THE COALFACE: Shorten reflects on 2012 and regulatory changes

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How do you review 2012 as a year for you and your office? What are you most proud of?

2012 was a year in which we made a lot of significant and at times difficult reforms in the financial services portfolio.

We moved to improve consumer rights in the insurance sector by establishing the legislative framework for a standard definition of flood and the provision of a key facts sheet.

Through FOFA we are creating a more competitive, client-focused market for financial products and advice, to ensure Australians can access good quality financial advice and give the financial services industry a stronger foundation for growth by:

  • Creating a duty for financial planners and advisers requiring them to act in the best interest of their customers
  • Creating a new form of financial advice licence, so up to 10,000 accountants are able to provide a much broader range of financial advice than they were previously able to.

How well do you feel financial planners have handled the FoFA reforms? How have you made that process easier for them?

The Future of Financial Advice (FOFA) reforms represent a major overhaul of the Australian financial advice industry.  The reforms are intended to strengthen investor protection and increase access to financial advice for retail clients.  Key reforms include:

  • a ‘best interests’ duty requiring financial advisers to act in the best interests of their clients;
  • greater transparency on fees charged to clients, including a ban on conflicted remuneration (i.e. commissions and volume-based payments) and a requirement to obtain client agreement to ongoing advice fees; and
  • enhanced disclosure of ongoing advice fees. 

The Government recognises the significance of these reforms for the financial services industry and that the industry is working hard to meet the higher conduct standards expected of them to better protect their clients. 

As with any significant structural reform, there will be a need for the financial advice industry to change their practices and processes in order to comply with the new requirements.

The benefits which consumers will enjoy as a result of the reforms will lead to greater trust and confidence in the finance industry. This will, in turn, contribute to an increased demand for advice and new opportunities for the financial advice industry offsetting any transitional costs to comply with the new requirements.

Since the initial announcement of the FOFA reforms in 2010, the Government has taken a number of decisions concerning the detail of the reforms.  Many of these decisions relieve businesses from some of the regulatory burden associated with the original proposals.  The Government has also delayed the mandatory start date by one year to 1 July 2013.

In addition, ASIC has announced that it will take a facilitative compliance approach for the first year of mandatory application to assist industry in adjusting to the reforms.

How effectively have the benefits of the National Disability Insurance Scheme been relayed to state governments and the wider public? Is there still work to be done on that front?

The Commonwealth, and all state and territory governments have been and will continue to work closely on the NDIS.

At the meeting on the 28 July 2012, the Council of Australian Governments agreed that, as a first step to settling the design of the NDIS, consultation should occur with people with disability, their families and carers, the workforce and disability sector and peak bodies. These consultations occur through a number of mechanisms established across the Commonwealth and States and Territories.

Five formal engagement mechanisms are being used to enable participation of stakeholders, including people with disability, their families and carers in the decision making process and at key points in design and implementation:

  • NDIS Advisory Group provides independent advice to the Select Council on Disability Reform on advice from expert groups, bilateral meetings with state based advisory groups and peak bodies and NDIS Your Say Forum.
  • Expert Groups provide technical advice to the Advisory Group on Choice and Control; Eligibility and Assessment; Quality, Safeguards and Standards; and Workforce and Sector Capacity.
  • National Disability and Carers Alliance – is leading grassroots engagement across the country, through forums with people with disability, their families and carers and service providers on the design of the NDIS, reporting to the Advisory Group monthly.
  • NDIS Your Say’ online forum which commenced in June 2012 seeks feedback from the wider public on key questions.
  • NDIS Launch Transition Agency is undertaking a co-design process on operationalising the high level scheme design.  This is being supplemented by a range of other engagements at the local level.

You claimed the recent Insurance Contracts Amendment Bill will mean less red tape for insurers and better disclosure for consumers, can you expand on why that is the case?

The Insurance Contracts Act 1984 (the Act) is now close to three decades old. At the time of the Act’s commencement products offered by insurers and the state of market were vastly different from today. Today we see an increased reliance on electronic communication and a more diverse range of insurance product offerings. These changes, while generally beneficial, pose challenges for both consumers and insurers.

The Insurance Contracts Amendment Bill (the Bill) addresses these challenges by introducing measures to give effect to reforms that improve the operation of the Act. The measures in the Bill are important for both insurers and consumers alike, as they will reduce complexity and provide certainty.

The Bill makes changes to:

  • enable insurers to provide statutory notices and documents to consumers electronically. This will not only reduce compliance costs for the insurance industry, but will also bring the insurance industry into line with other industries;
  • provide life insurers with additional flexibility in the types of remedies they can use when they are dealing with situations where an insured has made an innocent misrepresentation or fails to comply with the duty of disclosure; and
  • ensure consumers provide better disclosure before entering into contracts, reducing the scope for disputes when a claim is made.

How are you helping to solve Australia’s underinsurance problem?

There are problems with both non-insurance and underinsurance in the Australian community. 

For non-insurance, where consumers do not hold insurance for some of the risks they are exposed to, the Government is helping to provide better information about risks, so that people can make better decisions about getting the insurance cover they need.  One example of where we’re doing this is through the introduction of the National Flood Risk Information Portal.  The Government is also looking at ways to address affordability issues, for example by reducing risk through mitigation.

For underinsurance, where consumers do not hold adequate cover for the losses they suffer, the Government is improving transparency so people are better aware of the level of cover under their policies.  The introduction of the Key Facts Sheets will draw attention to the difference between concepts such as ‘sum insured’ and ‘total replacement value’.

How have you seen the insurance industry evolve since the massive impact of the 2011 floods? Is it somehow a better industry for that tough period?

Following the 2011 floods, the Government has undertaken a series of reforms to make flood insurance simpler and more effective.

The Government has enacted Regulations that give effect to the standard definition of flood to which all insurers must comply. This policy makes it easier for people to know what they are covered for - and what they are not covered for. If they have flood coverage, they now know that it covers events that fall within the terms of the standard definition.

The Government has enacted Regulations to require the provision of Key Facts Sheets for home building and home contents insurance policies.  Providing consumers with easier access to key information, Key Facts Sheets will help ensure consumers are able to make more informed decisions about their insurance policies.

The Government has recently launched the National Flood Risk Information Portal to assist the community, planners and insurers to access important flood information about their local area.  This Portal provides even more information for consumers and helps them make more informed choices.  The Portal is part of the $12 million, four-year National Flood Risk Information Project initiated by the Australian Government in response to the Natural Disaster Insurance Review.

The Insurance Industry has also been improving its own flood information database to assist insurers to better assess a property’s flood risk.

After the devastating floods in 2011, the Government asked the Insurance Council of Australia to publish data on flood insurance take-up rates, on a state by state basis, setting out the number of policies that include flood cover.  The number of policies which include flood insurance has increased significantly in recent years, from only 3 per cent in 2006 to an estimated 81 per cent today.  The increasing take-up of flood cover is a sign that consumers are better informed about the availability of flood cover than ever before.

The Insurance Council has made some significant improvements to the General Insurance Code of Practice since the 2011 floods.

Since the 2011 floods, the National Insurance Broker's Association has developed an online tool for consumers to find a broker close to them.  An insurance broker may be able to assist consumers to find insurance for flood coverage that best suits their needs.

How do you view the role of insurance brokers in the Australian market? Are there any changes afoot that could impact insurance brokers?

Insurance brokers play an important role in the Australian insurance market. Insurance brokers provide professional advice on and access to, both wholesale and retail insurance products. Being intermediaries, insurance brokers act on behalf of people seeking insurance and are responsible for obtaining cover appropriate to the needs of those people.

Last year the Government made two significant reforms to the Insurance Contracts Act, the introduction of a standard definition of flood and requirement for insurers to provide an Insurance Key Facts Sheet. These two reforms ensure that consumers have access to key information when making their insurance decisions.

In recognition of the fact that an insurance broker’s role is to assist their clients in securing appropriate insurance cover, insurance contracts entered into by consumers through insurance brokers are generally exempt from these reforms.  The exemptions provided to insurance brokers recognise that insurance brokers are under a duty to determine what their clients insurance needs are and whether they want to be covered against flood when arranging insurance on their behalf.

Insurance brokers will also be subject to the FOFA reforms that commence on 1 July 2013.  This includes the requirement to act in the best interests of the consumer and the ban on conflicted remuneration. These reforms will result in consumers being at less risk of receiving advice that is influenced by the payment of commissions.

However, in recognition of the different nature of insurance (as compared to an investment product) and the need to avoid introducing barriers to consumers obtaining adequate levels of insurance the application of these requirements have been modified in relation to insurance, and therefore this would extend to insurance brokers.

For example, an alternative best interests duty may be utilised by insurance brokers when advising on general insurance products.  In addition, an exemption from the ban on conflicted remuneration has been provided for general insurance and life insurance products. The Government provided these concessions for insurance products to ease the burden on the industry to help address the problems of underinsurance.

While, it is important to recognise the role insurance brokers play in the insurance market, insurance brokers are only one of many options open to people when they are seeking information on or making decisions in respect to their insurance needs.

Do consumers fully understand the role of insurance brokers? Can more be done to raise awareness of the benefits of using an insurance broker?

While I believe that consumers generally understand what insurance brokers are consumers are not fully aware of the important role that insurance brokers play in the market.

In June last year the Government was pleased to see the National Insurance Brokers Association (NIBA) announce an enhanced service to provide advice to consumers through the establishment of a 1300 phone number and the enhancement of its ‘need a broker’ website. These enhanced services will enable consumers to access valuable information about insurance and what services a broker can provide.  These initiatives are one way in which insurance brokers are raising consumer awareness in respect to the role that they play in the insurance market. 

In addition to its work in raising consumer’s awareness of the benefits that insurance brokers may provide, NIBA has also recently released a revised Code of Practice, setting voluntary industry standards. NIBA has indicated that, after an extensive program to promote the Code, the Code will come into force from January 1, 2014.

What initiatives are you looking to spearhead in 2013?

Like all my Labor colleagues, I’ll be getting on with the business of promoting and standing for true Labor values.  What I mean for example is the creation of jobs. What I mean is the support for a National Disability Insurance Scheme. What I mean is increasing people’s superannuation benefits so that they have more money when they retire. What I mean about true Labor values is making sure that we have better funded schools. What I mean about true Labor values is making sure that we have a strong economy.