Mr Bessell accepted that consumers were sold products that were of questionable or little value to them, and that the products could have been better explained by the dealers.[1] Mr Bessell agreed that the number and complexity of the products presented to the consumer, and the various options within the products, made it difficult for consumers to have a proper understanding of the products.[2]
8.3.1Misconduct
In closing submissions, Counsel Assisting submitted that it was open to me to find that Swann may have engaged in misconduct by breaching the obligation in section 912A(1)(a) of the Corporations Act (in a number of distinct ways), the obligation in section 912A(1)(ca) of the Corporations Act, the obligation in section 912A(1)(aa) and the obligation in section 145 of the National Credit Code. In its written submissions, IAG resisted any finding of misconduct being made.[3]
Section 912A(1)(a)
Section 912A(1)(a) obliges Swann to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly. Counsel Assisting submitted there were four matters that demonstrated that Swann’s conduct may have breached that provision. The first was that Swann undertook no meaningful review of its products to determine whether they provided any value to customers.[4] The second was that Swann continued to authorise the sale of those products after becoming aware that ASIC held concerns about their product design and sales practices.[5] The third was that Swann established and maintained arrangements that incentivised dealers to sell as many add‑on products to consumers as possible, regardless of the suitability or value to consumers.[6] The final basis was that Swann failed to establish systems to oversee and monitor the sales practices of its authorised representatives.[7]
I deal with each of the four matters in turn.
Swann undertook no meaningful review of its products to determine whether they provided any value to customers.[8] In its submissions, IAG pointed to internal reviews of loan protection insurance and GAP products in July and August 2016. But those reviews came at least eight months after ASIC had raised its concerns with Swann that Swann’s products may have contravened regulatory requirements. As at July 2016, Swann had not undertaken a ‘deep technical review of all the products distributed by Swann through Motor Dealers’.[9] Indeed, Swann’s view was that ‘ASIC’s review of the [motor dealer] channel and products will highlight any issues in respect of product design negating the need for a further internal review’.[10] Mr Bessell agreed that this was the position.[11]
Swann continued to authorise the sale of those products after becoming aware that ASIC held concerns about their product design and sales practices.[12] IAG noted that after ASIC raised its concerns, Swann participated in an industry approach to the issue through the Insurance Council of Australia.[13] It stated that ‘[w]hile with the benefit of hindsight, reasonable minds could differ as to what approach Swann could or should have taken in and after September 2015, it is difficult to see that becoming involved in an industry wide solution through the Insurance Council of Australia was inefficient or unfair (let alone dishonest)’.[14]
There are two problems with this submission.
The first is that, as Mr Bessell recognised in his witness statement, the pursuit of an industry solution through the Insurance Council of Australia delayed Swann dealing directly with the issues in its own business.[15] This approach by Swann, in circumstances where Swann lacked an understanding from (relevantly) September 2015 of the value of its products, does not point toward conduct consistent with the obligation imposed by section 912A(1)(a).
The second is that the submission seeks, impermissibly, to qualify Swann’s statutory obligation in section 912A(1)(a). As IAG accepted, Swann continued to sell the products after ASIC raised its concerns in September 2015.[16] Swann possessed all information necessary to ascertain those issues before ASIC’s work. Upon becoming aware of ASIC’s concerns, there were many options open to Swann to reduce the detriment to consumers. It took only one option, and that option was inadequate to ensure that the sale of the add-on insurance products was efficient, honest and fair.
The third matter referred to by Counsel Assisting was that Swann established and maintained arrangements that incentivised dealers to sell as many add‑on products to consumers as possible, regardless of the suitability or value to consumers.[17] In its submissions, IAG again pointed to the Insurance Council of Australia’s attempts to develop an industry–wide solution.[18] No doubt the market position made unilateral action difficult. But market-wide misconduct cannot condition the statutory obligation. Compliance with the law will sometimes require entities to sacrifice revenue or profit, if that revenue or profit cannot be generated in a lawful way.
The final matter was that Swann failed to establish systems to oversee and monitor the sales practices of its authorised representatives.[19] IAG pointed to the systems that it did have in place, presumably to suggest that they were adequate.[20] That submission is at odds with Mr Bessell’s acceptance that, at least between 2013 and January 2017, Swann did not have in place adequate risk management systems.[21] Given the significance of add-on insurance sales to Swann’s total revenue, the sales practices of its authorised representatives was necessarily a significant risk. IAG’s own internal report noted that the ‘authorised representatives currently are not actively recording potential breaches and, therefore, Swann has no oversight on any issues that may be occurring. Promoting the importance of logging all potential breaches is required’.[22]
In combination, the four matters identified above are sufficient to find that Swann may have engaged in misconduct by breaching its obligation to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly. Selling products through a heavily incentivised dealer network, as an add-on to another sale, creates very significant risk of unfairness for consumers. Doing so in circumstances where the conduct of the authorised representatives is not actively monitored and/or audited heightens the risk that the statutory standard of conduct will not be met. When the products are of low value, the risk of unfairness is compounded. And while industry-wide solutions will often be appropriate, participation through an industry group does not absolve a participating entity of its continuing legal obligations.
Section 912A(1)(ca)
IAG also resisted a finding that Swann may have breached its obligation under section 912A(1)(ca) of the Corporations Act – the requirement to take reasonable steps to ensure that its representatives complied with financial services laws – by failing to establish systems to oversee and monitor the sales practices of Swann’s authorised representatives.[23] The matters I have mentioned already show that Swann may have breached this obligation.
Section 912A(1)(aa)
IAG did not accept that Swann may have breached section 912A(1)(aa) of the Corporations Act by failing to have in place adequate arrangements for the management of any conflicts of interest that arose through incentivising sales of its add-on insurance products.[24]
IAG sought to rely on the processes that may have been insufficient to prevent Swann from breaching its obligations under section 912A(1)(a) and (ca) to say that its processes for managing conflicts were adequate.[25] The processes relied on operated together with Swann’s remuneration and incentive arrangements for its authorised representatives. Those arrangements were, by design, focused solely on sales volumes. The arrangements did not incentivise or promote appropriate sales; indeed, they encouraged the inappropriate conduct that has led to the remediation program. Mr Bessell accepted that the point of Swann’s remuneration and incentive arrangements was to incentivise sales.[26] He accepted that, on occasion, these incentive programs incentivised inappropriate sales practices, and that Swann’s authorised representatives sold products that were not appropriate to the consumer.[27]
IAG did not explain how, in light of these remuneration arrangements, the initial training and electronic compliance questionnaire ensured conflicts would be managed. Indeed, even by January 2017, Swann had no knowledge of what issues may have been occurring. Swann’s authorised representatives were not actively recording potential breaches and there was no monitoring in place to ensure that refresher training was completed. No face‑to‑face audits were being carried out. Swann’s electronic questionnaire was limited in the level of detail it captured.[28]
In these circumstances, I find that Swann may not have had in place adequate arrangements for the management of any conflicts of interest.
Exceeding commission cap
Finally, as IAG accepted in its 29 June 2018 letter, Swann may have breached section 145 of the National Credit Code by authorising payments to 34 authorised representatives that may have exceeded the 20% cap on commissions imposed under that section.[29]
8.3.2Conduct falling below community standards and expectations
Swann also engaged in conduct that fell below community standards and expectations by failing to take meaningful steps to ensure that its authorised representatives only sold add-on insurance products in circumstances where the product would be of value to the customer, by designing and implementing remuneration and incentive systems that promoted unfair sales practices; by failing to promote sales practices that focused on delivering value to customers and that met customer needs and expectations; by failing to investigate the appropriateness of its add-on insurance products or the sales practices of its authorised representatives in a timely manner; and by failing to redesign the add-on insurance products and the remuneration and incentive arrangements after first becoming aware of ASIC’s concerns in late 2013. Swann largely accepted that it had failed to meet community standards and expectations in those ways.[30]
8.3.3Causes of the conduct
Swann’s conduct had various causes. One was Swann’s remuneration and incentive arrangements for its authorised representatives. As I have noted above, those arrangements were, by design, focused solely on sales volumes.
The conduct was also attributable to Swann’s culture in various ways. Swann’s focus was profit and the maintenance of market share. Those were the goals pursued in the design of its remuneration and incentive arrangements, the prioritisation of the interests of motor dealers ahead of customers and the failure to design systems that properly supervised the work of the authorised representatives. Mr Bessell acknowledged that Swann viewed the motor dealers – not the ultimate consumer – as its customers.[31] In its initial submission to the Commission, IAG acknowledged that Swann’s focus on motor dealers was a ‘significant contributor’ to the conduct now the subject of the remediation program.[32]
Mr Bessell acknowledged that that there were two important features of the regulatory regime that facilitated the sale of add-on insurance: first, the point of sale exemption in the National Consumer Credit Protection Regulations 2010 (Cth), relevant to consumer credit insurance products; and second, the ability for Australian financial services licensees to authorise representatives to provide general advice.[33] Mr Bessell acknowledged that some industry participants considered it inappropriate for authorised representatives to determine whether an add-on insurance policy was suitable for the customer, in circumstances where authorised representatives were authorised to provide general advice only.[34]
[1] Transcript, Benjamin Bessell, 19 September 2018, 6140–1.
[2] Transcript, Benjamin Bessell, 18 September 2018, 6086.
[3] IAG, Module 6 Case Study Submission, 2–11 [6]–[55].
[4] Transcript, Closing Submissions, 21 September 2018, 6503.
[5] Transcript, Closing Submissions, 21 September 2018, 6503.
[6] Transcript, Closing Submissions, 21 September 2018, 6503.
[7] Transcript, Closing Submissions, 21 September 2018, 6503–4.
[8] Transcript, Closing Submissions, 21 September 2018, 6503.
[9] Exhibit 6.314, 27 July 2016, Report of IAG Risk Committee Review of CCI and Add-On Insurance, 9.
[10] Exhibit 6.314, 27 July 2016, Report of IAG Risk Committee Review of CCI and Add-On Insurance, 9.
[11] Transcript, Benjamin Bessell, 19 September 2018, 6134.
[12] Transcript, Closing Submissions, 21 September 2018, 6503.
[13] IAG, Module 6 Case Study Submission, 3 [12].
[14] IAG, Module 6 Case Study Submission, 3 [12].
[15] Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, 18 [105(e)].
[16] IAG, Module 6 Case Study Submission, 3 [12].
[17] Transcript, Closing Submissions, 21 September 2018, 6503–4.
[18] IAG, Module 6 Case Study Submission, 4 [16].
[19] Transcript, Closing Submissions, 21 September 2018, 6504.
[20] IAG, Module 6 Case Study Submission, 5–6 [17]–[26].
[21] Transcript, Benjamin Bessell, 19 September 2018, 6121.
[22] Exhibit 6.312, 9 January 2017, Oversight Report of Swann Authorised Representatives.
[23] IAG, Module 6 Case Study Submission, 6–7 [27]–[29]; see also Transcript, Closing Submissions, 21 September 2018, 6504.
[24] IAG, Module 6 Case Study Submission, 7 [30].
[25] IAG, Module 6 Case Study Submission, 7 [31].
[26] Transcript, Benjamin Bessell, 18 September 2018, 6105.
[27] Transcript, Benjamin Bessell, 18 September 2018, 6106.
[28] Exhibit 6.312, 9 January 2017, Oversight of Swann Authorised Representatives Report, 3; Transcript, Benjamin Bessell, 18 September 2018, 6114–15.
[29] Transcript, Benjamin Bessell, 19 September 2018, 6112.
[30] IAG, Module 6 Case Study Submission, 8–9 [37]–[47].
[31] Exhibit 6.304, Witness statement of Benjamin Bessell, 27 August 2018, 18 [105(b)].
[32] IAG, Initial Submissions, 29 January 2018, 33 [Item 73].
[33] Transcript, Benjamin Bessell, 18 September 2018, 6083–4.
[34] Transcript, Benjamin Bessell, 19 September 2018, 6144.