On 21 July 2021, ASIC released Consultation Paper 346 and a draft updated Regulatory Guide 38 (RG 38) to reflect new legislative changes that strengthen the current hawking prohibitions. As many in the industry will know, new hawking prohibitions come into effect on 5 October 2021.
The new hawking prohibitions will not only affect insurers, but also coverholders, underwriting agencies, brokers and other intermediaries. The hawking prohibition operates in parallel with the deferred sales model. See our separate update on the Deferred Sales Model.
In our view, the proposed regulatory guidance largely reflects the proposals set out in the explanatory memorandum. On this analysis, it is a fair reflection of the government’s intent.
However, it remains to be seen whether the reforms strike the right balance between information, access and potentially poor sales practices. The problem of underinsurance in Australia may be an even trickier one to solve.
What are the new hawking prohibitions?
The hawking reforms will be implemented by Schedule 5 of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth). The key points of the reforms to the hawking prohibition include:
- application to all financial products including insurance (as defined in the Corporations Act 2001 (Cth));
- a definition of “unsolicited contact” that extends to all means of communicating with a consumer without their consent by way of a real time interaction in the nature of a discussion or conversation;
- that consumer consent must be positive, voluntary, clear and capable of being reasonably understood;
- that consent is only valid for six weeks from the date it was given and may be withdrawn at any time by the consumer; and
- a statutory right for the consumer to return a product if they have been hawked that product.
Purpose of the consultation
Consultation Paper 346 requests feedback on, among other points:
- the forms of communication that offerors currently use, or foresee using and any practical issues raised by the prohibition of those forms of communication;
- whether offerors anticipate any practical issues in seeking consumer consent;
- what products do offerors commonly cross-sell or bundle together for sale or issue, and whether the guidance on the scope of consumer consent will raise practical issues; and
- whether the payment of refunds for financial products raises any practical issues.
Interested parties may provide feedback to ASIC on Consultation Paper 346 by 17 August 2021, for more information please follow this link.
What is ASIC considering?
The RG 38 released for consultation sets out ASIC’s current thinking around the application of the new laws, especially around some key areas of potential legal uncertainty.
When is something ‘because of’ an unsolicited contact?
Not surprisingly, ASIC is providing guidance on one of the key phrases used in the new prohibition. Under section 992A(1)(b), it is a breach of a hawking prohibition if an offer of financial products is made ‘because of’ or ‘in the course of’ an unsolicited contact.
ASIC is taking the view that offers that take place through a medium other than a real time interaction can still be ‘because of’ an unsolicited contact. For example, an emailed offer during or directly after an unsolicited outbound sales call.
In some cases, ASIC considers the ‘causal nexus’ may be broken. This might be, for example, the customer obtains personal advice on the product or the consumer has taken active steps to consent to further contact regarding the offer. However, obtaining general advice, receiving a PDS or providing a disclaimer that the offer is not because of an initial unsolicited contact is unlikely to break the nexus.
The forms of contact that are subject to the prohibition
The new hawking prohibition will apply to any real-time contact or interaction that is in the nature of a discussion or conversation. Accordingly, the prohibition is technology neutral. It could include any real-time interactions including telephone calls, face-to-face meetings, instant messages and chat bots.
ASIC’s draft guidance notes that businesses can utilise communications that are not in real time to encourage consumers to request future contact. However, note that if a customer provides consent in this way it is only valid for six weeks.
The prohibition applies to an ‘offer’ of a financial product. ASIC has expressed its view that providing a consumer with an insurance quote constitutes an offer of that insurance product and may, if provided because of or during an unsolicited real time communication, constitute a breach of the hawking prohibition.
However, the hawking prohibition does not prevent contact with an existing client about a product already held by that client if the discussion does not involve an offer or invitation to apply for a new financial product. This suggests that client retention contact can continue to be made.
Nature of consumer consent to be contacted
The proposed regulatory guidance also sets out ASIC’s view on the nature of the consent required. In summary:
- positive consent involves an active step by the consumer, such as initiating contact with the offeror through a telephone call or online form;
- consent cannot be provided in response to a leading question, including where a leading question is used to attempt to obtain an extension or renewal of consent; and
- an offeror must be satisfied that the consumer was sufficiently informed to provide consent.
ASIC suggests that offerors:
- encourage consumers to specify which financial products or classes of financial products they wish to discuss;
- provide consumers with enough information in a sufficiently prominent way so as to allow them to carefully consider whether to consent to the contact, and the form of that contact; and
- if in doubt, confirm the scope of the contact to which the consumer gives consent.
Section 992A(5)(2) requires the consent to be ‘clear’. ASIC has also proposed to provide regulatory guidance on what is ‘clear’, suggesting that offerors must consider whether the consent provided by a customer might be vague or ambiguous. We query the extent to which offerors will need to undertake this analysis, and the changes to telephone scripting and training this may require.
Scope of customer’s consent
Another important area for clarification is the scope of the consumer’s consent. Under s 992A(5), the gateway to contacting consumers, the financial product must be reasonably within the scope of the consumer’s consent. While each situation will depend on the particular facts and circumstances, ASIC’s draft clarification provides that certain products will be reasonably within the scope of the consumer’s consent, for example:
- if the consent is in relation to products of a particular type, with particular features or performs a particular function, and the product is of that type, has those features or performs that function; or
- the product covers risks that the consumer consented to being contacted about, has the same purpose or function as the product the consumer consented to, or is ‘so closely related’ that the consumer would reasonably expect to be offered that product. An example given in the regulatory guide is travel insurance offered by a travel agent as it is ‘closely related’ to the offering of the flights.
We consider this is a reasonably flexible interpretation, particularly important in bundled insurance products. However, care should be taken in these circumstances to ensure the communication does not stray into a product that is outside the scope. The new regulation may impact cross-selling through insurance bundle discounts. For example, consent to discuss car insurance will not permit the offeror to offer home insurance as part of a discounted package.
Furthermore, the regulatory guidance suggests that the consent must be obtained before the contact begins; consent to talk about additional products cannot be elicited during a call about another product to which the customer did consent.
The right to return a product and receive a refund
ASIC is also seeking feedback from industry on the right to return a product where a product has been sold in breach of the hawking prohibitions. The new right is set out in s 992AA. In particular for insurance products, a claim may have been made or indeed paid against a policy prior to it being returned and refunded under this new right. Furthermore, a discount may have been applied due to the bundling of insurance products and only part of the bundle is returned.
The regulatory guidance is also seeking to go beyond the protections offered to consumers under s 992AA, stating that Australian Financial Services licensees may need to remediate clients who have suffered loss or detriment as a result of a breach of the hawking prohibitions, beyond providing a refund.
ASIC will release its final Regulatory Guide on the hawking prohibition in September 2021. For access to Consultation Paper 346 and draft Regulatory Guide 38, please follow this link.
We are assisting clients to navigate these and other insurance regulatory changes. Feel free to get in touch with the authors if you have a question. You can also check out our Insurance Regulatory Hub.