Consumer credit insurance (CCI) is a type of add-on insurance sold with credit cards, personal loans and car loans. It is promoted to borrowers to help them meet their repayments if they lose their job, become sick or injured, or die. However, CCI has long been associated with poor consumer outcomes in Australia and overseas, including consumers being unaware that they have purchased CCI and consumers being ineligible to make a claim on their CCI policy. Compared with other common insurance products (such as car and home insurance), consumers can receive very little back in claims compared to what they pay in CCI premiums.
Recently, the Australian Securities & Investment Commission (ASIC) outlined the results of audits conducted by eight banks in Australia following the regulatory action taken in the United States against a well-known US international banking and financial services company. Overall, the audits did not find evidence of systemic misconduct involving illegal opening of accounts as seen in the US company but they did point to the fact that improvements need to be made to the sale of CCI.
In light of the audit findings ASIC has formed a CCI working group which includes participants from the banking industry and consumer advocates.
The CCI working group met for the first time on 27 July 2017 and is tasked with determining:
- how a deferred-sales model for CCI sold with credit cards over the phone and in branches will work;
- what measures need to be implemented for CCI sold with credit cards over the Internet;
- other measures to promote good consumer outcomes (including well informed decision making) for CCI sold with credit cards and other loan products; and
- the data necessary to ensure that the success of these reforms can be monitored (such as data on complaints, claims performance and cancellations).
The banks involved in the ASIC audit have now committed themselves to a range of measures to improve consumer outcomes in relation to CCI. Importantly, this includes a deferred-sales model for CCI sold with credit cards over the phone and in branches. This means that consumers cannot be sold a CCI policy for their credit card until at least four days after they have applied for their credit card over the phone or in the branch. The CCI working group is working to identify improvements that can be made to banks’ sales practices for CCI on credit cards sold online, and with other loan products in all sales channels. For example, the banks have committed to strengthening their processes for obtaining express consent from customers who purchase CCI and to provide improved disclosure about the cost and duration of the policy.
ASIC will incorporate these measures into the revised Code of Banking Practice and will accelerate their introduction so that they commence in the first half of 2018 and well before the new Code is fully in place.
In 2016, ASIC released three reports covering its review of the sale of add-on insurance through car dealerships, which found that the insurance is expensive, of poor value and provides consumers very little or no benefit. ASIC will shortly release a consultation paper to consult on proposals in relation to add-on insurance products (including CCI) sold through car dealerships, including a deferred-sales model for this channel.
Importantly, in addition to ASIC’s work on add-on insurance sold through car dealerships, the regulator has started surveillances into past CCI practices by banks. ASIC Deputy Chair Peter Kell has said: “Our last major CCI review in 2011 put forward a range of recommendations in relation to disclosure, staff training and compliance monitoring. We will examine how the banks addressed those recommendations as well as if further changes are needed to ensure better outcomes for consumers. If we find instances of mis-selling, we will take further action.”
The 2011 CCI review report can be found here.
In its review of sales practices the regulator identified the following risks:
- consumers not being made aware that they have purchased CCI or that CCI is optional;
- consumers not being asked whether or not they wish to purchase CCI;
- consumers not being eligible to claim on all components of the CCI policy they have purchased;
- the potential for consumers to be pressured or harassed by sales staff; and
- consumers not understanding the cost or the duration of the CCI policy.
In light of Mr Kell’s comments above banks and other entities that sell CCI should be re-reviewing ASIC’s recommendations to ensure that they have been implemented. The recommendations are set out in Table 2 (page 10) and sections C, D and E of the report, and cover issues such as:
- formal sales scripts;
- evidence of consent;
- disclosure of interest payments;
- separate quotes;
- disclosure of premium structure;
- duration of CCI policies;
- timing of provision of product disclosure statement;
- training programs;
- ongoing information; and
- monitoring systems.