3.2 Limitations in the regulatory framework

In considering the conduct that was examined during the Commission’s hearings, it is useful to begin with three important limitations in the regulatory framework.

First, as I have noted above, although most life and general insurance policies are financial products, and the selling of those policies is a financial service, the handling and settling of insurance claims is not.[1] This means that some of the general obligations imposed by section 912A of the Corporations Act including, in particular, the obligation on an AFSL holder to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly do not apply to the handling and settlement of insurance claims.

Second, most forms of life insurance are financial products but, as I explain further below, ‘funeral expenses policies’ are not.[2]

Third, because most insurance policies are financial products, insurance companies are bound by the extensive precontractual disclosure provisions of Chapter 7 of the Corporations Act including, for example, the obligations to provide product disclosure statements. But section 15 of the Insurance Contracts Act provides (in effect) that insurance contracts governed by that Act are not subject to the unfair contract terms (UCT) provisions of the ASIC Act.

Instead, as already noted, the Insurance Contracts Act imposes the duty of utmost good faith by section 13(1). But that duty is enforceable by ASIC against the insurer principally through provisions permitting action in respect of the insurer’s licence to operate – a very blunt instrument of enforcement. The ASIC Enforcement Review Taskforce recommended that breach of section 13(1) attract a civil penalty.[3] The recommended change should be made. I will say more about the ASIC Enforcement Review Taskforce in the chapters concerning the regulators and other important steps.

[1]See Corporations Regulations reg 7.1.33.

[2]See Corporations Regulations reg 7.1.07D.

[3]ASIC Taskforce Review, Report, 77–9, 90–1.