AFCA becomes one-stop-shop for financial services disputes
On November 1, 2018, the Australian Financial Complaints Authority (AFCA) replaced the Financial Ombudsman Service, Credit and Investments Ombudsman and the Superannuation Complaints Tribunal. The AFCA is now the ASIC approved External Dispute Resolution (EDR) scheme for consumer and small business complaints for Australian financial and credit industries.
All financial firms should now be members of the AFCA, as the deadline to register was September 21, 2018. For insurance industry participants, this includes holders of an Australian Financial Services Licence including insurers, brokers and other intermediaries.
The creation of the AFCA comes at a pivotal time, with a record number of 43,684 disputes received by the FOS in 2017–2018 (FOS Annual Review 2017–2018). This is an 11 per cent increase on the previous year. The top two categories of complaints received by FOS in 2017–2018 related to credit and general insurance, having a share of 43 per cent and 32 per cent respectively.
The AFCA will consider complaints about credit, insurance, banking deposits and payments, investment advice, and superannuation products. In relation to insurance, this includes the following products
- Home and contents insurance
- Car insurance
- Travel and ticket insurance
- Pet insurance
- Sickness and accident insurance
- Strata title insurance
- Medical indemnity insurance
- Life insurance
- Small Business Insurances including farm insurance.
The AFCA will also consider complaints about warranties (e.g. extended warranties on consumer goods) issued (not just administered) by financial firms that are members of the AFCA.
The AFCA creates a one-stop shop for financial services disputes and has increased monetary limits and compensation caps. Previously, the monetary limit and compensation caps for most non-superannuation disputes were A$500,000 and A$323,500 respectively. These have now increased to a A$1 million monetary limit and A$500,000 compensation cap.
New distribution rules in effect in the European Union
The Insurance Distribution Directive came into force on October 1, 2018 replacing the Insurance Mediation Directive which had been in effect since January 2005. The IDD places emphasis upon “product governance” – the design of insurance policies and their suitability for a target customer.
Insurers and intermediaries distributing to customers in the European Union must comply with the overarching obligation to act at all times in the best interests of customers and ensure that information is fair, clear and not misleading.
The new regime imposes significant sanctions upon businesses that breach the IDD rules – businesses can pay up to five per cent of annual turnover in fines.
Competition Commission proposes tough measures on motor insurers In August 2018, South Africa’s Competition Commission called for final comments on its far-reaching Code of Conduct for Competition in the Automotive Industry. The code will materially impact a range of stakeholders, including motor insurers. Following the consultation, stakeholders will have to decide whether or not to sign up to the code and be subject to extensive monitoring obligations.
Although the code primarily targets original equipment manufacturers, it also places material obligations on insurers. The code is voluntary in nature but, once a party becomes a signatory, it will impose binding obligations that can be relied upon by third parties (including service providers and consumers).
As part of its advocacy function under the Competition Act, the Commission has been developing the code since early 2017. An initial draft was published in late 2017 that contained a number of far-reaching proposals that, despite the consultation, reflect the Commission’s own policy. While some concessions have been made, the latest code still contains sweeping reforms to the service, maintenance and repair of vehicles.
Under the latest code, insurers must
- Fairly allocate work amongst service providers such as vehicle repairers.
- Broaden the allocation of work to entities either owned or operated by historically disadvantaged individuals.
- Publish a list of all approved service providers on their websites and/or other suitable media.
- Offer consumers a choice of approved repairers within their geographic area.
- Refrain from appointing any service provider for excessively long periods.
- Refrain from continuously renewing the appointment of the service provider.
Insurers must submit annual reports to the Commission in order to demonstrate compliance with the code. As part of these reports, insurers must confirm their aggregate annual spend and volume allocated to historically disadvantaged service providers.
The Commission says that it is pursuing the code as an alternative to enforcement action because it receives a material number of complaints alleging anti-competitive practices throughout the automotive aftermarket sector. Some of these complaints have apparently focused on the allegedly unclear and unfair allocation of work by insurers for motor-body repairs.
While the code is voluntary in nature, given the time and effort the Commission has devoted to it as well as the Commission’s view that these reforms are necessary, it is unclear what steps (if any) it will take if stakeholders decide not to sign up. Given that the code was positioned as an alternative to enforcement, it cannot be ruled out that the Commission will be more inclined to investigate such stakeholders should they be the subject of ongoing or future complaints.
Competition authority investigates insurance “loyalty penalties”
The Competition and Markets Authority (CMA) has received a “super-complaint”from Citizens Advice in respect of price discrimination against long-term customers. Citizens Advice is seeking a response from CMA including a commitment to initiating a market study to identify remedies to end overpricing for disengaged or loyal customers.
Super-complaints can be made under the Enterprise Act 2002 by certain UK consumer organizations, including Citizens Advice, requiring an investigation into markets or practices that significantly harm consumers.
Home insurance is included amongst the markets that Citizens Advice identify as penalizing existing customers. The percentage increase in the cost of home insurance can be as much as 70 per cent for long-standing customers.
The margins that firms can earn on new customers is often low. Attractive offers for new customers are sustained by offering longer term customers higher prices. Citizens Advice suggests that loyalty can cost home insurance customers as much as £900 per year.
In particular, Citizens Advice has identified that vulnerable consumers are disproportionately affected by loyalty penalties.
The CMA must now investigate the super-complaint and determine whether consumers’ interests have been harmed by higher prices for long-term customers.