Report REP 622 Consumer credit insurance: Poor value products

Consumer credit insurance:

Poor value products and

harmful sales practices

Report 622 | July 2019

Contents

About this report 2

ASIC’s work on CCI—At a glance 3

Background to our review 5

Changes to the CCI market during the course of ASIC’s work 7

Poor product design and value lead to poor outcomes 10

Sales practices must change 13

Strengthening consumer protections 17

Appendix 1: Lenders and insurers in the CCI review (2013–17) 19

Appendix 2: Accessible versions of figures 20

Key terms and related information 21

About ASIC regulatory documents

In administering legislation ASIC issues the following types of regulatory documents:

consultation papers, regulatory guides, information sheets and reports.

Disclaimer

This report does not constitute legal advice. We encourage you to seek your own

professional advice to find out how the Corporations Act and other applicable

laws apply to you, as it is your responsibility to determine your obligations.

Examples in this report are purely for illustration; they are not exhaustive and are not

intended to impose or imply particular rules or requirements.

About this report

Consumer credit insurance (CCI) 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.

CCI is optional and usually sold by lenders to consumers with a credit

card, personal loan or home loan.

ASIC has long been concerned about sales practices for CCI, which

have resulted in poor outcomes for consumers. We reviewed the sale of

CCI by lenders, for the period 2011 to 2018, and found that CCI sales

practices and product design are still delivering poor outcomes for

consumers.

This report confirms the standards we expect of lenders who sell CCI and

insurers who design the products and handle claims. ASIC expects

lenders and insurers to meet these standards or cease selling CCI until

they do. New products must meet the standards before being sold.

ASIC has commenced enforcement investigations into a number of entities

that have been involved in mis-selling CCI to consumers. We are 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. ASIC will provide a further update on this

program later in the year.

Our expectations in this report are supported by the recommendations in

the Final Report of the Royal Commission into Misconduct in the Banking,

Superannuation and Financial Services Industry (Financial Services Royal

Commission): see Recommendations 4.1, 4.3, 4.7 and 4.8.

ASIC’s work on CCI—At a glance

Finding: CCI is poor value for money

› For CCI sold with credit cards, consumers were paid only

11 cents in claims for every dollar they paid in premiums (and

the more cover types in the policy, the lower its claims ratio).

› For all CCI sold, this increased to only 19 cents in claims paid.

Finding: CCI sales practices cause

consumer harm

› CCI was sold to consumers who were ineligible to claim or

unlikely to benefit or need cover.

› Sales staff used pressure selling and other unfair sales practices.

› Consumers were given non-compliant personal advice to buy

unsuitable policies.

› Consumers were charged CCI premiums with no current loan.

› Many lenders did not have consumer-focused processes to help

consumers in hardship who had a CCI policy to lodge a claim.

Finding: Lenders are exiting the CCI market

› During ASIC’s work on CCI, 7 of 8 lenders have stopped selling CCI

with credit cards, 5 of 9 lenders have stopped sales with personal

loans, and 4 of 9 lenders have stopped sales with home loans.

ASIC’s expectations: Meet our standards

› ASIC expects lenders and insurers to meet the standards on

page 4 of this report or cease selling CCI until they do.

ASIC action: Enforcement investigations

› ASIC is investigating sales of CCI that did not comply with the law

before the recent strengthening of ASIC’s powers and penalties.

› For future conduct, we will use our 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.

ASIC action: Consumer remediation and

improved product value and sales practices

› ASIC is requiring lenders to undertake large-scale remediations

with over $100 million expected to be paid to 300,000+ consumers.

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.

ASIC’s expectations

We expect all lenders who sell CCI, and insurers who design and price the products and handle claims, to meet the following standards or cease selling

CCI until they do. New entrants to the market should also design their products and sales processes so they meet these standards as soon as they start

business. There is a risk of significant consumer detriment where these standards are not met. Where this occurs ASIC will consider enforcement action or

intervening using our product intervention power.

Improved product design and value

› CCI products should be unbundled so that

consumers can select cover they are eligible

to use and that meets their needs.

› Claims ratios must be significantly increased

from the current poor levels of 19 cents in the

dollar, so CCI provides real consumer value.

› Lenders should assess product value

including claims ratios of new and existing

products before deciding to sell CCI.

› Benefits should reflect the needs of

consumers (e.g. payments for periods of

unemployment rather than arbitrary limits).

Compliance and monitoring

› Lenders should refrain from selling CCI unless

they can demonstrate compliance with

these standards and the10 recommendations

REP 256 for the sale of all CCI products

through all channels.

› Where these standards have not been met,

lenders should conduct a complete,

thorough and robust review to assess any

consumer harm, and identify and remediate

affected consumers in a timely manner.

Improved sales practices

› Outbound unsolicited phone sales of CCI

should cease.

› Lenders should use ‘hard filters’ for key

eligibility criteria for online sales and ‘knock-

out’ questions in scripts for phone and

branch sales to prevent the sale of CCI to

consumers who are ineligible to claim on any

primary cover.

› Lenders should take into account information

they have about the consumer to ensure

consumers are not being sold a CCI policy

where they are ineligible to claim (this does

not have to mean that personal financial

advice is being provided).

› Lenders should obtain and record positive,

clear and informed consent before

discussing the sale of CCI with a consumer.

›

Lenders should, within a short timeframe,

incorporate a four-day deferred sales model

for all CCI products across all channels, with

the deferral period starting the day after the

consumer is told their loan is approved.

Improved post-sales conduct

› Lenders and insurers should not charge

premiums for CCI where primary benefits are

no longer available under the policy (i.e. the

loan has been repaid).

› Lenders and insurers should give consumers

appropriate annual communication about

the price, limits and exclusions of the policy

and remind them to lodge a claim if they

had a claimable event in the last 12 months.

› Lenders and insurers should, every two years,

contact consumers with CCI on a credit card

(or other revolving lines of credit) about

whether they want to keep their policy or

cancel their cover.

› Lenders should notify 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.

› Insurers should accurately and reliably record

the number of (and reasons for) withdrawn

claims and claims that did not proceed.

Background to our review

How CCI works

Consumer credit insurance (CCI) sold with credit cards, personal loans

and home loans provides cover for consumers if they are unable to meet

their minimum monthly loan repayments due to unemployment, sickness

or injury (under the terms of the policy) or to pay the outstanding loan

balance upon death. CCI is optional and usually sold at the time the

consumer applies for the loan.

The CCI premium and the amount and length of cover are tied to the

loan, with each policy having different features, limits and exclusions. Any

claim payout varies greatly between policies depending on these

features, limits and exclusions. For example, a claim for involuntary

unemployment under a policy will pay the minimum monthly loan

repayment each month from the date of unemployment but the claim

payments may be capped at a specified (monthly and overall) limit

amount and payments will only be available for a limited period of time.

ASIC’s previous work on CCI

In October 2011, ASIC issued Report 256 Consumer credit insurance: A

review of sales practices by authorised deposit-taking institutions (REP 256),

which

made 10 recommendations to raise industry standards and reduce

the risk that CCI may be mis-sold to consumers.

During 2015 and 2016, ASIC reviewed the sale of add-on insurance

(including CCI) through car dealerships. We found that consumers were

being sold expensive, poor value products that provided very little or no

benefit, and a sales environment with pressure selling, very high

commissions and conflicts of interests.

Note: See Report 470 Buying add-on insurance in car yards: Why it can be hard to say no

(REP 470), Report 471 The sale of life insurance through car dealers: Taking consumers for

a ride (REP 471) and Report 492 A market that is failing consumers: The sale of add-on

insurance through car dealers (REP 492).

In August 2017, ASIC formed a CCI working group with industry to help

respond to these concerns and improve outcomes for consumers. As a

result, the Banking Code of Practice now has a four-day deferred sales

period for CCI sold with credit cards and personal loans in branch or over

the phone, effective 1 July 2019.

ASIC continues to be concerned about the sale and design of CCI. Some

of our concerns include:

› the sale of CCI to consumers who did not meet, or were unlikely

to meet, the employment eligibility criteria under the policy when

they were sold the policy (for instance, because they did not

work the required minimum number of hours per week or were in

casual or temporary employment) and would be unable to claim

under the policy; and

› consumers being charged for more cover than they needed

under the policy, including premiums and cover based on the

(higher) loan amount applied for rather than the amount the

consumer borrowed.

Note: See Media release 15-318MR Westpac to refund premiums for unwanted insurance

cover, 29 October 2015; Media release 17-268MR Commonwealth Bank to refund over

$10 million for mis-sold consumer credit insurance,14 August 2017; and Media release

17-457MR Latitude Insurance refunds almost $1.1 million for poor consumer credit

insurance sales and claims handling, 21 December 2017.

What we did in this review

In December 2017 we required 11 lenders to undertake an independent

review of their CCI sales practices for the five-year period from January

2013 to December 2017 (independent review).

The purpose of our review was to:

› test whether the 10 recommendations in REP 256

had been

implemented and were working effectively;

› review a sample of CCI sales over the period across all products and

distribution channels (except CCI sold through car dealers, which was

reviewed in REP 492) to identify any non-compliant sales and ensure

CCI had not been sold to consumers who were unlikely to meet the

employment eligibility criteria and would be unable to claim;

› analyse complaints, sales and claims information to identify systemic

concerns, poor value products and poor consumer outcomes; and

› address additional concerns about CCI sales practices across all

products and distribution channels.

These independent reviews revealed a range of problems (as highlighted

in this report) 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 our work, including declined and

withdrawn claims. We calculated claims ratios based on the data

provided.

Note: When ASIC conducted a final factual accuracy review, one entity identified an error in

the data provided to ASIC. For a range of reasons, including materiality, this data has not

been changed in this report and does not change the report’s findings or recommendations.

Table 1 lists the lenders and insurers covered by our review. For a full

summary showing the links between lenders and insurers, see Appendix 1.

Table 1: Lenders and insurers covered by our review

Lenders

Insurers

› Australia and New Zealand

Banking Group Limited

(ANZ)

› Australian Central Credit

Union Ltd (People’s Choice

Credit Union)

›

Bank of Queensland Limited

(BoQ)

›

Bendigo and Adelaide Bank

Limited (Bendigo)

› Citigroup Pty Limited

(Citigroup)

› Commonwealth Bank of

Australia - Retail Banking

Services and Bankwest

(CBA)

› Credit Union Australia

Limited (CUA)

› Latitude Finance Australia

and Latitude Personal

Finance Pty Ltd (Latitude)

› National Australia Bank

Limited (NAB)

› Suncorp-Metway Limited

(Suncorp)

› Westpac Banking

Corporation (Westpac)

› AAI Limited (AAI)

› AIA Australia Limited (AIA)

› Asteron Life & Superannuation Limited

(Asteron Life)

› Credicorp Insurance Pty Ltd (Credicorp)

› Great Lakes Insurance SE (Great Lakes)

› Hallmark General Insurance Company Ltd

(Hallmark General)

› Hallmark Life Insurance Company Ltd

(Hallmark Life)

› Insurance Australia Limited (IAL)

› MetLife Insurance Limited (MetLife)

› MLC Limited (MLC)

› MTA Insurance Pty Ltd (MTAI)

› OnePath General Insurance Pty Limited

(OnePath General)

› OnePath Life Limited (OnePath Life)

› QBE Insurance (Australia) Limited (QBE)

› St Andrew’s Insurance (Australia) Pty Ltd (St

Andrew’s)

› St Andrew’s Life Insurance (Australia)

Pty Ltd (St Andrew’s Life)

› St. George Life Limited (St. George Life)

› Swann Insurance (Aust) Pty Ltd (Swann)

› The Colonial Mutual Life Assurance Society

Limited (CMLA)

› Westpac General Insurance Limited

(Westpac General)

› Westpac Life Insurance Services Limited

(Westpac Life)

Note: All lenders reviewed for REP 256 were included in this review except HSBC Bank

Australia Limited as it had withdrawn all sales of CCI by October 2013. During the time of our

review, Asteron Life was known as Suncorp Life & Superannuation Limited. IAL, trading as

CGU Insurance, provided CCI life insurance cover through group life insurance policies issued

by AMP Life Limited.

Changes to the CCI market during the course of ASIC’s work

Market changes

From 2014 to 2018, total sales of all CCI products by the 11 lenders in our

review decreased by 71% (from 664,240 to 190,488 sales): see Figure 1.

Figure 1: Decrease in total CCI sales by year (2014–18)

Note: For the data shown in this figure, see Table 5 (accessible version).

The decrease in sales was consistent across all products:

› for personal loan CCI, a decrease of 71% (from 318,551 to 93,161 sales);

› for credit card CCI, a decrease of 71% (from 255,216 to 74,186 sales);

and

› for home loan CCI, a decrease of 74% (from 90,249 to 23,073 sales):

see Figure 2.

Figure 2: Decrease in total CCI sales by product (2014–18)

Note: For the data shown in this figure, see Table 6 (accessible version).

During this period, sales of CCI decreased across all sales channels with

some variation:

› branch sales decreased by 84% (from 411,605 sales to 66,306 sales);

› phone sales decreased by 64% (from 145,656 sales to 51,904 sales);

and

› online sales decreased by 30% (from 96,358 sales to 66,981 sales); see

Figure 3.

664,240

527,090

420,702

338,265

190,488

2014 2015 2016 2017 2018

10,000

60,000

110,000

160,000

210,000

260,000

310,000

2014 2015 2016 2017 2018

Number of sales

Personal Loan Credit Card Home Loan

Figure 3: Decrease in total CCI sales by channel (2014–18)

Note: For the data shown in this figure, see Table 7 (accessible version).

Some lenders stopped selling CCI for some or all products: see Table 2.

Table 2: Changes to CCI sales for products by lender (2014–19)

Lender

Credit card

Personal loan

Home loan

ANZ

Ceased

Selling

Bendigo

Ceased

BoQ

Not sold

Selling

CBA

Ceased

Selling

Citigroup

Ceased

Not sold

CUA

Not sold

Selling

Latitude

Selling

Not sold

Lender

Credit card

Personal loan

Home loan

NAB

Ceased

People’s Choice

Not sold

Selling

Suncorp

Ceased

Westpac

Ceased

Note: While CBA is selling CCI with home loans, Bankwest (a division of CBA) has ceased selling

all forms of CCI.

ASIC investigations, consumer remediation and

changes to practices

ASIC action

Our review of CCI sales, informed by the independent reviews, has

identified consumer harm, the need for consumer remediation and

improved practices in the following situations:

› consumers being sold CCI when they were ineligible to claim;

› pressure selling and unfair sales practices;

› inappropriate personal advice provided to consumers to buy

unsuitable policies;

› consumers incorrectly charged for CCI; and

› deficient hardship processes and procedures.

Where significant, lenders have lodged breach reports about the

misconduct. ASIC has commenced enforcement investigations into the

sales practices of a number of entities where we are concerned there

have been breaches of the law.

45,000

95,000

145,000

195,000

245,000

295,000

345,000

395,000

445,000

2014

2015 2016

2017

2018

Number of sales

Branch Online Phone

Remediation program for affected consumers

We are requiring all lenders in this review to undertake a large-scale

remediation program to address consumer harm (expected to involve

over 300,000 affected consumers paid over $100 million).

We have been actively involved to help ensure that the lenders’

remediation programs follow these principles:

› lenders conduct a complete, thorough and robust review of the harm

to identify the number and nature of affected consumers and the

total amount of remediation (with interest);

› consumers are remediated in a fair, timely and transparent manner to

put them back in the position they would have been in had the mis-

selling not occurred (but timeliness must not compromise the

program’s quality);

› consumers are pro-actively remediated (and where there is good

reason for the consumer to take some action for remediation, the

‘call to action’ should not be onerous nor influence them to take an

action that does not align with their best interests);

› communication with consumers should use multiple channels, be

informed by awareness of consumer behaviour, and focus on the

right ‘call to action’ and/or messaging to achieve high response rates

and good consumer outcomes;

› where consumers have active bank accounts, remediation should be

processed automatically to that bank account;

› where consumers have inactive accounts, they should be given the

option of nominating an alternative bank account;

› if a cheque is issued, the consumer should receive follow-up

communication to ensure the cheque is deposited;

› lenders continually monitor outcome metrics of the remediation to

track progress and identify and fix areas of the remediation that need

improvement; and

› lenders follow Regulatory Guide 256

Client review and remediation

conducted by advice licensees (RG 256).

Changes to practices

We required the 11 lenders to change their practices to implement the

recommendations made in the independent reviews, including

improvements to the sales systems and practices and monitoring and

supervision. Some of these recommendations have already been

implemented. Lenders must ensure that the remaining recommendations

are implemented and working effectively. We plan to collect data to

measure improvements and will use the full range of our regulatory

powers if consumer outcomes have not improved.

Poor product design and value lead to poor outcomes

CCI is poor value, especially with credit cards

For the financial years 2011–18, we found that for CCI sold with credit

cards, consumers received only 11 cents in paid claims for every dollar

paid in premiums. Across all CCI products, 19 cents was paid to

consumers as a proportion of the insurance premium (claims ratio).

Claims ratios focus on the consumer experience of paying premiums and

receiving paid claims. Separately, we compared loss ratios (a different

metric to the claims ratio) for four different insurance products for this

period. Loss ratios take into account the expenses and claims reserves of

the insurer.

APRA’s Quarterly General Insurance Statistics for the financial years

2011–18 show the following loss ratios:

› 24 cents for CCI;

› 47 cents for travel insurance;

› 59 cents for home and contents insurance; and

› 89 cents for domestic motor insurance: see Figure 4.

This comparison illustrates that CCI, with the lowest ratio of losses to gains,

is likely to be the most profitable general insurance product for insurers.

As noted earlier, CCI sold with credit cards is consistently the poorest

value for money for consumers compared to other CCI products.

For the financial years 2011

–18, CCI with credit cards earned insurers the

most in premiums ($1.78 billion) but paid out the least in claims ($0.2 billion).

This means that for every dollar that consumers paid in CCI premiums, they

received on average only 11 cents back in paid claims: see

Figure 5.

Figure 4: Comparison of loss ratio by general insurance product (FY 2011–18)

Figure 5: Claims ratio by CCI product type (FY 2011–18)

Note: For the data shown in these figures, see Table 8 and Table 9 (accessible version).

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

2011 2012 2013 2014 2015 2016 2017 2018

Domestic motor vehicle Houseowners and householders

Travel Consumer credit

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

2011 2012 2013 2014 2015 2016 2017 2018

Credit card Personal loan Home loan

Table 3 shows the CCI claims ratio in cents for the lenders in our review.

The five lowest claims ratios for each product are:

› for credit cards: Suncorp, Citigroup, ANZ, Latitude and Westpac

(each had a claims ratio less than 12 cents);

› for personal loans: Suncorp, BoQ, CUA, Bendigo and ANZ (each had

a claims ratio less than 14 cents); and

› for home loans: NAB, BoQ, CBA, Westpac and Bendigo (each had a

claims ratio less than 31 cents).

Table 3: Claims ratio (in cents) for lenders by CCI product (FY 2011–18)

Lender Credit card Personal loan Home loan

Suncorp

3.86

11.22

32.67

Citigroup

4.80

n/a

ANZ

6.90

13.88

41.15

Latitude

9.76

21.35

n/a

Westpac

11.76

20.30

29.89

NAB

14.22

29.17

23.02

CBA

16.00

14.89

28.08

People’s Choice

29.40

18.10

31.56

Bendigo

32.31

13.50

30.60

BoQ

n/a

11.77

24.90

CUA

n/a

12.32

31.43

Note: The claims ratio data contains claims and premium data for policies sold during and

prior to ASIC’s review.

Bundled cover in credit card CCI means lower value

Compared to CCI sold with personal and home loans, CCI sold with

credit cards tended to contain more types of cover per policy and those

cover types were ‘bundled’ together, meaning they could not be

bought separately. For example, one credit card CCI product contained

bundled cover for temporary disability, permanent disability, terminal

illness, death, and involuntary unemployment.

Based on data from lenders, the more cover types bundled in a CCI policy

sold with credit cards, the lower its claims ratio, as the bundled policy was

more likely to contain cover an individual consumer was less likely to need.

Changes in product design can improve value

We expect lenders and insurers to sell products with significantly higher

claims ratios by:

› making changes to price and product design;

› unbundling cover for products so that consumers can choose the

cover they need;

› communicating with consumers regularly to remind them of their

cover and their ability to claim; and

› having processes and systems to ensure that CCI is delivering value.

We will continue to collect data from lenders and insurers on actual claims

ratios for their CCI products and plan to publish this data. We consider this will

encourage lenders and insurers to make substantial improvements to the

price of, and cover provided by, these products, to deliver improved value.

If claims ratios do not improve, we will consider using our product intervention

power to limit the sale of CCI products to specific classes of consumers.

When the design and distribution obligations take effect, we will act where

we have concerns about the sale of products to consumers who do not

meet the lender’s or insurer’s own target market criteria for the product.

Higher rates of declined/withdrawn claims raise

concerns about the way in which CCI is sold

One of the value measures of insurance is the ability for a consumer to

successfully claim on the policy when they need it.

For the financial years 2011–18, we found that one in five (20.03%) claims

made on a CCI policy were either declined by the insurer or withdrawn.

This ranged between 15.6% to 33.6%: see Table 4.

Many insurers also did not accurately and reliably record the number of

(and reasons for) withdrawn claims or claims that did not proceed.

The higher declined/withdrawn claim rates indicate that:

› there are systemic issues in how the product was sold, including the

sale to consumers who were ineligible to claim;

› consumers do not understand (or were misled about) the features,

limits and exclusions of the policy;

› policy exclusions are too onerous; or

› policies may not have been suitable for the consumer’s individual

circumstances.

Table 4: Combined declined and withdrawn claim rates (FY 2011–18)

Lender

Credit card

Personal loan

Home loan

All CCI

Citigroup

33.6%

n/a

33.6%

CBA

28.3%

33.5%

24.4%

30.1%

Suncorp

29.2%

28.5%

34.0%

29.1%

CUA

n/a

24.4%

13.4%

20.2%

NAB

20.1%

20.9%

10.9%

19.4%

Bendigo

21.6%

19.6%

15.0%

17.7%

BoQ

n/a

20.7%

16.0%

17.7%

ANZ

27.3%

13.8%

14.6%

17.3%

People’s Choice

14.5%

0.0%

17.0%

16.8%

Westpac

17.4%

15.5%

28.1%

16.8%

Latitude

14.4%

21.5%

n/a

15.6%

Note: The declined and withdrawn claim rates contain claims data for policies sold during

and prior to ASIC’s review.

Sales practices must change

Our review of 11 lenders found that CCI sales practices are still delivering

poor outcomes for consumers as well as poor product value.

On page 4, we set out the standards that we expect all lenders and

insurers who design and sell CCI products to meet.

CCI was sold to ineligible consumers, and to those

who did not need cover or were unlikely to benefit

A number of lenders sold CCI policies to consumers who were ineligible to

claim for all or many benefits under the policy.

Some examples of the key eligibility criteria in the CCI policies that

consumers did not meet when sold the product include:

› not working the required average number of hours per week and/or

the number of consecutive days;

› having seasonal, casual, temporary, or fixed-term employment; or

› having a pre-existing condition excluded under the CCI policy.

These sales were due to inadequate sales and internal monitoring systems,

processes, procedures, and controls. Affected consumers are being

remediated.

In many situations, CCI was also sold to consumers who did not need

cover or were unlikely to benefit. We consider that CCI is unsuitable for

the following categories of consumers:

› in the case of the life component of CCI, sales to single consumers

under the age of 25 with no dependants who have minimal assets;

› consumers who already have life, total and permanent disability or

income protection cover through their superannuation fund that

covers the same risks;

› consumers in financial hardship due to a change in personal

circumstances who obtain a loan to consolidate their debts, where

the change in personal circumstances means the consumer no

longer meets the key eligibility criteria;

› consumers who do not meet the key eligibility criteria for all or some

types of cover when they are sold the product; and

› consumers who do not meet a lender’s own target market criteria for

the product, including income thresholds.

Case study: Consumer was ineligible to claim

During February 2014, a personal loan CCI policy was sold to a

consumer working less than 20 hours per week. The consumer later

became unemployed and lodged an insurance claim for

unemployment benefits.

The claim was declined on the basis the consumer was not working

the required minimum of 20 hours per week for the six-month period

leading up to the claim date. When the policy was taken out,

proper checks were not performed to ensure the consumer was

eligible to claim for the benefits under the CCI policy.

This consumer will be remediated.

Consumers were charged for CCI even if they had no

loan repayments to protect

Consumers were charged for CCI before they had drawn down on their

loan or after they had paid off their loan. This was despite being unable

to claim on the primary benefits of the insurance because there was no

loan balance outstanding or loan repayments owing.

Case study: CCI premiums charged for loans with nil balances

A minimum annual premium of $150 for home loan CCI was

charged to consumers when the home loan balance was zero.

The policy remained open in case consumers redrew on their home

loan, despite many never doing so. During this time, consumers were

not obtaining any primary benefit from paying the premium.

Affected consumers in the review will be remediated.

CCI was not considered when assessing financial

hardship

Our review of lenders found that many did not have consumer-focused

systems to adequately inform or remind consumers with a CCI policy who

were in financial hardship that they had a CCI policy and might be

eligible to claim.

Some lenders who did have such systems did not adequately help

consumers to lodge a claim.

Unfair sales tactics were used to sell CCI

Lenders employed telemarketers, with motivation to maximise sales

Some lenders used third-party telemarketers to sell CCI and motivated

them to maximise sales by providing volume bonuses and sales targets.

Lenders reinforced these incentives by concentrating their limited

monitoring on telemarketers’ sales performance rather than on detecting

and preventing misconduct.

This resulted in significant mis-selling of CCI.

Telemarketers used a variety of unfair sales tactics

Our review found that telemarketers’ staff engaged in unfair sales tactics.

These tactics included:

› falsely representing that buying CCI was a condition of getting credit;

› pressuring consumers and persisting with sales calls even when

consumers stated they did not need or want CCI;

› overcoming consumers’ reasonable objections using practiced

techniques that played to the consumers’ concerns (e.g. describing

scenarios where the consumer may find it difficult to make credit card

repayments such as suffering an injury and not being able to work);

› suggesting that consumers buy CCI and cancel it during the cooling-

off period at no cost if they continued to see no value in it;

› failing to inform consumers about exclusions, including exclusions for

pre-existing medical conditions and limitations of a new CCI product

(that they may not have been informed they were acquiring);

› advising that the monthly insurance premiums for credit card CCI

could be avoided while suggesting vague, impractical or misleading

methods to do so (e.g. the consumer could avoid paying for the CCI

if they paid their credit card by the due date when, in fact, they had

to pay by the statement date to avoid paying the premium); and

› using ambiguous language to obtain consent so that some

consumers did not realise they were agreeing to buy CCI.

This misconduct caused consumers to cancel their CCI policies and

complain disproportionately about telemarketers.

Case study: Sales conversation involving unfair sales tactics

At the start of a sales conversation, a telemarketer pretended to be

calling about a consumer’s loan repayments and did not make it

clear they were calling to sell CCI or obtain consent to discuss CCI.

Despite the consumer expressing several times that he was not

interested in CCI, the telemarketer persisted and attempted to

persuade the consumer that CCI provides ‘peace of mind’ and only

costs $4.10 per day.

The telemarketer also applied time pressure, saying ‘if you have it at

the start, from day one, you can cancel anytime’ and ‘you can

always cancel at no cost within the 30 days cooling-off period’.

The telemarketer refused the consumer’s request for more time to

consider the CCI policy and for the telemarketer to call back later.

Affected consumers in the review will be remediated.

Sales scripts and monitoring systems to detect mis-

selling were inadequate

In REP 256, ASIC made 10 recommendations for the sale of CCI products

to raise industry standards and reduce the risk of CCI being mis-sold. The

recommendations covered sales practices, disclosure (particularly in

formal sales scripts), training programs and monitoring systems.

Based on independent reviews undertaken by the 11 lenders, we found

that in sales scripts, many lenders failed to provide consumers with:

› a clear statement of the intention to sell insurance before any

attempt to sell CCI (e.g. a clear question seeking the consumer’s

consent, or ‘permission to discuss insurance’);

› a clear explanation of the main exclusions that apply to the CCI

policy and where CCI is sold as a bundled product, the main

exclusions that apply to each component of the policy;

› clear instructions to end any attempted sale if a consumer indicated

once, or twice at most, that they did not want to buy the product; and

› information on the cooling-off period without using it as a selling point

(this is best achieved by providing information about the cooling-off

period after the consumer has clearly agreed to buy the product).

Many lenders failed to tell consumers how much interest they would pay

on the single upfront financed premium for the life of the CCI policy (or

loan). This additional interest meant that consumers paid significantly more

for the CCI than if the premium had been paid monthly outside the loan.

Another significant finding and consistent theme of the independent

reviews was that many lenders failed to have documented systems to

detect non-compliant sales of CCI through regular reviews of sales,

complaints and cancellation reports, mystery shopping exercises, sales

verification calls, and failed to have processes to monitor calls.

ASIC is writing to lenders and insurers to set out the standards that we

expect for their processes and procedures for monitoring and supervision.

We will seek confirmation by an attestation from each lender that:

› the recommendations from the independent reviews have been

implemented and are working effectively;

› the standards in this report are being met; and

› the remediation programs are complete, thorough and robust.

Online sales did not distinguish between CCI and

loan applications and relied on written disclosure

In 2018, we reviewed a sample of credit card online application forms

and online sales content for six lenders and wrote to the lenders to outline

our concerns. The six lenders reviewed were ANZ, Citigroup, CBA,

Latitude, NAB and Westpac.

We found that lenders listed CCI under headings such as ‘card options’

or ‘setting up your card’, misleading consumers about the distinction

between credit card and CCI application and information.

Almost all lenders reviewed did not inform consumers that interest was

payable on the CCI premium if the credit card balance was not paid in

full and they relied on the Product Disclosure Statement (PDS) to provide

consumers with the necessary information.

Research has shown that disclosure documents do not enhance

consumer decision-making, assist with product comparisons or prevent

consumers buying unsuitable products.

Note: See Report 416 Insuring your home: Consumers’ experiences buying home insurance

(REP 416). For a summary of the findings on disclosure in REP 416, see paragraphs 17–28 of

Report 415 Review of the sale of home insurance (REP 415).

The online sales content also did not provide consumers with balanced

information about the cover, exclusions, features, limits and costs of CCI.

Overall, lenders have failed to:

› effectively and efficiently communicate CCI policy terms to

consumers;

› innovate their disclosure in digital channels (where there is an

opportunity to be interactive); or

› address issues with product design, sales and marketing processes to

improve consumer understanding and outcomes.

Strengthening consumer protections

Deferred sales model for CCI

In August 2017, ASIC formed a CCI working group with industry to respond

to concerns about the way in which CCI was sold and to improve

outcomes for consumers. As a result, the Banking Code of Practice now

has a four-day deferred sales period for CCI sold with credit cards and

personal loans in branch or over the phone, effective 1 July 2019.

In its Final Report the Financial Services Royal Commission recommended

the development of an industry-wide deferred sales model for the sale of

any add-on insurance product (except policies of comprehensive motor

insurance) and that the model be implemented as soon as practicable

(Recommendation 4.3).

Given the concerns identified in this report, in ASIC’s view, the four-day

deferred sales period should apply to all CCI products sold across all

distribution channels to facilitate improved consumer decision making.

This will give consumers the time to understand the complexities of CCI

products, assess their value and whether the product meets their needs

and to ensure that consumers do not feel pressured to buy CCI to be

approved for the loan.

Note: For ASIC’s expectations for deferred sales of CCI, see page 4.

We consider that all relevant industry codes (e.g. banking, life and

general insurance) should incorporate a deferred sales model.

Product intervention power and design and

distribution obligations

On 5 April 2019, legislation was enacted to introduce design and

distribution obligations for financial services providers and give ASIC a

product intervention power.

Note: See Treasury Laws Amendment (Design and Distribution Obligations and Product

Intervention Powers) Act 2019. The product intervention power is available for ASIC to

use. The design and distribution obligations will be phased in over two years. We are

working to provide guidance on the new regime.

From 6 April 2019, ASIC can intervene using its product intervention power

where there is a risk of significant consumer detriment. In these situations,

ASIC can order that a person not engage in specified conduct in relation

to a product or class of product, or except in accordance with certain

conditions. For example, ASIC could use the power to place restrictions

on the way CCI products are marketed and sold.

From 5 April 2021, issuers and distributors of certain financial products,

including CCI, will need to identify target markets, and design their

products to be consistent with the needs of, and direct distribution

towards, the target market. Firms will be obliged to review these

arrangements to ensure they remain appropriate.

Ban on unsolicited sales of CCI

CCI products are complex and are typically sold under a no advice or

general advice model. When complex products are sold through

unsolicited contact, there is an increased risk that consumers do not need,

want or understand the product, resulting in poor consumer outcomes.

Our review identified pressure selling and other unfair sales in unsolicited

outbound sales of CCI, particularly through telemarketers where sales

commissions drive poor consumer outcomes.

The Financial Services Royal Commission recommended that the hawking

of insurance products should be prohibited (Recommendation 4.1). ASIC

is working towards implementing this recommendation.

Unfair contract terms in insurance contracts

The Financial Services Royal Commission recommended that unfair

contract term provisions set out in the ASIC Act should apply to insurance

contracts regulated by the Insurance Contracts Act 1984

(Recommendation 4.7). ASIC has supported this for many years and is

working with the Government to assist with implementation.

Claims handling as a financial service

The Financial Services Royal recommended that the handling and

settlement of insurance claims, or potential insurance claims, should no

longer be excluded from the definition of a financial service

(Recommendation 4.8).

This means that insurers’ decision making on claims, claims investigations,

policy interpretations and settlement negotiations will need to meet the

obligation to do all things necessary to ensure that financial services are

provided efficiently, honestly and fairly in s912A of the Corporations Act.

ASIC supports this reform and is working with the Government to assist

with implementation.

Stronger civil penalties

The Treasury Laws Amendment (Strengthening Corporate and Financial

Sector Penalties) Bill 2018 was enacted in March 2019.

This law improves ASIC’s enforcement regulatory toolkit allowing us to

pursue civil penalties against a greater range of misconduct, including a

failure by a lender or insurer to act efficiently, honestly and fairly, failure to

report breaches and defective disclosure.

The new civil penalties apply to conduct engaged in from 13 March 2019.

Appendix 1: Lenders and insurers in the CCI review (2013–17)

Lender

Credit cards

Personal loans

Home loans

ANZ

OnePath General (general insurer),

OnePath Life (life insurer)

QBE (general insurer), OnePath Life (life

insurer)

QBE (general insurer), OnePath Life (life

insurer)

Bankwest (CBA)