Some regulatory roadblocks for new Retirement Income Covenant

Alert to all industry and retail superannuation funds – compliance with the proposed retirement income covenant (RIC) faces two major regulatory roadblocks: personal advice and anti-hawking. There is an urgent need for regulatory relief or reform in relation to this.

There are two major regulatory problems that are thrown up by the recently proposed RIC, to be legislated into section 52 of the SIS Act. As we know, the new RIC will require superannuation trustees to formulate, regularly review and give effect to a retirement income strategy that meets certain prescribed requirements.

In the broader context of financial services law, the two problematic elements are:

  • the requirement to take steps to gather information about member needs, which will inform the formulation of the retirement income strategy; and
  • the incidental aspect of the trustee engaging with members of the fund to discuss not only the potential needs of fund members in retirement, but also to discuss what relevant retirement income solutions the trustee can facilitate through the superannuation fund.

Roadblock #1: Personal advice risk

The first activity of getting information raises the issue of the trustee inadvertently running foul of the personal advice prohibition. As we know, this legislative prohibition has two distinct limbs: the first is whether the relevant person interfacing with the member actually took their relevant personal circumstances into account (i.e. the subjective limb).

But the second limb (i.e. the objective limb) is even more problematic for two reasons:

  • first, because it can effectively deem an interaction to be personal advice where the client could have had a reasonable expectation that the interfacing person had considered the client’s personal circumstances; and
  • second, because in the wake of the High Court decision in Westpac v ASIC, there is almost a presumption of personal advice where an entity such as a trustee has both personal information about the client and has a legal duty to act in the client’s best interests.

So it follows that in the course of using personal interactions to elicit information from superannuation fund members in respect of their retirement income needs, the trustee runs a real risk of activating the personal advice requirements (through both the subjective and objective limbs), including the best financial interests fact-finding obligations.

The Explanatory Memorandum to the proposed RIC addresses this point indirectly by noting that trustees need not elicit client-specific information, but could rely on publicly available information. However, there are numerous examples mentioned in the Explanatory Memorandum where the Explanatory Memorandum refers to very specific pieces of member information, for example:

  • Paragraph 17.72: “trustees may consider information about whether beneficiaries are likely to have assets in other funds, other pensions or non-superannuation assets”;
  • Paragraph 17.36: which states that trustees have discretion as to how they balance objectives “using their understanding of the needs and preferences of beneficiaries when formulating the strategy”; and
  • Paragraph 17.31: other specific member information such as superannuation balances, expected eligibility for age pensions, partner status, home ownership, gender, expected retirement age, expected draw-down years, other demographic considerations.

It is not inconceivable or unrealistic that where a trustee formulates a relevant income strategy based on some or all of these factors, that it could be held to be providing personal advice.

Unlike the DDO regime, the RIC legislation contains no exception from the personal advise prohibition in respect of information gathering.

It is true that a trustee could seek to leverage the DDO exemption in this regard, but this would be quite a clumsy and potentially shaky strategy.

Roadblock #2: Anti-hawking risk

The anti-hawking regime seems to treat a pension interest as a separate financial product to an accumulation interest.

We reach this conclusion based on the following factors:

  • section 761E(7) of the Corporations Act indicates that the regulations may make provision to determine the meaning of ‘issue’ in relation to a class of financial products;
  • regulation 7.1.04E of the Corporations Regulations is made under section 761E(7), and applies if a member of a superannuation fund, who has a superannuation interest in the growth phase, elects to receive a pension in relation to that interest. Under sub-clause (2) of the regulation, a superannuation fund is taken to issue a new financial product when (a) it acknowledges receipt of the member’s election, or (b) it makes the first payment of the pension, whichever occurs first;
  • use of the word ‘new’ in this context suggests that a pension is a separate financial product to the growth phase of a superannuation interest; and
  • inserting this distinction into the language of the anti-hawking prohibition under s 992A(1) of the Corporations Act (that a person must not ‘offer a financial product for issue’), ultimately means that trustees who engage in unsolicited contact regarding pension products with existing members will be in breach of the anti-hawking regime.

This means that prima facie, a trustee or a party acting on behalf of, or by agreement with, the trustee could not interface with superannuation members to discuss the possible take-up of a retirement income solution by the member in a contact interaction which is captured by the anti-hawking regime (such as phone calls or branch conversations) without breaching the prohibition.

ASIC in Regulatory Guide 38 The hawking prohibition addresses this scenario by suggesting that it would be permissible for a trustee to provide information to a member about the pension product, provided that this would not consist of a prohibited offer, issue, sale or invitation. As you may be aware, we have taken the view that this is extremely ambiguous territory in practice – because even the provision of some information about a financial product, such as a pension product, could amount to an implied invitation and therefore, be captured by the anti-hawking prohibition.

The solution

The fact that an interaction by a trustee or a third-party product provider which is envisaged by, and in some respects required by, the proposed RIC could breach the personal advice and anti-hawking prohibitions seems curious, certainly unintended, and contrary to government policy.

It seems to us that a modification of the Corporations Act would be warranted in this scenario.

Such a modification could provide, for example, that the personal advice prohibition and the anti-hawking prohibition would not apply where the relevant interaction/communication with a member is made by the trustee or a party on behalf of the trustee in pursuit of compliance with the RIC. The key proposition would be to enable trustees to communicate with superannuation fund members freely in respect of retirement income options, particularly as members approach retirement phase.

It is of course possible that ASIC could decline to provide modification by pointing to the need for intervention by Treasury.  The reality is that the proposed timeframe for compliance with the RIC by 1 July 2022, not to mention the need for substantial preparation for the new regime, is likely to be problematic in this regard. An alternate to an ASIC modification might be for APRA to provide some suitable relief but this said, it seems more appropriate for relief to emanate from ASIC given that relief is sought in respect of personal advice and anti-hawking.

 

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Hartley Spring
Hartley Spring
Senior Associate
+61 2 9322 4656
Preeta Seshachari
Preeta Seshachari
Senior Associate
+61 2 9225 5763

Anti-hawking regulations for financial services registered

On Friday 6 August 2021, Treasury registered the long-awaited anti-hawking regulations in relation to financial services, which can be found here.

The Financial Sector Reform (Hayne Royal Commission Response) (Hawking of Financial Products) Regulations 2021 (Cth) operate to exempt certain conduct from the proposed anti-hawking prohibition coming into effect on 5 October 2021. Some key exemptions for the industry include:

  • Renewals: making an offer to renew a financial product that is substantially similar to a financial product held by the customer within 30 days of which the offer is made. This provision is an important one and will enable the insurance industry in particular to continue to assist in preventing underinsurance/insurance policy lapses, which result from a range of unintended circumstances (e.g. due to non-payment of premium or a failure to renew);
  • Basic banking products: making an offer, request or invitation in relation to a basic banking product in the course of any contact initiated by a customer (e.g. where the customer calls inbound or walks into a branch of their own initiative); and
  • Term deposits: making an offer, request or invitation in relation to a term deposit with a maximum term of 5 years, where the customer can withdraw their funds with up to 31 days’ notice to the bank, in the course of any contact initiated by a customer (e.g. where the customer calls inbound or walks into a branch of their own initiative).

These exemptions in relation to basic banking and term deposit products are also, in our view, sensible given there is widespread financial literacy on how these relatively simple and low risk products operate.

Along with these exemptions, there are a series of other exemptions available, including in the context of listed securities, managed investment schemes and litigation funding arrangements.

If you have any questions on the anti-hawking regime, get in touch with one of our experts below.

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Steven Rice
Steven Rice
Special Counsel
+61 2 9225 5584
Crystal Sanders
Crystal Sanders
Special Counsel
+61 2 9225 5146
Hartley Spring
Hartley Spring
Senior Associate
+61 2 9322 4656

Some further observations on anti-hawking and cross-positioning in financial services

We have previously written about our 12 principles that apply to the implementation of the new anti-hawking regime (NAHR), as well as some observations on the evolving structure of insurance contracts and distribution resulting from the NAHR.

In this article, we make some further observations on the scope of an invitation, consent, causation, and the scope for regulatory dialogue.

Cross-Positioning – The Scope of an Invitation

The scope of the concept of an “invitation” in the NAHR is wide.

Where a customer contacts the sales representative about Product A but the sales representative wants to cross-position Product B, in what circumstances can this occur and not constitute an unsolicited invitation under the NAHR?

The simplest scenario is where the customer’s scope of enquiry/request reasonably encompasses Product B. In this scenario, the discussion of Product B is solicited on the basis of inferred consent (which is permitted under the NAHR for products reasonably within the scope of the customer’s request).

Another similar solicited scenario is where the customer enquires about Product B of his or her own initiative, unprompted by the sales representative.

However, if the sales representative mentions Product B unprompted and not in one of these two scenarios or the scenarios outlined below, the mention of Product B is likely to be construed as an unsolicited invitation and a de facto presumption is created. We will call this the Invitation Rule.

The possible exceptions to the Invitation Rule

It is suggested that in addition to the above-mentioned scenarios, there are three basic possible exceptions where (what we have called) the de facto presumption could be rebutted. There are possible rebuttals based on the following:

  • Matching customer needs to relevant products

The customer contacts the sales representative and states that they have or want cover under an insurance policy they specify but in reality, that policy does not provide the cover the customer wants. In our view, here, the sales representative can point out that that the requested policy does not provide the cover but rather, another policy provides that cover. Provided that the representative who is offering the other product is responding to an expressed need of the customer, the presumption in the Invitation Rule is rebutted. Or perhaps more accurately, the sales representative has merely clarified the scope of the customer’s request in relation to the cover they want.

This could apply to a gap of cover being evident in a claims scenario, although it is probably not routine that the customer is, in making the claim, expressing a need for the relevant non-covered type of insurance. This scenario could also apply where, for example, a customer requests a home and contents policy to ensure protection for the boat parked in their garage. In this scenario, it would be permissible for the sale representative to clarify to the customer that a different insurance policy is needed to cover the boat. This is because such a conversation is reasonably within the scope of the customer’s request.

  • Pricing

The customer contacts the sales representative and indicates that they wish to purchase either a non-financial product (e.g. roadside assistance) or a financial product (e.g. comprehensive car insurance).

Where the pricing structure for the customer’s requested product is such that there is a difference (e.g. discount) if the person holds another financial product available from the same issuer, the sales representative can mention that fact (i.e. explaining the different pricing structures that are available). However, care needs to be exercised here to ensure the sales representative’s conduct does not constitute an implied invitation for the customer to ask or apply for the other financial product in order to take advantage of the pricing differential. The customer can clearly however request that other financial product of their own initiative without offending the NAHR.

  • Loss of a valuable right

Where the customer contacts the sales representative about a non-financial product or a financial product, and the sales representative is aware that the customer holds another product which is about to lapse the sales representative can point out the fact that the customer’s other product is about to lapse. This is arguably not prohibited under the NAHR, even if the lapsing product bears no relationship to the product which the customer contacted the sales representative about. This is because it is a discussion about the existing product already held by the customer. Further, we anticipate that the proposed regulations on anti-hawking foreshadowed by Treasury will provide a grace period during which customers can be contacted before or after a financial product they hold has lapsed or expired.

In our view, even absent a specific exemption in the regulations to contact customers about their existing financial products, the presumption in this scenario could arguably be rebutted because the sales representative is not mentioning the lapsing product in order to invite the customer to apply for it to be issued to them. There could however be some degree of argument about this (given a renewal will typically result in a new financial product being issued) and hence, we are proposing raising this with ASIC (see below).

  • Insurance as a prerequisite for another product

In a scenario where insurance is needed as a prerequisite to a customer holding another financial product (e.g. a home or car loan), there is a difference here between the sales representative mentioning the relevance of, and need for, the insurance versus the sales representative offering to arrange for the issue of the insurance to the customer. The former, in our view, is not prohibited under the NAHR, whereas the latter could be (unless the customer makes a specific request for insurance).

The scope of consent

We know that a customer can proactively agree to be contacted about certain financial products. However, the consent must be specific to those products.

A consent to receive a call about a broad class of financial products is unlikely to be specific enough – unless circumstances make it clear what the specific financial products are that the customer’s consent relates to.

Breaking the chain of causation

Readers will know that we regard the issue of breaking the causal nexus to be difficult from a legal perspective.

For example, the chain of causation is not broken where a sales representative mentions a financial product in an unsolicited call, sends information about that product to the customer, and proceeds in the same call (or a later one) to arrange for the issue of the financial product to the customer. The mere provision of information (including through non-live, digital channels) is not a sufficient intervening event to break the chain of causation.

While the Explanatory Memorandum provides that the chain of causation will be broken if the customer initiates contact with the provider having received and considered the information sent to them during or after the first unsolicited call, this does not accord with the legislation, which applies ordinary principles of interpretation to the ‘because of’ test which forms part of the prohibition under the NAHR. This issue is also addressed in the recently released consultation draft of ASIC Regulatory Guide 38 The hawking prohibition (Draft RG 38), which will be the subject of a separate note from us. But importantly, Draft RG 38 states [at RG 38.25]:

“The prohibition may still apply to offers, requests or invitations that take place through a medium other than one that is a real-time interaction. For example, emailing a consumer an offer during or directly after an unsolicited outbound sales call with them would be ‘because of’ that call.”

This statement from ASIC also aligns with the traditional legal interpretation of the term ‘because of’.

In a different scenario, can the chain of causation be broken when a sales representative mentions a particular financial product and the customer rings back of his or her own accord to ask about that product? On a technical legal view, we consider the answer is likely to be no, as the initiative of the customer is unlikely to be treated as a sufficient intervening event to break the chain of causation. However, the Explanatory Memorandum adopts a more practical view that such steps by the customer can break the chain of causation. On this point, ASIC has provided some guidance on its position in Draft RG 38 at [RG 38.28]:

“The causal nexus may also be broken if between an unsolicited contact and subsequent offer, request or invitation, the consumer has taken active steps to consent to further contact regarding the offer, request or invitation, and has had a reasonable opportunity to consider any information that they have been provided about a financial product and to assess its suitability prior to receiving the offer: see paragraph 5.55 of the Explanatory Memorandum.”

We consider that this aligns with the policy intent behind the anti-hawking regime, which aims to empower customers to ask about products they are interested in.

Mention of a financial product by a customer is a separate contact

It follows from what we have said elsewhere and in this briefing note, that for the NAHR to work, it must proceed on the basis that each mention of a financial product by a client can constitute a separate contact. So when a client calls the representative and raises a query about, or expresses a need in relation to a financial product, the client is consenting to a conversation about the product by virtue of making the call.

The Explanatory Memorandum notes that the NAHR allows for the offer of multiple products “if the consumer consented to being contacted about multiple products before the contact, or the consumer’s consent is sufficiently broad so as to reasonably apply to more than one product”.

The evolutionary consent

Where a client enquires about a product at inception of the contact but then asks about another product during the same conversation, that second query should be treated as a separate contact for the purposes of the NAHR. Expressed another way, the client’s consent has evolved into consenting to a conversation about the second product. In our view, this allows the conversation on the second product to proceed on a solicited basis.

Some regulatory dialogue

In our view it would be very useful to raise the following scenarios with ASIC and Treasury, and to even request a no action position or exemption in the regulations:

  1. As we canvass above, mentioning a financial product triggers the Invitation Rule, on a strict and proper legal interpretation of the NAHR legislation. We consider that where a sales representative mentions a financial product purely on an information only basis and then sends the customer information by other channels, such as email/SMS, this should be permissible from a policy perspective. In our view however, this is caught by the NAHR but should be exempted, given that the actual sale of the product would occur in a later interaction with the customer, and is not analogous to a potentially pressured sales scenario. This would also be consistent with the examples provided in Example 5.3 and Example 5.6 of the Explanatory Memorandum, thereby appropriately reflecting the policy intent.
  2. Similarly, using the marketing material exemption pursuant to section 992A(7) of the Corporations Act does not, in our view, allow marketing material to be used to break the chain of causation once an unsolicited invitation for a financial product has been made (e.g. during a phone call). Rather, the legal interpretation (which we favour) is that this provision merely confirms that sending of standard marketing material is not captured by the NAHR. A contrary interpretation is possible to the effect that the marketing material can be used to break the chain of causation because the provision of the marketing material is a new and separate interaction with the customer. We favour the first interpretation above from a legal perspective, but clarity and preferably a no action position would be desirable. Again, this is because there is no potential pressure selling scenario in this case, which is what the NAHR seeks to prevent.
  3. On causation, in short, we believe the current “because of” test is too wide and goes well beyond what is logical and reasonable in these circumstances. For this reason, we are working on a revised version of the causation test, which we would seek to socialise with ASIC.

Some commentary on various examples from the Explanatory Memorandum

Example 5.2

In this example, a superannuation fund runs an information session; in that session, the representative, Ros, informs the attendees of “the different superannuation products that the Very Good Super Fund has available”.

Leaving aside whether offerings within the Very Good Super Fund are separate financial products (but assuming that they are), this example seems to proceed on the basis that the introduction of these products by the representative is not hawking. This is likely to be explicable because the attendees have consented to hearing about such products by attending the session.

The example goes on to say that as Gary is leaving the session, Ros hands him an application form and asks him to fill it out. The example states this is unsolicited because “Gary did not consent to being invited to apply for a superannuation product before Ros gave him the application form and asked him to fill it out”. This example is difficult; if Gary has consented to hear about the various superannuation products available from the Very Good Super Fund, then is this effectively consent to be invited to ask about the product? If it is, then is it also consent to be invited to apply for the product? Or is any consent able to be implied by attending the session too generic and not specific to the products invited to be applied for? On this point, Draft RG 38 provides some insight into ASIC’s position at [RG 38.57]:

“This means that a consumer’s consent must demonstrate they understand they are consenting to being contacted for the purpose of being offered, or invited to purchase or apply for, a financial product. For consent to be clear, it must not be vague or ambiguous: see paragraph 5.79 of the Explanatory Memorandum.”

In any event, it is submitted that Ros, instead of giving an application form, could have given Gary some marketing material which complied with section 1018A of the Corporations Act as:

  • Gary had consented to be informed about the products and hence a mention of the products by Ros is not an unsolicited invitation; and
  • the giving of the marketing material is exempt from being unsolicited contact under section 992A(7) of the Corporations Act, as noted above.

Example 5.3

In this example, the issue of causation is dealt with. It is said that the client, Jonathan, sets up a meeting with his bank to discuss the refinancing of his mortgage. During the meeting, the bank representative provides Jonathan with some brochures relating to insurance products that the bank offers.

Jonathan calls the bank subsequently and asks for a quote for life insurance. The example states that the quote (and offer of life insurance) is not prohibited because the chain of causation is broken, “because Jonathan took positive steps to consent to being contacted in relation to the policy, had reasonable opportunity to consider the information, and was not pressured into providing that consent”.

This example is interesting because the sale following the initial introduction of insurance by the bank representative is not seen as being made “because of” the initial unsolicited contact. However, this interpretation exhibits a narrow view of the concept of causation, which is not consistent with the usual legal parameters of the concept of causation.

In saying this, we are conscious that the legal interpretation we believe is correct is extremely restrictive, if not illogical and inconvenient, and for this reason, we have included it in the topics for regulatory dialogue noted above.

Example 5.6

In this example, Alex, the customer, calls Trusty Bank and enquires about his insurance needs (viz “sort out” insurance arrangements related to the refinancing of his mortgage). The example states that Emily, the bank representative, can legitimately provide quotes in relation to home building and landlord insurance. However, during the meeting, the representative also asks about home and contents insurance in relation to Alex’s residential property, to which Emily responds by providing that information.

It is stated that the discussion of the residential home and contents insurance is outside of the scope of consent because it does not relate to Alex’s investment property. We disagree with this principle from a legal perspective, as the client has clearly consented to the enquiry about the home and contents insurance and the needs of the client encompass this enquiry.

This example states that the giving of information is not hawking. This only seems true if the information is provided in response to a request from the customer. Otherwise, the unprompted provision of information could, and is likely to, be an implied invitation.

Again, we are conscious that the legal interpretation gives rise to significant commercial restrictions which do not align with the policy intent of the NAHR, and hence has been included in the topics for our regulatory dialogue.

 

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Steven Rice
Steven Rice
Special Counsel
+61 2 9225 5584
Crystal Sanders
Crystal Sanders
Special Counsel
+61 2 9225 5146

THE EVOLVING STRUCTURE OF INSURANCE CONTRACTS, DISTRIBUTION & THE NEW ANTI-HAWKING REGIME

Following the publication of our principles on the new anti-hawking regime for financial products, we have been advising many life insurers and general insurers on their readiness for the new regime, due to come into effect on 5 October 2021. This is without a doubt one of the biggest reforms to impact the insurance industry in a long time.

It may not be immediately obvious to everyone, but it will be obvious to some that one of the important by-products of the new anti-hawking regime will inevitably be a change to the way in which insurance contracts are structured. The core reason for this is simple: the anti-hawking regime will prohibit the cross-selling of financial products through unsolicited interactions. In other words, insurers will be restricted from (among other things) inviting applications for or offering financial products to a customer other than products which the customer has enquired about or otherwise consented to discuss.

A major corollary of this is that speaking to a customer about an existing financial product already held by them will not constitute a breach of the anti-hawking regime. This is because there will be no unsolicited offer or invitation to purchase or apply for a new financial product.

This requires us to consider the core concept of a “financial product” and what this means in the insurance context. The starting position under the Corporations Act is that the relevant financial product is the contract of insurance (see section 764A of the Corporations Act). What constitutes the contract of insurance is typically a matter of contractual construction. However, there is a statutory overlay here and importantly, the Corporations Act adopts a differentiated approach between life insurance and general insurance.

In the life insurance context, a customer could contact their insurer about, say, their disability insurance cover and where the overarching contract of life insurance also provides options for obtaining death or trauma cover, these options could be raised with the customer without contravening the anti-hawking prohibition. However, if the death or trauma covers were offered under separate contracts, these would constitute separate financial products which could not be offered without customer consent.

This leads to Proposition #1 that there is a legitimate rationale and incentive for a contract of life insurance contract to be structured such that a single contract offers a series of optional benefits that can be purchased at the election of the customer. Where multiple covers are provided under a single contract and therefore, a single financial product, the making of offers or invitations for different covers under the same life policy would not, on the better view, constitute a breach of anti-hawking. There seems to be no reason why this structure could not be fruitfully employed in the life insurance context to optimise sales flexibility or what we refer to as “cross-positioning” of life insurance covers. We are aware of many instances across the industry when such “bundled” life policies are used.

The position in respect of general insurance is a bit more complicated. This is because of the “X-factor” represented by subsections 764(1A) and 764(1B) of the Corporations Act. These sections effectively deem different kinds of insurance cover and insurance cover for different kinds of assets to be separate financial products, thereby modifying for regulatory purposes the usual rules of construction of contracts. This means that a customer with one type of general insurance cover, such as say home insurance, could not be sold landlords insurance in an unsolicited interaction, as these different types of cover would constitute different financial products. Further, the parameters of this deeming can be ambiguous. For example, is home and contents insurance one or two kinds of cover?

This leads to Proposition #2, namely that general insurance will be less pliable when it comes to restructuring for the purposes of cross-positioning and the new anti-hawking regime. However, some restructuring is still possible and in fact, the above analysis lends itself to other cross-positioning opportunities. For example, an existing motor vehicle insurance policy can be altered such that it can cover multiple vehicles, not just one.

So while major changes were always expected to the way in which insurance is distributed, associated changes to product design are also, in our view, inevitable.

Shifting briefly from the above discussion on product design, there are also opportunities to restructure distribution (as many insurers will be aware) by bundling or categorising different types of cover from a sales perspective, where such covers are sufficiently connected. For example, some common categories could be:

  • car insurance (which could capture comprehensive car insurance, CTP, and fire and theft);
  • home insurance (which could capture home building, home and contents, contents only, and landlord insurance);
  • business insurance (which could capture public liability, product liability or professional indemnity covers); or
  • personal items (which could capture personal and valuable items cover, or home contents only cover).

Such categorisation from a sales perspective would seek to leverage the legislative mechanism that enables a product offer/invitation to be made where such an offer/invitation is “reasonably within the scope of the consumer’s consent” (see section 992A(5)(a)(ii) of the Corporations Act). This approach would be premised on a customer providing consent on broad terms, such as identifying a broad risk or need for which they would like insurance cover for (as opposed to a specific type of insurance cover), e.g. “I would like insurance for my business” as opposed to “I would like public liability insurance”. The Explanatory Memorandum for the new anti-hawking legislation at [5.66] expressly acknowledges that:

“A reasonable person should consider a financial product to be within the scope of the consumer’s consent if it:

    • covers the risks that the consumer consented to being contacted about;
    • has the same purpose or function as the product that the consumer consented to being contacted about; or
    • is so closely related to the product that the consumer consented to being contacted about that the consumer would reasonably expect to be offered that product.”

This leads us to Proposition #3, namely that in addition to opportunities for insurers to restructure a single financial product to provide different or broader protections, insurers can also consider whether the protections provided by different products have an adequate connection to enable a conversation with a customer about those different products.

If you have any questions about the new anti-hawking regime or about the distribution of financial products, get in touch with one of our experts below.

 

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Crystal Sanders
Crystal Sanders
Special Counsel
+61 2 9225 5146
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160

FSR GPS: Anti-hawking reforms for financial products

This edition of our ‘FSR GPS’ (Guidelines, Principles and Strategies) series covers the upcoming changes to the anti-hawking regime for financial products in the Corporations Act, with
the new regime coming into effect on 5 October 2021. In this article, we outline:

  • our 12 legal principles which go to the heart of the new anti-hawking regime;
  • our legal and practical insights on each of these principles; and
  • some observations on personal advice in the context of new anti-hawking regime.

Download and read our insights here.

The HSF Financial Services Team has also formulated a ‘Cross-Positioning Strategy’ designed to assist clients stimulate sales but within the parameters of the new anti-hawking regime. If you would like more information, including a workshop, in relation to our Cross-Positioning Strategy, please contact one of the team members appearing below.

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Ruth Stringer
Ruth Stringer
Consultant
+61 2 9225 5099
Steven Rice
Steven Rice
Special Counsel
+61 2 9225 5584
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Hartley Spring
Hartley Spring
Senior Associate
+61 2 9322 4656

Financial services distribution & future sales models

There are several tectonic forces at play which are all converging to impact on sales and distribution of financial products. The key forces are:

  1. general law developments affecting general advice and personal advice;
  2. the new anti-hawking changes;
  3. the evolution of the efficiently, honestly and fairly obligation (click here to read our detailed discussion in previous articles in this series in parts 1 and 2 of Spotlight on efficiently, honestly and fairly); and
  4. the new ASIC design and distribution regime (covered in an upcoming article).

This edition of I-LEAP (Integrated Legal Enhanced Assisted Productivity) like others in the series (on disclosure, operations, and compliance and governance) is designed to assist financial institutions gain business and operational efficiencies through legal options and solutions.

 

1. General advice and personal advice

The issue of the distinction between and blurring of, these two forms of financial product advice has been around forever.

The key most important integer of change really stems from the ASIC v Westpac decision.

The ratio of the decision was that personal advice had been given even though this was not intended.

The sting in the tail of the legal concept of personal advice in the Corporations Act is that it contains a second objective limb which can operate to convert adviser/client interactions into personal advice where a reasonable person might expect the provider of the advice to have considered one or more of the client’s objectives, financial situation and needs.

Clearly, this test applies in one sense irrespective of the intention of the provider of the advice, although a threshold issue is the extent to which a disclaimer can negate the application of this second limb.

In the Westpac decision the court observed that a general advice warning appeared only at the start of the interaction. It is clear the usage of multiple general advice warnings would be desirable to fortify a negation of the second objective limb of the personal advice definition and hence ensure the client interaction is general advice only.

In our view, a suitable disclosure or series of disclosures can legally negate this second limb. Although it may be that a court would increasingly adopt a “National Exchange”[1] type approach of requiring the disclaimer to be very prominent, the equivalent of being in neon lights as it were.

But, in our view, another technique can be employed which is seeking and obtaining formal confirmation from the client that they understand that the advice is not intended to take their personal circumstances into account.

This could be obtained in writing if possible or via a recording in other appropriate circumstances.

Of course if the adviser actually takes the client’s personal circumstances into account, such a disclaimer will be entirely ineffective and a personal advice interaction will be present.

An additional layer is added to the above equation by reason of some of the judicial commentary in the ASIC v Westpac Full Federal Court decision (now on appeal to the High Court).

In this case, as mentioned, the court found that the advice was in fact personal advice, despite this not being the licensee’s intention. What is most significant, perhaps, is the fact that some observations in the case suggest that the second objective limb of the definition of personal advice might be triggered in circumstances where the client might anticipate that the adviser was acting in their best interests. From here the expectation is said to arise that the adviser was giving personal advice. This emerges from the judgment of Justice O’Bryan, who observed (at paragraph 390):

An individual that has invested superannuation with an institution would reasonably expect that institution to act for their benefit and in their interests in relation to their superannuation affairs. Such an expectation arises from the nature of the product, which is held by a financial institution on trust for the superannuation member. In my view, the combined facts that a financial institution calls and gives advice to an individual who is a member of a superannuation fund held or managed by that institution about rolling over superannuation points towards the circumstance described in [the second limb of the personal advice definition].

 

2. Anti-hawking changes

The proposed changes to the anti-hawking regime (“AHR”) are very significant to future distribution and advice models as they will tighten up sales restrictions which are already quite tight.

The key elements of the proposed new AHR are as follows:

(a) The two-sided nature of the prohibition

It has always been the case that the prohibition captured not just offers to the client to the relevant financial product but also invitations to the client to apply for the financial product.

The proposed extension covers requests or invitations to ask for or apply for a financial product.

As is currently the position, this prohibition is activated when the offer, request or invitation is made in the course of, or because of, an unsolicited meeting with the client.

These changes are significant as they substantially nullify an argument that one can approach the relevant client and effectively influence them to apply for the relevant financial product.

There is of course a question as to whether it may still be possible for the financial product issuer or licensee to simply mention the relevant financial product and rely on the client’s proactive actions to apply for the product. This scenario is explored further in section 5 below.

(b) Exemptions under the new AHR

Whilst a multitude of exemptions exist under the new AHR, the vast majority pertain to very specific types of transactions of specific financial products and it is not proposed to run through these.

A few of these however are not transaction specific and are worthy of attention.

The first relates to advice given to a client by a person who is required by the best interests obligations to act in the best interests of the client in relation to the advice. So this would capture a situation where the adviser is providing personal advice. In other words this captures any personal advice situation as section 961B(1) of the Corporations Act applies a best interests obligation to all personal advice interactions by requiring that: “The provider must act in the best interests of the client in relation to the advice.”

We explore this example further in section 5 below.

The second is the exemption that relates to add-on insurance products; more specifically to an offer of, or a request or invitation relating to, a financial product that is an add-on insurance product in relation to a product or service … sold to a consumer by: (i) the person making the offer, request or invitation; or (ii) another person with whom that person has an arrangement …”.

Various exceptions to this exclusion apply.

The real issue here is what products will qualify as add-on insurance products.

We canvass this aspect in section 4 below.

 

3. Parameters of the concept of “unsolicited contact”

The concept is expressed in terms of a contact which is wholly or partly in one or more of the forms of:

(a) a telephone call;

(b) a face-to-face meeting;

(c) any other form that a reasonable person would consider creates an expectation of an immediate response from the other person,

where

(d) the client did not request the contact; or

(e) if he or she did request, the request meets certain specifications.

The specifications are:

  • the request was for the issue, transfer or sale of the financial product;
  • the request was a positive act;
  • the request was clear and the client understood what was being requested;
  • if the request indicated a form of contact, the contact is in that form;
  • the request was made within 6 weeks before the contact occurs;
  • the request was not withdrawn before the contact;
  • any variations to the request before the contact occurs must be taken into account; and
  • the request may be varied or withdrawn at any time.

So clearly the new AHR is very explicit about what constitutes unsolicited contact.

Emails are unlikely to meet this definition as would paper correspondence. In addition to what the EM calls “ordinary corporate transactions such as sending investors offer documents” (paragraph 1.42).

Texts are also unlikely to meet this definition unless the text itself creates a reasonable expectation of an immediate response.

So the question obviously arises as to what other forms of contact would trigger this criterion.

The EM is useful in this regard when it refers to online video chats, web chat services and conversations in instant messaging apps.

Of course door-knocking was the historical genesis of this requirement.

 

4. Add-on insurance products

The AHR will not apply to offers to sell or issue add-on insurance products if the offer is subject to the rules for selling add-on insurance products under the proposed deferred sales model regime for add-on insurance products. As explained in the EM, insurance providers will be subject to either the deferred sales model or the AHR, but not both at the same time (paragraph 1.28).

An add-on insurance product is defined in the relevant proposed draft Bill as follows:

An add-on insurance product, in relation to another product or service (the principal product or service), is a financial product that:

(a) is offered or sold to a consumer in connection with the consumer acquiring, or entering into a commitment to acquire, the principal product or service as a consumer; and

(b) is offered or sold by:

(i) the provider of the principal product or service; or

(ii) another person, in accordance with an arrangement between that other person and the provider of the principal product or service; and

(c) manages financial risk (within the meaning of section 12BAA) relating to the principal product or service; and

(d) either:

(i) is a contract of insurance; or

(ii) provides for the consumer to benefit from a contract of insurance to which the provider of the financial product is a party.

One issue is whether the add-on insurance was to insure a risk which arises under the original product issued. Under the proposed definition extracted above, a product will only be an add-on insurance product if it manages financial risk relating to the principal product or service.

Again, some useful guidance is given in the EM. An insurance product offered on the standalone market, for example, will not be an add-on insurance product or service (paragraph 1.25), even if intended to compliment a general type of existing insurance. Mortgage protection insurance offered by an insurer with an arrangement with the bank mortgagee will be add-on insurance when offered to the mortgagor customer in connection with the provision of a mortgage (see Example 1.2 in paragraph 1.25).

 

5. Structural issues

(a) Raising awareness of financial product

Clearly a key structural issue is whether it is still possible to raise the awareness of the client in relation to the relevant financial product but without crossing the line into the realms of the prohibition, viz asking the client or inviting them to apply for the financial product. It is clear, as pointed out in the EM (paragraph 1.30) that:

“… an offeror cannot avoid the hawking prohibition by approaching a consumer and asking the consumer to request a financial product or by asking a consumer to fill in an application to be sold, transferred or issued a financial product.”

However the EM points out that certain interactions are exempted where “… another regime already gives appropriate consumer protection in relation to the offer of that financial product or where the consumer is expected to have enough knowledge to adequately assess the financial product offered” (at paragraph 1.60). This is reflected in the exemption to the prohibition referable to the advertising provisions contained in section 1018A of the Act.

More specifically, if a financial product is available for acquisition, then an advertisement or publication that is reasonably likely to induce people to acquire the product may be made if the criteria in section 1018A(1)(c) – (e) of the Corporations Act are satisfied; essentially referring readers to the product disclosure statement.

A similar exemption exists where the financial product is not yet available (under section 1018A(2)(c) – (f)).

Various other circumstances permitted under section 1018A will also be allowable for the purposes of the AHR.

So in view of this specific exemption, it is clear that a marketing campaign linked to the permitted advertising regime under the Corporations Act could be harnessed.

This then leaves it up to the client as to whether they will decide to apply for a relevant financial product. This model will provide some mileage to product issuers to remain in the direct market.

So to summarise this potential route, a product issuer could initiate a sales campaign where it commences the campaign by sending the target audience an advertisement or potentially by contacting them by telephone and then sending them the “advertisement” (although see our comments in section 6 below on the causation point).

(b) Using the personal advice route

As mentioned earlier, this route is broad. It does not require a link between the financial adviser and the relevant product per se but simply that the adviser is subject to the best interests duty.

So this is why this exemption provides a distribution opportunity, but also a distribution challenge. This is because the exemption will only work if a personal advice model is used.

But what about a scoped or scaled personal advice model?

Could not the product issuer give advice purely on the product sought to be sold, provided the advice was personal advice?

In the view of the authors, the answer is yes; although this model does raise issues of just how far a scaled/scoped advice model can go. It seems nonetheless incontrovertible that scaled/scoped advice is possible under a personal advice model.

The Corporations Act (in section 961B(2)) deals with the issue somewhat obliquely; it only explicitly refers (in the note to the sub-section) to the scenario where “a client may seek scaled advice” and in this case “the inquiries made by the provider will be tailored to the advice sought”.

But in the new AHR, could the product issuer operate a sales campaign where it uses scaled advice, purely on the product it seeks to distribute/sell?

The reference to scaled advice being sought by the client as per the note to section 961B(2) and not being framed by the product issuer/licensee may be deliberate. Nonetheless ASIC acknowledges in RG 244 that the scope of the advice may be agreed between the adviser and the client (see the examples of giving information and advice at paragraph 100).

So if the approach to the client by the product issuer/licensee clearly stipulated that personal advice will be provided but only in relation the particular product, then this should be possible.

This is subject to the adviser satisfying the best interests obligations which include providing appropriate advice (section 961C).

It still remains that:

  • the reasonable steps inquiries (set out in section 961B(2)) will be shaped by the scoped/scaled advice;
  • the ancillary best interests obligations, such as to give appropriate advice should also be affected and moulded by the scope of the advice.

(c) The multi-faceted financial product

Another potential sales model to consider is the use of a compendious financial product whereby:

  • there is only one financial product on issue;
  • where the person already holds that product,

in which case certain product upgrades can be made to that product without triggering the new AHR.

As pointed out in the EM (at paragraph 1.61), “The new hawking prohibition will not apply to financial providers who are contacting an existing customer about an existing financial product that has not lapsed, been cancelled, or otherwise expired, including a renewal of that financial product”.

We would add to this, interactions relating to a variation or extension of the existing financial product.

We have done considerable analysis of what such a model might look like and our team would be pleased to discuss this analysis with you.

 

6. Some observations on the causal connection in the new AHR

The concept and reach of the words “because of” are not straightforward.

In RG 38 (at paragraph 31), ASIC cites the Macquarie dictionary definition of:

“for the reason that;’ due to the fact that”

The EM reflects this when it states: (as paragraph 1.34):

“An offer is made ‘because of’ a meeting, telephone call or other contact if the offer is caused by, or is a result of, the unsolicited contact.”

In RG 38, ASIC distinguishes situations where causes are “remote and insignificant” (at paragraph 32).

In the EM, the words “significant or trivial” are used (at paragraph 1.34).

Both the RG and the EG state that causal connection will depend on all the facts and circumstances including:

  1. the nature of the initial unsolicited contact;
  2. how much time has elapsed between that contact and the offer; and
  3. whether there are any intervening events that should be regarded as breaking the connection between the initial unsolicited contact and the offer (at paragraph 33 of RG 38 and 1.35 of the EM).

The RG and EM are also synchronised on when the causal connection might be seen to be broken (paragraphs 34 and 1.36 respectively) and when it may not generally be broken (paragraphs 35 and 1.37 respectively). Reference is made here to the nexus being broken where the consumer obtains personal advice or a significant period of time has elapsed since the initial or any other unsolicited contact with the client.

It is submitted that causality is a hard peg to hang one’s hat on in terms of arguing that an interaction with a client does not cause the customer to respond. As pointed out by the EM, it will be difficult to seek to avoid the causal connection by arranging, or providing the opportunity for, the client to request the product in a subsequent interaction, viz. “The inclusion of the words “because of” seek to address the situation in which a financial provider makes unsolicited contact with a consumer, but the actual offer, request, or invitation is made during subsequent contact that is solicited by the consumer” (at paragraph 1.33).

We comment further on the reach of this concept in section 8.

 

7. Observations on the client request exemption

As observed earlier, an exemption exists where the financial is specifically requested by the customer or reasonably within the scope of the consumer’s request. The examples and guidance given in the EM are useful namely where:

  1. the consumer requested a product with a particular purpose or function;
  2. the consumer requested a broad class of products (for example life insurance);
  3. the consumer requests a product (for example a home loan) and a reasonable person would consider related financial products that provide cover for associated risks (for example home insurance).

The EM contains some useful guidance in this regard and essentially discusses 3 levels of client request.

The first is the most straightforward where the request is sufficiently clear to identify what is being required (paragraph 1.48).

The second is where a broader request is made, in which case, “… the request must clearly identify the purpose for which the consumer needs a financial product before a financial product provider is able to offer a product within the scope of the request” (also at paragraph 1.48).

The third is where the consumer makes an unclear request. Here, importantly, the EM (at paragraph 1.49) states that “… it is expected that the financial product provider will seek out more information to get a clear indication of the type of financial product the consumer is interested in discussing or the type of financial risk the consumer is interested in managing through a financial product.

This last observation is interesting. To the extent the person interacting with the client seeks out more information about the client’s request, this could very well bring the interaction into personal advice. In this case, the interaction would be covered by the personal advice exception previously discussed.

Certainly in this last level of interaction, there will be scope for a product issuer to refine the client’s scope of request and truly better align the request with the products the product issuer is offering.

 

8. Exploring the client request route

As mentioned above, the AHR carves out certain contact requested by the client from being unsolicited (see section 7 above).

Two distinct scenarios can be distinguished. The first is where the client requests a contact. A limitation here is where the product issuer invites the client to make the contact. In other words what is the situation if the product issuer sends a prompt or facilitates the client to make a request for contact? In this scenario, the issue is whether the contact is truly unsolicited (see the expressed view in the EM at paragraph 1.33 in section 6 above).

The second is where the client contacts the product issuer and issues a request in relation to a particular product or expresses a need or a purpose. In this scenario the issue is not so much whether the contact itself is unsolicited but whether the client has made a request for contact in relation to the particular financial product which is offered, invited or issued. Most of the examples in the EM deal with this second scenario.

Our commentary on this second scenario is set out in the next section.

Before, however, turning to that discussion, a few points need to be made about the first scenario.

In the current version of section 992A, there is no definition of “unsolicited contact”.

Rather the prohibition applies if the relevant offer etc occurred in the course of, or because of a specified unsolicited contact.

Because of the breadth of the concepts of “in the course of” and “because of”, there was at least some uncertainty as to whether a product issuer could contact the client, get the client to request a contact with the product issuer and then the client could voluntarily decide to apply for the product (although the EM seems to negate that possibility – see above).

Given there is a new definition of “unsolicited contact”, which contains an exemption where the other person requests the contact, would it be possible for the product issuer to invite the client to request a contact?

Provided the various elements of this exception are satisfied, then if the client is prompted by an unsolicited contact to set up a subsequent contact with the product issuer, then the issue will be whether any subsequent invitation, offer or issue arose because of the first contact which was unsolicited or the second contact which was not unsolicited, or even both?[2]

On our reading of the client request exemption, if a product issuer makes an unsolicited call to a potential customer inviting them to request a face-to-face meeting to discuss the purchase of a particular financial product or type of financial product, and the potential customer then clearly requests that meeting, then a reasonable person might consider any offer of that particular product or type of product made within the subsequent contact to be within the scope of the person’s request for the further contact, and so long as the meeting occurs within 6 weeks from the request, that subsequent meeting would fall within the client request exemption.

However, the problem remains whether the offer during the subsequent contact would still be “because of” the original unsolicited contact, in which case the offer would fall within the AHR prohibition.

It is submitted that there is no clear-cut answer to this question. From a logic and policy point of view, the relevant nexus could be seen to be broken by the client’s subsequent request for contact. Where ASIC in RG 38 indicates situations where the causal connection is broken, then this is what we would see as a policy decision, rather than necessarily a legally determined outcome. On the one hand, it would be useful if ASIC proffered a view on this. On the other hand, a product issuer can always send an advertisement for the product to the client and rely on the exemption discussed in section 5(a) above.

 

9. What guidance can be taken from the examples in the EM?

As we know, the request of the client must be clear, positive and informed.

It is beyond the scope of this edition to traverse all examples.

Rather it is useful to consider these examples from the point of view of the two scenarios described in section 8 above, namely:

  • scenario 1 where the client is taken to positively request the contact;
  • scenario 2 where the client is taken to positively make a request in relation to a particular financial product which is invited, offered or issued.

The EM notes that: “A consumer must take an active step to initiate a request for contact, such as calling a product issuer and asking to discuss a financial product or submitting a form online indicating that the financial provider should contact the provider” (paragraph 1.48).

It goes on to say that: “A positive request should involve a conscious decision by the consumer to seek a financial product. A positive request would not simply be an ambiguous or vague statement, a compliant answer to a leading question, or failing to ask that future contact not take place when given an opportunity to do so” (paragraph 1.47).

Examples given are:

  • typing a phone number into an insurance website which clearly offers a call back to discuss life insurance (which is said to be permissible);
  • when applying for life insurance online, not un-ticking a box which says the customer agrees to be contacted with regard to insurance products (which is said to be not permissible).

But do the examples cast any light on the situation where, as canvassed in section 9, the client’s request is preceded or facilitated by the product issuer providing the client an opportunity to request a contact through some interaction, such as an email or text?

Under the new AHR if the product issuer sends a communication which asks for the client to apply for the product, this is clearly captured.

That is, what if the communication asks for the client to request simply a contact?

The bulk of the relevant examples relate to the client proactively requesting a contact (eg filling in a website request) and do not deal with a situation where the product issuer facilitates that contact request (such as by sending a website link to the client).

This said, the EM discusses scenarios where it refers to “a consumer is incentivised to hastily consent to be contacted about a financial product, for example as part of the terms and conditions of entering a competition…” (at paragraph 1.52).

An example given in this context is a client filling in a competition form in a shopping centre to win $100 and where the form discloses that their details would be forwarded to a business partner who would contact them with regard to an annuity.

This example arguably touches on our scenario of the client being approached to agree to a future contact but at the best is ambiguous as:

  • it is not clear whether the client was approached by the competition organiser or whether they approached the organiser;
  • the client seems to be agreeing to being contacted, rather than requesting a contact; and
  • the example hinges off the client not being given sufficient opportunity to understand what they were agreeing to.

Hence, the example (Example 1.8 at paragraph 1.52) notes: “As Christian agreed to make the request for contact with little time or information to consider annuities, he is unlikely to understand that he may requesting to be contacted and his request may result in the offer of a financial product.”

The remainder of the examples relate to the scope of the request made by the client.

The examples traverse scenarios which are said to be permissible where:

  • the product offered directly corresponds to the request by the client, eg the client requests a specific life insurance product and is offered this;
  • the client requests a generic type of product and is offered one or more of these, eg the client requests information about life insurance products generally;
  • the client expresses a need or purpose and the product offered corresponds to this, eg the client expresses a need to be covered for insurance for an investment property the products offered are house building and landlord insurance;
  • the client makes a request for a product and the product issuer also offers a product which covers risks associated with the product (eg a mortgage is the core financial product but the product issuer offers home insurance).

We have considered these issues and other related issues in detail. Please let us know if you would like to arrange a presentation or discussion with us on either the general operation of the new AHR or how it might impact specifically on your business.

[1] National Exchange Pty Ltd v ASIC [2004] FCAFC 90 concerned an offer by National Exchange to shareholders in a company for the purchase of that company’s shares, and the inclusion in the written offer document of a qualification that the purchase price was to be paid by fifteen annual instalments. The majority (Jacobson and Bennet JJ) stated that (at [50]-[51]) “A document which, when read as a whole, is factually true and accurate may still be capable of being misleading if it contains a potentially misleading primary statement which is corrected elsewhere in the document but without the reader’s attention being adequately drawn to the correction… The principle which applies to those cases is that the qualifying material must be sufficiently prominent or conspicuous to prevent the primary statement from being misleading…”. In that case, the disparity between the primary representation and the qualification was so great that the qualification was insufficient to draw the true position to the attention of the ordinary shareholder, and all members of the Court agreed with the trial judge that National Exchange had engaged in misleading and deceptive conduct.

[2] Courts commonly grapple with the question of whether a particular result is caused by one or more separate events and whether a subsequent event has the effect that the initial event should no longer be seen as a cause (see, eg. March v E & MH Stramare Pty Ltd (1991) 171 CLR 50).

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Philip Hopley
Philip Hopley
Special Counsel
+61 2 9225 5988
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Sky Kim
Sky Kim
Solicitor
+61 2 9225 5573