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Consumer credit insurance (CCI) – usually sold by lenders to borrowers when taking out a mortgage, personal loan or credit card – provides cover for consumers if they are unable to meet their minimum loan repayments due to unemployment, sickness or injury or to pay the outstanding loan balance upon death.
ASIC has previously raised concerns about CCI and asked 11 lenders to undertake an independent review of their CCI sales practices for the five-year period from January 2013 to December 2017.
These independent reviews revealed a range of problems and resulted in breach reports being lodged with ASIC.
ASIC also collected and reviewed data from lenders and insurers for the financial years 2011-2018 to help inform its work, including declined and withdrawn claims.
The results of this review form the basis of a new report, Consumer credit insurance: Poor value products and harmful sales practices (REP 622), in which ASIC found that CCI sales practices and product design are “still delivering poor outcomes for consumers” and, in some cases, resulting in “consumer harm”.
In ASIC’s new report, the regulator warned that CCI products are typically of “very low value” and have been sold and promoted in an “unfair manner”, the financial services regulator said. CCI sold with credit cards was found to consistently be the poorest value for money for consumers compared to other CCI products.
Overall, the ASIC report found that:
- Consumers were sold CCI despite the fact they were ineligible to claim under their policy.
- Consumers were incorrectly charged for CCI, including being charged ongoing CCI premiums even though they no longer had a loan.
- Telephone sales staff used high-pressure selling and other unfair sales practices when selling CCI.
- Consumers were given non-compliant personal advice to buy unsuitable policies.
- CCI is “extremely poor value for money”, with consumers receiving only 11 cents in claims for every dollar paid in premiums.
- Across all CCI products sold by lenders, only 19 cents was recovered in claims for every premium dollar that consumers paid.
- Several lenders did not have consumer-focused processes to help consumers in hardship make a claim under their CCI policy.
Given the serious findings, ASIC has commenced enforcement investigations into a number of entities that have been involved in mis-selling CCI to consumers. The defendants to ASIC’s future action will reportedly be publicly identified at the time proceedings commence.
It is also requiring lenders to remediate over 300,000 affected consumers with over $100 million to ensure that consumers who have not been treated fairly are appropriately remediated.
To date, more than $51 million has been paid to over 186,000 consumers.
While ASIC is investigating sales of CCI that did not comply with the law before the recent strengthening of ASIC’s powers and penalties, it warned that for future conduct, it will use its “enhanced powers and penalties, including the product intervention power where there is a risk of significant consumer detriment, and civil penalties for breaches of the duty to do all things necessary to ensure that financial services are provided efficiently, honestly and fairly”.
“The consumers’ best interests must underpin every decision and action of the lender in undertaking the remediation. We will assess changes to product value and sales practices, using the full range of our powers if we do not see improvements,” the regulator said, adding that it would provide a further update on this program later in the year.
Lenders backing away from CCI
According to ASIC, during its work on CCI, four of nine lenders stopped selling CCI with home loans, seven of eight lenders stopped selling CCI with credit cards, and five of nine lenders stopped sales with personal loans.
The lenders that ceased selling CCI with mortgages were: Bendigo Bank, NAB, Suncorp and Westpac.
The lenders that continue to sell CCI with mortgages are: ANZ, BOQ, CBA (but not its subsidiary, Bankwest), CUA and People's Choice.
Further, the report showed that between 2014 to 2018, total sales of all CCI products by the 11 lenders in its review decreased by 71 per cent, from 664,240 to 190,488 sales.
The decrease in sales was consistent across all products, but home loan CCI saw the largest drop (74 per cent), with sales going from 90,249 to 23,073 sales.
Meanwhile, personal loan and credit card CCI sales both decreased by 71 per cent (from 318,551 to 93,161 sales for personal loans and from 255,216 to 74,186 sales for credit cards).
Branch sales decreased by 84 per cent over the period, the report showed.
While the signatories of the new Banking Code of Practice have committed to a four-day “cooling off” period for CCI, ASIC said it now expects all CCI lenders – regardless of whether they are signatories to the code – to incorporate a four-day deferred sales model for all CCI products across all channels.
ASIC has also revealed that it will shortly consult on banning “unsolicited outbound sale of CCI by telephone” in a bid to protect consumers.
‘We are deeply troubled’
Speaking after the release of the report, ASIC commissioner Sean Hughes said: “We are deeply troubled by the findings in our report, and the stories they tell of unfair practices occurring within Australia’s largest and most well-known financial institutions.
“Lenders and insurers have had more than enough time to improve sales practices and provide better value for consumers.
“An inevitable consequence of these widespread failings and mis-selling practices will involve ASIC taking significant enforcement action against some of the entities named in our report.”
ASIC said it expects lenders and insurers to design and offer products with significantly higher claims ratios and will continue to collect and publish data to measure improvements.
All lenders selling CCI will now be required to meet the following standards or cease selling CCI altogether:
- Improve product design and value, including unbundling CCI products so that consumers can select cover they are eligible to use and which meets their needs; and “significantly increasing” claims ratios from “the current poor levels of 19 cents in the dollar”.
- Improve sales practices. This includes ceasing outbound unsolicited phone sales of CCI, the introducing of “hard filters” for key eligibility criteria for online sales, ensuring consumers are not being sold a CCI policy where they are ineligible to claim, and incorporating a four-day deferred sales model for all CCI products across all channels.
- Improve post-sales conduct, including not charging premiums for CCI where primary benefits are no longer available; giving consumers appropriate annual communication about the price, limits and exclusions of the policy; and notifying a consumer with a CCI policy who applies for changes to their loan contract due to financial hardship that they have a CCI policy and provide or transfer their claim details to the insurer for assessment.
- Improve compliance and monitoring, such as refraining from selling CCI unless they can demonstrate compliance with these standards, and conducting a “thorough and robust review” and identifying remediation for consumers when these standards are not met.
“If we do not see early, significant and sustained improvement in the design and sale of consumer credit insurance, our next steps may involve the deployment of our new product intervention power where we see a risk of significant consumer detriment,” Mr Hughes said.
“We also will not hesitate to pursue civil penalties where there has been a failure by any lender or insurer to act efficiently, honestly and fairly. All options are on the table.”
Further, ASIC requires attestations from accountable senior executives that:
- the recommendations to address mis-selling have been implemented and are working effectively;
- the minimum standards in ASIC’s report are being met; and
- the remediation programs are thorough and robust.
Commissioner Hughes concluded: “Regrettably, the ongoing systemic failings and misconduct we have seen in the CCI market demonstrate that a range of robust regulatory responses is required.
“ASIC is committed to address the unfairness to consumers and lack of transparency our report has uncovered. Product issuers and distributors in the CCI market need to start to put their consumers front and centre.”
The lenders in ASIC’s review are:
- Australia and New Zealand Banking Group Ltd
- Australian Central Credit Union Ltd
- Bank of Queensland Ltd
- Bendigo and Adelaide Bank Ltd
- Citigroup Pty Ltd
- Commonwealth Bank of Australia - Retail Banking Services and Bankwest
- Credit Union Australia Ltd
- Latitude Finance Australia and Latitude Personal Finance Pty Ltd
- National Australia Bank Ltd
- Suncorp-Metway Ltd
- Westpac Banking Corp