ASIC publishes guidance on the deferred sales model for add-on insurance
05 August 2021
What you need to know
- The deferred sales model for add-on insurance commences on 5 October 2021 and is intended to give effect to recommendations from the Financial Services Royal Commission
- ASIC has provided guidance on its interpretation of requirements that will apply to providers of add-on insurance products and how to comply with them, as well as its approach to exemptions
What you need to do
- Consider whether your sales practices require alteration to comply with the deferred sales model, and if so, ensure that they are appropriately modified prior to 5 October 2021
- Consider whether you will need to apply for an existing exemption from the deferred sales model or on an individual basis
The Deferred Sales Model for Add-on Insurance
Schedule 3 of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) commences on 5 October 2021 and introduces a deferred sales model for add-on insurance in response to recommendations from the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry (the Financial Services Royal Commission).
On 28 July 2021, the Australian Securities and Investments Commission (ASIC) issued Regulatory Guide 275 The deferred sales model for add-on insurance (RG 275). RG 275 explains ASIC's interpretation of the requirements that will apply to providers of add-on insurance products under the deferred sales model and provides guidance on compliance. It also describes ASIC’s approach to applications for exemption from the model.
Scope of the Deferred Sales Model
RG 275 explains the following key elements of the definition of 'add-on insurance product' in section 12DO.
Financial product offered or sold to a 'consumer'
ASIC explains that the customer of an add-on insurance product must be a 'consumer' as defined in the law. It refers to the existing definition of 'consumer' contained in section 12BC of the Australian Securities and Investments Commission Act 2001 (ASIC Act).
Principal product or service
ASIC views a principal product or service as one which a customer acquires or agrees to acquire during the transaction in connection with which the customer is offered or sold an add-on insurance product.
Offered or sold in connection with acquiring, or entering into a commitment to acquire, a principal product or service
ASIC considers that the concepts of ‘offer’, ‘sale’ and ‘sold’ are relatively broad and take their ordinary meaning.
ASIC considers that ‘in connection with’ takes its ordinary meaning and the add-on insurance product is likely to be offered or sold ‘in connection with’ a principal product or service if:
(a) the add-on insurance product is offered or sold around the same time as the principal product or service;
(b) the sale of the principal product or service gives an advantage to the provider of the add-on insurance product to leverage its sale; or
(c) arising from the principal transaction, the principal provider refers the customer to a third-party provider who offers or sells insurance to the customer.
ASIC also considers the terms ‘acquiring’ and ‘commitment to acquire’ to take their ordinary meaning.
That manages financial risk
ASIC refers to the existing definition of 'manages financial risk' in section 12BAA of the ASIC Act.
Types of contracts that can be add-on insurance products
ASIC notes that to meet the definition, the product must be a 'contract of insurance' as defined in section 12DO(2), or provide for the customer to benefit from a contract of insurance to which the provider of the add-on is a party.
The latter includes, for example, where a group purchasing body provides customers with cover under a risk management product provided by a third-party provider.
Complying with the Deferred Sales Model
ASIC has clarified that the scope of permitted conduct for add-on providers changes over the distinct periods in the model.
Pre-deferral period
This period starts when a customer indicates an intention to acquire a principal product or service and ends when the deferral period starts.
Although a principal or third-party provider may advertise and discuss an add-on insurance product during this period, it is prohibited from selling such a product.
Deferral period
This period commences when the customer commits to acquire a principal product or service and receives the information in the prescribed manner and form.
It extends for four days during which a principal or third-party provider cannot sell an add-on insurance product and cannot offer, request or invite a customer to ask for, apply for, or purchase such a product (except in writing). The latter prohibition does not apply where the offer, request or invitation is made in response to contact initiated by the customer and relates only to the purpose of that contact.
Post-deferral period
This period starts at the end of the deferral period and ends six weeks after the start of the deferral period.
During this period, add-on insurance products can be sold and offers, requests and invitations to buy the product can be made only in writing, subject to the rules for customer-initiated contact.
Exemptions from the Deferred Sales Model
ASIC has clarified that it has discretionary powers to exempt an add-on insurance product. If a product does not fall within an existing exception, a person may apply to ASIC through the ASIC Regulatory Portal on an individual basis under section 12DY(1).
ASIC will consider applications for an exemption in accordance with its general approach to relief set out in Regulatory Guide 51 and must take into account factors specified in section 12DY.
These factors include: whether the product has historically been good value for money, whether there is a high risk of underinsurance or non-insurance, any evidence as to whether the product is well understood by consumers, and any differences with products of a similar kind that are not sold as add-on insurance products.
Authors: Rehana Box, Partner; Alexandra Nash, Senior Associate
