As I explained in the Introduction to this Report and in the chapter on banking, I consider it important that some provisions of industry codes be picked up and applied as law, so that breaches of those provisions will constitute a breach of the law. In the insurance context, the provisions to be picked up and applied are those that govern the terms of the contract made or to be made between the insurer and the policyholder.
I have explained my reasons for this conclusion earlier in this Report, in both the Introduction and the chapter on banking. I will not repeat those reasons here beyond noting that, as Treasury has recognised, self-regulation through an industry code carries with it a number of limitations and difficulties, including that:
- the standards set may not be adequate;
- not all industry participants may subscribe to, and be bound by, the code;
- monitoring and enforcement of compliance with the code may be inadequate; and
- consequences for breach of the code may not be enough to make industry participants correct and prevent systemic failures in its application.
As in the context of banking, I would add one further point. The range and diversity of code obligations, and some developments at common law, may have contributed to there being some uncertainty about which provisions of industry codes may be relied upon, and enforced by, individuals. Uncertainty of this kind is highly undesirable. Participants in the financial services industry must know what rules govern their dealings.
To that end, I have recommended that the law should be amended to provide that breach of an enforceable code provision will constitute a breach of the Act. The law should also be amended to provide for remedies that may follow from such a breach. Those remedies should be modelled on those now set out in Part VI of the Competition and Consumer Act 2010 (Cth) (the Competition and Consumer Act).
As I explained in the chapter on banking, I anticipate that the process of identifying and rendering enforceable these code provisions will proceed in four steps:
- Industry should identify the provisions that it says govern the terms of the contract made or to be made between the financial services entity and the customer or guarantor.
- Industry should seek ASIC’s approval of those provisions. If industry does not put forward its proposed enforceable code provisions in a timely manner, consideration will need to be given to whether a mandatory industry code should be established, using a similar process to that which currently exists under the Competition and Consumer Act.
- ASIC should review the provisions put forward by industry. ASIC’s role must go beyond being the passive recipient of industry proposals. Rather, ASIC should assess whether industry has appropriately identified, from the provisions contained in the code, those provisions that should be made enforceable. ASIC should also assess whether those provisions are expressed clearly and unambiguously, so as to be capable of enforcement.
- Once ASIC has approved the enforceable code provisions, they will be enforceable by statute. Those to whom the promises are made will be able to elect whether to enforce any breaches of those provisions through existing internal dispute resolution (IDR) or EDR mechanisms or through the courts. Use of IDR mechanisms would not constitute any election about future action, but use of EDR mechanisms will be treated as an election not to pursue court action unless good cause is shown to the contrary.
I explained each of those steps in some detail in the chapter on banking. However, I should say something more about the first and second steps here because of some particular features of the insurance codes.
The first and second steps require industry to identify the enforceable code provisions and to seek ASIC’s approval of those provisions. The three insurance codes are still being developed. They are not at the same stage of maturity (or particular specificity) as the 2019 Banking Code.
As I have explained, the Life Insurance Code of Practice became binding on FSC members on 30 June 2017. On 12 November 2018, the FSC released a further draft version of the Code for public consultation. The draft explicitly identifies numerous areas ‘where the content is new or where the policy intent has changed’. These include, but are not limited to, issues relating to policy design and disclosure, sales practices and advertising, the use of health (including genetic) information and family medical history, policy cancellation, claims handling, and the obligations of superannuation trustees. The next iteration of the Code may be significantly different from the present version.
I have also noted that the Insurance in Superannuation Voluntary Code of Practice was introduced on 1 July 2018. Superannuation fund trustees who have chosen to adopt the Code agree to comply with the Code as early as they can, and by no later than 30 June 2021. It appears that the FSC is presently contemplating incorporating the Insurance in Superannuation Voluntary Code of Practice into the next version of the Life Insurance Code of Practice.
At the time of the sixth round of hearings, the ICA was in the process of reviewing the General Insurance Code of Practice, with the intention of releasing a new version of that Code in 2019.
Taken together, these points lead me to conclude that it is undesirable to require the insurance industry to seek to identify now (and give to ASIC) the provisions that it sees as being proposed enforceable code provisions. Instead, I recommend that in respect of the three insurance codes, the FSC, the ICA and ASIC take all necessary steps, by 30 June 2021, to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder designated as ‘enforceable code provisions’. The process will most likely occur in conjunction with the Insurance in Superannuation Voluntary Code of Practice becoming mandatory.
In the chapter on banking, I made two broader points about industry codes. I need to say something about each of those points here.
The first is that by creating a system of enforceable code provisions, I do not intend to modify or limit ASIC’s existing, and more general, power under section 1101A of the Corporations Act to approve industry codes. As I have said, industry should continue to be given the option to seek general ASIC approval of its codes. To that end, I have recommended that the law be amended to provide that:
- ASIC’s power to approve codes of conduct (relevantly) extends to codes relating to all APRA-regulated institutions, including insurers; and
- industry codes of conduct approved by ASIC may include ‘enforceable code provisions’, which are provisions in respect of which a contravention will constitute a breach of the law.
More broadly, I do not wish to interfere with the continued development of industry codes. The witness statements tendered in the sixth round of hearings indicated that the Life Insurance Code of Practice has played an important role in addressing previously problematic behaviours within that industry. The two clearest examples related to reducing the use of surveillance of claimants and reducing the use of outdated medical definitions. I consider it important that industry continue to identify opportunities for improvement. It is equally important for industry to commit, in its codes, to making those improvements.
The second point relates to the basic structure of IDR and EDR under the codes. In the chapter on banking, I said that subject to one caveat, I did not consider that any amendment was required to that structure.
The caveat I make in the context of insurance relates to the sanctions powers given to the Code Governance Committee in respect of general insurance, and to the Life Code Compliance Committee in respect of life insurance.
The Commission received a statement from the Chairperson of the Code Governance Committee. In that statement, the Chairperson said that since 1 July 2014, the Committee had determined that there had been breaches of the Code on 33 occasions. Code subscribers had conceded breaches of the Code in the course of an investigation on a further 689 occasions, and had self-reported over 13,000 breaches of the Code. Despite this, the Code Governance Committee had never exercised its powers to impose sanctions in response to those breaches. Nor had the equivalent power been exercised by the Life Code Compliance Committee since its formation on 1 July 2017.
The evidence indicated that the power to impose sanctions had not been exercised because the Committees could only impose sanctions where an insurer had failed to correct a Code breach. Sanctions could not be imposed in response to a breach of the Code, in and of itself.
In my view, the sanctions power in the General and Life Insurance Codes of Practice should not be limited in this way. Rather, the FSC and the ICA should amend section 13.10 of the Life Insurance Code of Practice and section 13.11 of the General Insurance Code of Practice to empower (as the case requires) the Life Code Compliance Committee or the Code Governance Committee to impose sanctions on a subscriber that has breached the applicable Code. When considering whether to impose sanctions following a breach, the Committees should continue to be guided by the matters referred to in section 13.14 of the General Insurance Code of Practice and section 13.13 of the Life Insurance Code of Practice.
Recommendation 4.9 – Enforceable code provisions
As referred to in Recommendation 1.15, the law should be amended to provide for enforceable provisions of industry codes and for the establishment and imposition of mandatory industry codes.
In respect of the Life Insurance Code of Practice, the Insurance in Superannuation Voluntary Code and the General Insurance Code of Practice, the Financial Services Council, the Insurance Council of Australia and ASIC should take all necessary steps, by 30 June 2021, to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder designated as ‘enforceable code provisions’.
Recommendation 4.10 – Extension of the sanctions power
The Financial Services Council and the Insurance Council of Australia should amend section 13.10 of the Life Insurance Code of Practice and section 13.11 of the General Insurance Code of Practice to empower (as the case requires) the Life Code Compliance Committee or the Code Governance Committee to impose sanctions on a subscriber that has breached the applicable Code.
Treasury, Interim Report Submission, 9–10 .
Brighton v Australia and New Zealand Banking Group Ltd  NSWCA 152; Doggett v Commonwealth Bank of Australia (2015) 47 VR 302.
The Corporations Act may be the preferable option, given that it already contains ASIC’s code approval power: see s 1101A.
See Competition and Consumer Act s 51AE, and more generally Treasury, Industry Codes of Conduct: Policy Framework, November 2017, 14–15.
Exhibit 6.409, Witness statement of Sally Loane, 30 August 2018, 14 [9.1]; Background Paper No 29, 15 [5.4].
FSC, FSC Life Insurance Draft Code of Practice 2.0 (5 December 2018) FSC <www.fsc.org.au/event-list/website-events/Code-Roadshow/
FSC, Consultation Draft: Life Insurance Code of Practice (5 December 2018) FSC <www.fsc.org.au/event-list/website-events/Code-Roadshow/1.
FSC, Consultation Draft: Life Insurance Code of Practice (5 December 2018) FSC <www.fsc.org.au/event-list/website-events/Code-Roadshow/ 9–11 [3.5A]–[3.6B]; 12–16 [4.1]–[4.3A], [4.11]; 17–19 [5.2A]–[5.5]; 23 [6.6A]; 25–31 [8.2]–[8.18]; 41–2 [13.9] and 43–4 [13.22]–[13.23].
FSC, Insurance in Super Working Group (5 December 2018) FSC <www.fsc.org.au/policy /life-insurance/insurance-in-superannuation-working-group-iswg/>.
Insurance in Superannuation Voluntary Code of Practice s 3.6.
FSC, Consultation Draft: Life Insurance Code of Practice (5 December 2018) FSC <www.fsc.org.au/event-list/website-events/Code-Roadshow/2, Ch 2.
Exhibit 6.404, Witness statement of Robert Whelan, 27 August 2018, 11 ; see also Transcript, Robert Whelan, 21 September 2018, 6398.
Transcript, Senior Counsel Assisting, 14 September 2018, 5787–8.
See, eg, Transcript, Senior Counsel Assisting, 13 September 2018, 5655–7.
Exhibit 6.401, Witness statement of Lynelle Briggs, 14 September 2018.
Exhibit 6.401, Witness statement of Lynelle Briggs, 14 September 2018, 4 (Question 1(c)).
Exhibit 6.401, Witness statement of Lynelle Briggs, 14 September 2018, 4 (Question 1(f)).
Exhibit 6.401, Witness statement of Lynelle Briggs, 14 September 2018, 7 (Question 1(j)).
Exhibit 6.401, Witness statement of Lynelle Briggs, 14 September 2018, 32 .
Exhibit 6.402, Witness statement of Anne Brown, 28 August 2018, 2 .
In the general insurance context, see Exhibit 6.401, Witness statement of Lynelle Briggs, 14 September 2018, 32 ; General Insurance Code of Practice s 13.11. In the life insurance context, see Exhibit 6.402, Witness statement of Anne Brown, 28 August 2018, 1–2 –; Life Insurance Code of Practice s 13.10.
General Insurance Code of Practice s 13.11; Life Insurance Code of Practice s 13.10.