Recent enforcement action by ASIC against collapsed payday lender, the Cash Store Pty Ltd (TCS), has put the sale of consumer credit insurance (CCI) into sharp focus.
On 19 February 2015, the Federal Court awarded penalties against TCS and its loan funder, Assistive Finance Australia Pty Ltd (AFA) of almost $19 million. It found that TCS and AFA had breached national consumer credit legislation and engaged in unconscionable conduct in the sale of CCI to customers.
This is the largest civil penalty ever obtained by ASIC.
ASIC v The Cash Store Pty Ltd (in liq)
Justice Davies found that TCS breached the responsible lending provisions of the National Consumer Credit Protection Act 2009 (NCCPA) in arranging short term, low value loans usually to customers who were on low incomes or in receipt of Centrelink benefits. He concluded that there was a failure by TCS to make reasonable enquiries about the customer’s financial situation.
TCS was also found to have engaged in unconscionable conduct in breach of section 12CB of the Australian Securities and Investments Commission Act 2001 (ASIC Act) in selling CCI to customers who took out these payday loans. This insurance product was intended to cover death and dismemberment, disablement, cancer, heart attack or stroke, involuntary unemployment and catastrophic illness.
Justice Davies made the following findings in relation to the sale of CCI by TCS:
- TCS collected over $2 million from customers in insurance premiums across 182,838 credit contracts during the period when it sold CCI. However, only 110 claims were made with only 43 policies receiving a settlement, totaling $25,118;
- The average ratio of claims to premiums for the TCS policy was 1.1 per cent compared to an industry average of 20.7 per cent for CCI;
- TCS actively encouraged its employees to overcome customers’ objections in their efforts to sell the product; and
- Many of the CCI policies were sold to borrowers who were on Centrelink benefits and who therefore stood to gain little from the CCI policies, because they were ineligible for benefits for disablement or involuntary unemployment.
Judge Davies imposed the maximum penalty available under the ASIC Act ($1.1 million) in respect of the unconscionable sale of CCI. ASIC has since announced that the underwriter of the CCI insurance has agreed to refund consumers $400,016 in premiums in respect of policies sold by TCS.
Lessons for insurers and CCI distributors
The PPI scandal in the UK has inevitably caused regulatory interest in CCI products in Australia. It is apparent that ASIC is looking closely at whether these products are being appropriately sold and whether the product is generally providing consumers with value. ASIC has expressed general dissatisfaction with the sale of add-on products in insurance (where the consumer’s primary focus is on another transaction entirely); and CCI is a leading example of that distribution model.
ASIC will be eager to understand how a product can be appropriate to a consumer if few claims are made and accepted. Low combined ratios and high claim declinature rates should be a red flag to underwriters. The sale of CCI through third parties should be closely monitored, and attention given to incentives that may not promote appropriate sales practices.
For further information please contact Matt Ellis.