The Government has released a consultation paper in response to the recommendation from the Financial Services Royal Commission that claims handling should no longer be excluded from the definition of ‘financial service’.
A two-pronged approach has been proposed in response to this recommendation:
- Remove regulation 7.1.33 which currently excludes claims handling and claims settlement from constituting providing financial advice or dealing in an insurance product.
- Define the activity of handling or settling an insurance claim as a ‘financial service’ for the purposes of the Corporations Act.
While a precise definition is yet to be developed, it is proposed that the new definition could cover all conduct of the insurer (or its representative) in relation to claims handling. Captured conduct could include:
- making a decision about a claim, including investigating claims and interpreting policy provisions;
- conducting negotiations in respect of settlement amounts;
- preparing estimates of loss or damage, or likely repair costs; and
- making recommendations about mitigation of loss.
It is intended that an extended definition would improve consumer outcomes, for example by:
- ensuring that AFS licensees are required to act efficiently, honestly and fairly when handling an insurance claim with the potential for ASIC to take action to address potential systematic issues;
- requiring AFS licensees to have adequate measures in place to manage conflicts between representatives’ own interests in refusing claims, and legal obligations owed to clients; and
- requiring AFS licensees to adequately supervise claims handling conduct engaged in by their representatives and ensure that representatives are adequately trained and competent to engage in those services.
The introduction of ‘claims handling’ as a financial service would impact insurers that provide claims handling services as well as third party representatives that are involved in claims handling services on behalf of the insurer. If the reform is passed, these parties will need to consider whether variations to their existing AFS licence (or authorisations given to third parties) are required and also whether parties not previously subject to the AFS licensing regime will now be caught.
Responses to the consultation paper are open until 29 March 2019. Further information can be found here.