Answer 1 a) The legislations that regulate the insurance industry are as follows:
- Insurance Act, 1973: Major aim of the Act is to provide protection to the interest of policyholders. This act was formulated to enlarge the safety of customers and support the prudential supervision and by establishing different provisions to safeguard policyholders’ interest in case, the company is being winding up (Kaplan professional 2020).
- Insurance Contracts Act, 1984: This Act ensures adequate movement of information among insurers and insured to ensure effective decision-making process with regard to different insurance contracts offered to people. It is essential to establish regulations that administer association between them. Various restrictions have been imposed on the capability of the insurer with regard to cancelling of the contract at any time without giving any former notice. The contract stands cancelled in case the insured failed to act in utmost good faith and have made any kind of misrepresentation.
- Life Insurance Act, 1995: This Act ensures safety of interests of owners of life insurance policies. It was formulated to take successive action towards enhancement of consumer safety and to strengthen the supervision.
Answer 1 b) People apply for life insurance policies to acquire benefit for the family members except the person who is insured to look after the financial needs of dependents (Masud et al. 2020)). It is considered essential for the person who is insured to know his/her duties and responsibilities with regard to complete disclosures that he/she must make in front of insurer so that the insurer can take suitable action to reduce the risk of future conflicting situations and the insured must adhere to the rules and regulations at the time of procuring or renewal of such life policy.
Insurer must disclose all the required and necessary information as his/her legal duty to the insurer prior signing any insurance contract. It is left at the discretion of the insurer whether to accept or reject the insurance application of the insurer either wholly or partially if the applicant does not make complete disclosure of necessary information.
Major things that are required to be taken into consideration at the time of offering advice with regard to life insurance involves required amount of cover, nature and type of life insurance as per the needs of client, owner of such policy, the effective period for waiting, efficient premium structure and policy structure, etc. (Sinclair 2019).
All such type of information has major influence on the current affordability level of insurance as well as on the future time period. Adequate structure of the insurance policies is a must for the person whose life is being insured in order to undertake successive savings.
Answer 2) Four key components of the Corporation Act that play a major role in driving adequate conduct of advisers to achieve positive outcomes for clients are as follows:
- False or misleading information: There are restrictions imposed on financial advisers with regard to providing false information to the client to persuade the customer to buy particular financial product or service (Kaplan Professional 2020). Any act that show potential to induce the client to buy or sell any financial product constitutes as an offence.
- Deceptive or misleading conduct: Financial adviser cannot remain silent regarding the relevant matter where they had made mistake. Ignorance is not considered as an excuse under the law. Deceptive conduct also include omission that involves failing to provide information to the client which is important with regard to the product purchase. Several restrictions have been imposed on using on certain words like unbiased, independent, impartial, etc. while explaining the business of any financial adviser.
- Deceitful inducements to deal: Under the Corporations Act, financial advisers cannot induce another person to agree to the contract in financial products by dishonestly revealing material facts and by making any false promises with the client. If the adviser found that involved in such action, penalties will be imposed on him/her.
- Unconscionable conduct: Any conduct in which the other person is treated unfairly comes under the unconscionable conduct. The corporations act prohibits such conduct. For instance, selling of inappropriate insurance policy by a licensee to the person who has poor command in English or who is illiterate without making sufficient efforts to make him understand comes under the conscionable conduct.
Answer 1) Major recommendations of the Ripoll Enquiry are as follows:
- The first recommendation is concerned with raising the standards of providing financial advice.
- Other recommendation is to make the disclosure practices more effective in the financial industry.
- Undertake effective measures to eliminate the conflicted remuneration practices.
- Lending practices must be reformed.
- There is a need to ensure competency, transparency and accountability with the help of licencing system.
- Limited access must be provided in relation to risky and complex products of investment.
- The last recommendation is to introduce or establish a last resort statutory compensation scheme for investors.
Answer 2) Consumer are benefitted when the financial advisers provide effective advice to the clients at lower rates. They can undertake effective and efficient decision-making process when all the information regarding various financial products have been provided by the advisers. An efficient regulatory framework is one that regulates the advice regarding financial products and services and resolve all the conflicting situations.
The major objective of FOFA reforms is to improve the quality of the advice given by the financial advisers to the clients. The chances of conflicts must be eliminated by maintaining a balance between the interest of consumers and financial advisers.
Major Future of Financial Advice (FOFA) reforms are listed below:
- Prohibition of conflicted compensation: The receipt and the payment of conflicted compensation received by the advisers has been prohibited. During early periods, remunerations have been received from various sources by the financial advisers. They used to earn large amount of incentives as commissions. All this harms the clients. Thus, such reform has been made.
- Statements regarding fee disclosures: Earlier, advisers were not needed to provide fee disclosure statement to the client. Under FOFA reforms now, fee disclosure statement is required to be given by the financial advisers to the clients in the prescribed format.
- Scaled advice: It has become mandatory to provide advice with regard to specific area of the needs of the client like insurance or other issues. The term ‘scaled advice’ is completely different from the term holistic advice in which all the aspects of the circumstances of the client are included in the full financial plan.
- Best interest’s duty: It is considered as the statutory duty of the financial advisers to act best to the interest of the clients while providing advice. This duty makes sure that the financial advice procured by the clients is not given on the basis of the interests of the adviser and is affected by the desires and goals of the client.
- Codes: The ability of ASIC to act against dishonest operatives through the establishment of codes of conduct in the financial industry have been enhanced with this reform. The main aim of this reform or such codes of conduct is to increase the standards of industry and adhere to the requirement of legislation in order to improve or obtain confidence of consumers.
Answer 3) There were various exceptions for insurance advice provided under FOFA. The ban on conflicted commission is not applicable to the advantages received by a financial adviser by selling general insurance policies and other types of life insurance policies. Conflicted commission is defined as any non-monetary or monetary advantage paid by the retail clients to financial licensee for giving advice on financial products. The major objective of this exemption is to achieve fair and equal treatment of the various distribution channels of life insurance established under the law.
Answer 4) It has been found in the ASIC report 413 that there is a need to improve the value of the financial advice and to make sure that interest of clients is placed at the top in the priority list (ASIC 2014). The major purpose of this report is to determine the relation between lapse rates in policies, upfront commissions and poor results. This report also focused on the renumeration exercises being followed in the financial sector. ASIC has the authority to postulate the criteria required to satisfy various life insurance products to get exemption from ban on conflicted remuneration (Zelizer 2017).
Findings: It has been found that the policies of life insurance were lapsing at higher rates and on an average, 45% advice got failed to obey the legislation provided under truthful commission. 58% of the total insurers have distributed their policies with AFS licensees that were carrying out operations under the models of personal advice. Income protection and life-only policies constitute as the common policies. Moreover, the advice given to the clients were found to be of lower quality. Clients were mainly provided with the recommendations to switch from one financial product to other financial product.
Answer 1 a) The major aim of the Trowbridge Enquiry was to determine the factors that are leading to the conflicts of interest among the consumers and advisers of financial products (Mclnnes and Ahmed 2016). A specific review has been conducted to verify whether incentives provided for new and replacement policies are in alignment with the insurers’ interest, advisers’ and licensees’ interest. It has also been checked whether the new arrangements made in the industry regarding life insurance are adequate in terms of interest of consumers and financial firms. Moreover, remuneration practices followed in the financial industry has also been evaluated.
Mr John Trowbridge who was the former member of APRA member has proposed several recommendations to grab effective alignment in interests of consumers and the financial advisers across the value chain of life insurance. The major recommendation was concerned with clawbacks that must be applied to all first-year premiums and IAPs (FSC 2020). The other recommendation was concerned with restoration of the public confidence in the financial sector by eliminating unaligned financial incentives that are paid to the licensees and advisers. He also recommended that consumers must be provided with a wide range of financial products and services to undertake adequate decision-making process that will help in fulfilling their needs and desires. All these recommendations must be followed to bring a positive transformation in the financial sector and to accomplish set objectives and goals in the life insurance industries. Moreover, renumeration related conflicts must be reduced to avoid the chances of conflicts between licensees and advisers.
Answer 1 b) On December 14, 2017, the Royal Commission into Misconduct in the Superannuation, Banking and Financial Services Industry was established by the Governor General of the Australia Commonwealth. Commissioner Hayne has issued several recommendations under various categories (O’Brien 2019). He recommended that the amendments must be made in the law to eliminate exemptions for policies meant for funeral expenses from the category of financial product (Tarrant 2019). One of the other recommendations was related to the limit on commissions that might be paid to the people who deal in vehicles. It must be strictly prohibited to make any misrepresentation to the insurer with regard to any kind of financial product. The amendments must be held in Insurance Contracts Act to change the duty of disclosure into duty top take reasonable care while providing information to the retail clients. Insurer must be given right to avoid life insurance contract only on the basis of misrepresentation or non-disclosure of important information. The settlement and handling of insurance claims must no longer be removed from the term of financial service. There is a need to amend the law to include enforceable provision of codes and for the formulation and adhere to the compulsory codes of industry. It is highly recommended that AFSL holders must undertake reasonable steps to resolve disputes. They must provide all the relevant documents and records that are in relation to such disputes. In order to ensure the duty of utmost good faith, the insurance contract act provisions must be held independently (Sam et al. 2019).
Answer 2) the two major principle regulators of life insurance industry in Australia are:
- ASIC (Australian Securities and Investment Commission)
- APRA (Australian Prudential Regulation Authority)
ASIC has the responsibility to safeguard the interest of investors, creditors and consumers by maintain high level of integrity and ensuring fair conduct by the financial advisers (Schmulow 2017). It is responsible for the issuance of licences and for administrating the law and regulations. It governs the organizations by following and implementing strict course of actions. It maintains fairness and high efficiency of the financial markets. In the financial industry, adequate registration and license criteria is followed that is issued by ASIC. All the consumers and investors are given complete information about the financial products so that they can make effective decisions with regard to investment opportunities. It educates the investors in order to make them efficient to undertake smart and effective decisions after looking at the risk and return trade off assessment.
On the other hand, APRA is accountable for supervising and regulating the practices of friendly societies, banks, corporations, credit unions and also look after the management of the funds of the public (Unda et al. 2019). It formulates and enforces highly efficient management codes and practices by incorporating accountability, professionalism, collaboration and integrity. It has put forward several legislations like Insurance Act 1995, Banking Act 1995, General Insurance Reform Act 2001, Insurance Contracts Act 1984 and Superannuation Industry Act 1993. It has also formulated several provisions to control banking practices and safeguard the public credit currency of the commonwealth (Authority, A.P.R. 2017).
Answer 1 a) Life insurers, customers, licensees, government and advisers constitute as the major stakeholders of life insurance industry.
With the introduction of several LIF reforms, the chances that the customers would be able to get benefits from the decline in in the cost of insurance have increased. A new and more effective code of conduct and practices has been formulated that will fix all the insurers of life insurance and would fetch advantage to the customers (Wright 2017). There will be complete disclosure of all the material information and other related information and customers will get full and access to that data and information.
With the LIF reforms, there has been a reduction of 60% in the upfront commission which was paid to the advisers and licensees by the customers. They are now required to obtain sufficient knowledge and skills in order to perform efficiently in the financial market. It is considered essential for them to act and maintain ethical standards of the financial industry (Kelly 2016).
To understand the influence of LIF reforms on the life insurers is regarded as essential requirement. All the internal procedures must be updated at regular intervals of time. The technology related to renumeration of adviser must also be updated on periodic basis. The transparency in the whole process of offering of life insurance must be raised and customers should be encouraged to participate in effective decision making. Advisers must be provided with back office assistance to formulate better processing and improve the organization of customers’ applications.
Answer 2 b) After thorough review of LIF reforms, it can be concluded that the influence of these reforms is positive on all key stakeholders of the life insurance industry including government, life insurers, consumers, financial advisers, etc. Significant decline in upfront commission enabled the insurers to provide their savings to other persons. Financial advisers and licensees are now required to obtain sufficient knowledge and skills in order to perform efficiently in the financial market. It is considered essential for them to act and maintain ethical standards of the financial industry and must be aware about all the norms and standards through which their performance is evaluated. The transparency in the whole process of offering of life insurance has been raised and customers are encouraged to participate in effective decision making.
ASIC. 2014. Report 413. [Online]. Available at: http://download.asic.gov.au/media/2012616/rep413-published-9-october-2014.pdf [Accessed on: 25th July 2020].
Authority, A.P.R. 2017. To: All authorised deposit-taking institutions (ADIs), general insurers, life companies, Level 2 Heads and potential Level 3 Heads Implementing the non-capital components of the framework for supervision of conglomerate groups. APRA. Available at: https://www.apra.gov.au/sites/default/files/Supervision%2520of%2520Conglomerate%2520Groups%2520-%2520August%25202016%2520Response%2520letter.pdf
Kaplan Professional. 2020. Topic 3: Regulation of insurance industry. [Online].
Kelly, A. 2016. Protecting consumers from insurance claims-handling. Precedent (Sydney, NSW), (134), p.20.
Masud, M.M., Ismail, N.A. and Rahman, M. 2020. A conceptual framework for purchase intention of sustainable life insurance: a comprehensive review. International Journal of Innovation and Sustainable Development, 14(3), pp.351-373.
McInnes, A. and Ahmed, A.D. 2016. Examining the legitimacy of the current’authorisedrepresentative’licensing model’. Financial Planning Research Journal, 2(2), pp.64-90.
O’Brien, J. 2019. “Because They Could”: trust, integrity, and purpose in the regulation of corporate governance in the aftermath of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Law and Financial Markets Review, 13(2-3), pp.141-156.
Sam, I.A., Hooper, N., Niesche, C., Pash, C., Rowbotham, J., Southward, J. and Jepson, G. 2019. 2019 Australian governance summit wrap-up. Company Director, 35(3), p.16.
Schmulow, A. 2017. The four methods of financial system regulation: An international comparative survey.
Sinclair, D. 2019. Speak Loudly and Carry a Small Stick: Prudential Regulation and the Climate, Energy, and Finance Nexus. Jurimetrics, 59(2), pp.141-166.
Tarrant, J. 2019. Reforming Australia’s Twin Peaks to Better Protect Consumers and Deter Market Misconduct Andrew Schmulow, University of Wollongong Karen Fairweather, University of Auckland 2. Consumer Interests Annual, 65.
Unda, L.A., Ahmed, K. and Mather, P.R. 2019. Board characteristics and credit‐union performance. Accounting & Finance, 59(4), pp.2735-2764.
Wright, L. 2017. Utmost Good Faith and Fairness in Life Insurance: Restoring Consumer Confidence. UNSWLJ Student Series, (17-03).
Zelizer, V.A.R. 2017. Morals and markets: The development of life insurance in the United States. Columbia University Press.
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