Where are we up to again? Insurance regulation over the horizon

By Philip Hopley

The Australian regulatory financial services sector has certainly been giving props to Greek philosophy of late with its channelling of Heraclitus’ statement that “there is nothing permanent except change.”

Now that the dedicated insurance hearings at the Royal Commission have finished, here is a snapshot of the current legislative and regulatory plans for the insurance industry that are in train and coming over the horizon.

  1. Product design and distribution obligations & intervention powers – following the recent consultation by Treasury, draft legislation has now been introduced into parliament (link here).
  2. Unfair contract terms legislation to apply to insurance – Treasury consultation on a proposed model law ended in August (link here).
  3. Life insurance claims reporting – ASIC and APRA are in the process of creating a formal reporting regime for life insurance claims to drive accountability in the sector (link here).
  4. Disclosure regime for general insurance – Treasury is currently reviewing and considering reform of the product disclosure regime for general insurance products (link here).
  5. ASIC oversight of insurance claims handling – work to implement this recommendation from ASIC Report 498 in 2016 was placed on hold by the Royal Commission.  The impetus for change in the law has only increased in the meantime and reform must now be very likely.
  6. Civil penalties for breach of the duty of utmost good faith – the government has agreed to give ASIC the power to impose civil penalties on insurers that breach their duty of utmost good faith, as recommended in ASIC’s Enforcement Review Taskforce Report in December 2017 (link here).
  7. ASIC approval of industry codes – another Taskforce Report recommendation by ASIC that the government has agreed to, pending the Royal Commission’s final report, is to move the general and life insurance codes of conduct to a co-regulatory model where ASIC approves these codes and enforces breaches.

No doubt the above proposals will receive a tailwind from the publication of the interim Royal Commission report at the end of September and the final report at the beginning of February 2019, that will consider insurance and superannuation.

The obvious questions at this stage are whether the planned reforms that pre-date the Royal Commission will be seen to go far enough, whether additional reforms are likely to feature to add to the list, whether the government can legislate in time before next year’s federal election and what difference a change in government may bring.

It seems likely it will take at least the next six to 12 months for a more complete picture of the legislative and regulatory reform programme to emerge.


Consumer Data Right – The Rules Framework is out

Written by Amy Ciolek and Kiara Salvia

On 12 September 2018, the Australian Competition and Consumer Commission (ACCC) released for public consultation the Consumer Data Right (CDR) Rules Framework (Rules Framework) following the release of the exposure draft Treasury Laws Amendment (Consumer Data Right) Bill 2018 (the Bill) which proposes amendments to the Competition and Consumer Act 2010 (Cth), the Australian Information Commissioner Act 2010 (Cth), and the Privacy Act 1988 (Cth). Continue reading

The evolving role of the financial services regulator

Written by Amy Ciolek and Nicola Greenberg

As community expectations and the nature of crime changes, 
so too does the role of the regulator.

The ABC news reports today that “for the first time, the Australian Securities and Investments Commission will have enhanced powers to place dedicated staff within the big four banks and wealth manager AMP to directly monitor governance and compliance and fight white-collar crime.” Continue reading

When utmost good faith is not good enough

Written by Philip Hopley

There is just over a month left for stakeholders to provide views on a proposed model that will implement the government’s policy to apply unfair contract terms legislation to life and general insurance contracts for consumers and small businesses. To find out more, click here.

ASIC updates its ICO guidance

What this means for you

Initial Coin Offering (ICO) issuers have been placed on notice that from 19 April 2018, the Australian Competition and Consumer Commission (ACCC) has delegated powers to the Australian Securities and Investments Commission (ASIC) to enable ASIC to take action under the Australian Consumer Law (ACL) relating to crypto-assets. See ASIC’s Media Release 18-122MR.

This new power enables ASIC to take action against entities using ICOs to raise funds, for conduct that is misleading and deceptive, including making false or inaccurate statements in white papers.  The new delegated powers are applicable to both crypto ‘currency’ and to crypto ‘tokens’.

Key developments – new delegated power and updated INFO 225

ASIC has released a revised Information Statement 225 (INFO 225).  Revisions to INFO 225 include:

  • introducing ASIC’s new delegated powers, and intention to focus on misleading conduct; and
  • describing the key attributes of certain classes of financial product, and when an ICO may display the characteristics of a regulated financial product.

To clarify some commonly held misperceptions, INFO 225 also confirms that the mere fact that a token is:

  • described as a ‘utility’ token; or
  • accompanied by a statement that the ICO or the token is not a financial product,

does not mean that it is not a financial product.

INFO 255 may need further future updates to explore some more sophisticated considerations, such as whether distributed ledger technology platforms hosting the ICO’s, or the DApp hosts may also be arranging financial products, whether white-paper authors or promoters may be jointly liable for false and misleading statements, how incentive schemes may be governed and whether master nodes may also be ‘arranging’ or have disclosure obligations.

INFO 255 also does not give a precise definition of a ‘crypto-asset’, and whether this is a broad concept (including usage and work tokens), or whether this is limited to the digital tokens sold through an ICO.

Is our current regulation fit for purpose?

Crypto currency is now more widely available in Australia, including in retail outlets such as Australian newsagencies. The industry remains active, even after the first quarter of 2018 ‘crashes’. It appears that crypto is becoming more broadly accepted, or at least understood in Australia.  This does raise questions about the future of crypto in Australia, and elements of our regulatory ecosystem need to adapt at a faster pace.

For example, assume that an ICO issuer obtains an Australian Financial Services Licence (AFSL), and as part of its licensing obligations, is a member of an external dispute resolution scheme (EDR).   EDR schemes provide dispute resolution mechanisms for unresolved disputes with member licensees, and are an essential pillar of consumer protection under the AFSL regime.  If a crypto customer has an unresolved dispute with an AFSL licensee, they are generally entitled to complain to the licensee’s EDR to seek assistance resolving the dispute.

Are our EDR schemes equipped to respond to matters relating to ICOs, particularly in the case of third party fraud or unauthorised intervention? If EDRs are not equipped, the requirement for the ICO issuer to be a member seems redundant, and consumers should be told before acquiring the product that they will have no EDR recourse.

As the AFSL regime provides no separate authorisation category for ICO issuers, existing AFSL holders can potentially issue an ICO if the relevant ICO has the characteristics of the financial products that the AFSL holder is authorised to deal in. But are they appropriately equipped to protect consumers in an ICO?  Are they digitally savvy enough, do they hold adequate capital and does their insurance deal with ICO related risks?  Do we need a new AFSL authorisation category which applies to ICO issuers and promoters, and deals with the risks and protections specifically relevant to ICOs?

Perhaps a low-value exemption or ‘restricted AFSL’ could enable ICO issuers to have a total circulation of up to a “specified amount” to enable them to learn about financial services laws before applying for their full AFSL.

Finally, the retail AFSL licence is focused on consumer and investor protection.  In a particularly complex token arrangement (for example, a multi-token digital hedging arrangement including future options or vesting), the potential complexity of a properly constructed white paper containing a correct and valid economic calculation can baffle the most sophisticated investor who does not hold an honours in advanced computational mathematics.  How useful is a Product Disclosure Document in describing risk to a retail client in a complex ICO?

Regulatory focus is essential

It could be argued that an AFSL is not required if you include in the white paper that “this is not a token of value and must not be sold on an exchange”, or if your initial intent is to design a utility token, as the initial intent is relevant in categorising the nature of the token.

These strategies are not valid exemptions from the AFSL regime.  An issuer or promoter must still consider whether the digital token has the characteristics of a financial product for which a licence may be required. To echo ASIC, a utility token may still be a financial product.

It is clear from ASIC’s new delegated power, updated INFO 225 and roadshows to fintech hubs through Australia that ASIC is beginning to understand and turn its mind to ICOs, and to the conduct of issuers.  Regulatory intervention and focus is critical to the growth of genuine ICOs as potentially innovative and beneficial vehicles.

Get in touch

Contact us for any assistance, including help on what to do next, or to learn more about possible implications for your business.

Tony Coburn

Amy Ciolek
Senior Associate

Nicola Greenberg

Lisa Whiting