman case studies
Financial planning advice: Mr and Mrs A complained about the advice they received from their bank's financial planner about how they could arrange their financial arrangements to allow Mrs A to qualify for the maximum aged pension and maximise their income. After a meeting with the bank’s planner, he provided advice that Mrs A would qualify for the full pension if her term deposit monies were invested in a superannuation fund in her name and recommended investment in a bank balanced superannuation fund.
Mr and Mrs A accepted the advice and transferred the funds to the recommended fund. Mrs A subsequently reached retirement age and applied for the aged pension. However, she was subsequently advised by Centrelink that her pension entitlement was approximately half the full pension. A review of the financial planner’s advice showed he had erred in his calculation. The lower pension entitlement therefore meant Mr and Mrs A’s overall already modest income fell after implementing the planner’s recommendation. The value of Mrs A’s superannuation investment subsequently fell significantly.
The Financial Ombudsman Service’s view was that the recommendation made by the planner was inappropriate given Mr and Mrs A’s financial position, their historical investment profile and the resultant reduction in their income. Had the correct pension information been stated, and the appropriate recommendation supplied, it was more likely than not, in the circumstances of this case, that Mr and Mrs A would have retained their existing investment arrangements together with a part pension.
On that basis, the Financial Ombudsman Service determined that the disputants were entitled to be put back in the position they would have been had the term deposit remained in place and the bank was liable to compensate them on that basis.
- Travel insurance: Mr B was stranded in Thailand in September of last year when the Phuket airport was closed due to an anti-government protest. As a result, Mr B had to purchase new flight tickets, and incurred additional costs. The member denied his claim on the basis that the proximate cause for the loss arose from an excluded clause in the policy that is “a loss that arises from any act of war, or from a rebellion, revolution, insurrection or taking power by the military”. The Financial Ombudsman Service upheld Mr B’s claim on the basis the events should be described as a “riot” or “civil commotion” rather than an “insurrection”.
- Superannuation advice: Mr D alleged that the superannuation consultant agreed to advise the consumers into the future and for an indefinite period of changes to the superannuation rules which would prevent them withdrawing their contributions without incurring tax or other penalties.
Eight years after initial contact, changes to superannuation rules meant that a component of Mr and Mrs D’s superannuation contributions would be taxed substantially if it were withdrawn. Mr and Mrs D complained that the member breached its contractual obligation to warn them of such changes ahead of their operation, and claimed compensation.
The Financial Ombudsman Service found that there was no ongoing retainer to provide financial advice, Mr and Mrs had not paid any fees for advice, and that there had been no contact between Mr and Mrs and the member during the eight year period. The Financial Ombudsman Service did not uphold the dispute
Private health insurers governance standardsWe have set up a new site for private health insurers and you can read about the latest consultation draft of the PHIAC governance standards here.
Private health insurance coverage
The Senate Community Affairs Committee is conducting an Inquiry into the Private Health Insurance Legislation Amendment Bill 2009
If the Bill is passed, the amendments will add a category of "dependent child" under the Private Health Insurance Act 2007 by inserting the definition of "dependent child non-student". This will allow insurers to charge a different premium for "dependent child non-students" under a family policy. A "dependent child non-student" is a person aged from 18 to 24 (inclusive), who does not have a partner, is not receiving a full time education at a school, college or university and is defined in a private health insurer‟s fund rules.
Senate Inquiry into Private Health Insurance
The Senate has referred the The Fairer Private Health Insurance Incentives Bill 2009, the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2009 and the Fairer Private Health Insurance Incentives (Medicare Levy Surcharge — Fringe Benefits) Bill 2009 to the Senate Economics Committee for an Inquiry.
The Bills change the rate of the private health insurance rebate and increase the Medicare levy surcharge for higher income earners.
The Committee is due to report by 16 June 2009.
Remuneration policies of ADI's and insurers: draft governance standards
The Australian Prudential Regulation Authority (APRA) has released a consultation package on remuneration for authorised deposit‑taking institutions and general and life insurance companies.The consultation package comprises a discussion paper, draft extensions to the governance standards already applying in these industries and a draft prudential practice guide (PPG).
APRA’s proposals on remuneration are designed to give effect to the Financial Stability Forum’s Principles of Sound Compensation Practices by aligning financial institution remuneration with risk management. APRA’s proposals also respond to the Prime Minister’s request in October 2008 that APRA consider the linkages between remuneration practices and the capital adequacy requirements of regulated institutions.
APRA is intending to take a principles‑based approach in this area, by requiring Boards of regulated institutions to have a remuneration policy that aligns remuneration arrangements with the long‑term financial soundness of the institution and its risk management framework; at the same time, Boards would be able to design remuneration arrangements that suit the structure of their own institution.The policy would extend beyond senior executives to all persons who, because of their roles, have the capacity to make decisions that could materially affect the interests of depositors or policyholders, and owners.
APRA also proposes that regulated institutions have a Board Remuneration Committee, comprising only independent directors with the appropriate experience and expertise.
The PPG covers a number of issues, including the use of deferred compensation, the links between incentives and risk, the use of shares in incentive arrangements, the need to link incentive compensation to both forward‑looking and backward‑looking risk measures, and the balance between cash and non‑cash incentives.
APRA is seeking submissions on the draft standards and by 24 July.Subject to consultation, it is expected that the final prudential standards and associated PPG will be released in September 2009 and be effective from 1 January 2010
Regulation of insurance groups
In Insurance Group Regulation - A Comparative Case Study: Australia and the United States John Trowbridge, Executive Member, Australian Prudential Regulation Authority, examines the "AIG problem" involving the supervision of more than 150 AIG subsidiaries in many different countries notwithstanding the difficulties of the parent company in the USA and its lessons for group supervision and structures.