Interim Policy Statement 161 Registered insurance brokers and their representatives

Transcription

1 ASIC POLICY STATEMENTS [PS 161.4] [PS 161] Interim Policy Statement 161 Registered insurance brokers and their representatives Insurance (Agents & Brokers) Act 1984: s9, 11, 16, 19, 32, 35 and 39. Issued 18/7/2000 What this interim policy statement is about [PS 161.1] This interim policy statement (IPS) sets out: A how ASIC expects life and general insurance brokers registered under the Insurance (Agents & Brokers) Act 1984 (IABA) and persons who act as representatives of such brokers to comply with their obligations; and B how we will enforce IABA. see [PS 161.5] [PS ] see [PS ] [PS ] [PS 161.2] The guidelines are designed to assist registered life and general insurance brokers (registered brokers) and their representatives to fully comply with their legal obligations under IABA and the relevant common law. [PS 161.3] As far as possible, we have aimed to maintain consistency with the draft provisions under the Financial Services Reform legislation (FSR regime). If the FSR regime is to be implemented substantially in the current form, we believe that compliance with these guidelines will assist registered brokers and persons acting as their representatives to make a smooth transition to the new regime. We will review this interim policy statement after the implementation of the FSR regime. [PS 161.4] The guidelines apply to franchise and other contractual arrangements under which registered brokers conduct their broking business through representatives. 1

2 [PS 161.4] ASIC POLICY STATEMENTS Contents What this interim policy statement is about... [PS 161.1] A How you can comply with IABA Our policy... [PS 161.5] Underlying principles... [PS ] Explanations... [PS ] B How we will enforce IABA... [PS ] Key terms... [PS ] Related information... [PS ] 2

3 ASIC POLICY STATEMENTS [PS ] A How you can comply with IABA Our policy When is a person acting as a representative of a broker? [PS 161.5] Agents and sub-agents of a registered broker through whom that broker conducts their broking business are called representatives of the broker. [PS 161.6] A person is regarded as conducting a broking business (in life or general insurance) where that person arranges insurance contracts for intending insureds: (a) as agent of the intending insureds; (b) for reward; and (c) with system, repetition and continuity. [PS 161.7] Although IABA recognises the role of employees and agents in the conduct of a registered broker s broking business, it does not contain a definition of what constitutes an act of a representative of a registered broker. Generally, a person will be considered as acting as a representative of a registered broker when that person provides or purports to provide broking services to clients: (a) on behalf of the registered broker; or (b) in connection with the broking business of the registered broker. When should a person get their own registration under IABA? [PS 161.8] If a person is in fact acting as representative of a registered broker, they need not be registered as a broker under IABA in their own right. [PS 161.9] IABA requires registration only if a person carries on business as a life or general insurance broker. A person acting wholly as a representative of a registered broker is not conducting a broking business in their own right; instead they merely carry out activities relating to the broking business of their principal who is duly registered. [PS ] However, if a person claims to be a representative of a registered broker but in fact conducts their own separate broking business as a principal, that person must be registered as an insurance broker under IABA. 3

4 [PS ] ASIC POLICY STATEMENTS How will ASIC determine whether a person is in fact acting as a representative of a broker? [PS ] We will apply the following guidelines on a case by case basis when assessing whether or not a person is in fact acting as a representative of a registered broker. [PS ] We consider a person to be acting truly as a representative of a registered broker where the arrangement (eg a franchise or other contract) between the broker and that person results in: (a) the person being properly authorised to provide insurance broking services to clients on behalf of the registered broker; and (b) the person in fact providing the services to clients clearly on behalf of the registered broker. [PS ] Where the franchise or other contract does not result in achieving these outcomes, the person acting under such an arrangement will be considered as providing broking services as a principal and therefore should obtain their own registration under IABA. [PS ] To determine whether or not a person in fact provides broking services to clients as a representative of a registered broker, we will look at the overall arrangement between the registered broker and that person. The matters we will particularly look at include: (a) the extent of cover for that person s conduct under the registered broker s professional indemnity insurance policy; (b) the adequacy of disclosure of the identity of the registered broker by that person; (c) the handling of clients funds by that person; (d) the adequacy of the monitoring and supervising of that person s conduct by the registered broker; and (e) the ownership of client information. Professional indemnity insurance [PS ] A key consumer protection requirement is that a person seeking or renewing their registration under IABA must have a current professional indemnity insurance policy (PI policy) in a form that is acceptable to ASIC. This is also a key requirement under the FSR regime. [PS ] Generally, for underwriting purposes, the PI insurer requires information from a registered broker about the persons involved in the conduct of that broker s business. If a person permitted to act as a representative of a registered broker is not specified as a person providing insurance broking services on behalf of that broker for the purposes of the 4

5 ASIC POLICY STATEMENTS [PS ] broker s PI policy, liability for the services provided by that person may not be covered by the broker s PI policy. [PS ] We will consider any direct or indirect exclusion of liability for the conduct of a person permitted to act as a representative of a registered broker under the broker s PI policy as indicating that the person is not in fact acting as a representative of the broker. [PS ] Where necessary, we will seek information about the PI insurance arrangement of the registered broker to ascertain the identity of persons permitted to provide broking services on behalf of the broker under that broker s PI policy. Disclosure of the identity of the principal [PS ] Another key consumer protection measure is that clients can clearly discern the identity of the persons responsible for the provision of broking services to them. IABA prohibits a person from claiming to be a registered insurance broker unless that person is so registered. To comply with IABA, a person providing broking services as a representative of a registered broker must clearly indicate to clients that they are providing those services on behalf of the relevant registered broker. [PS ] Under the FSR regime, this requirement is not only retained but strengthened. The identity of the relevant principal must be clearly disclosed in key disclosure documents such as the Financial Services Guide, which must be provided to all retail clients. [PS ] There are a number of ways in which a person providing broking services as a representative of a registered broker can clearly disclose to clients the identity of the relevant registered broker on whose behalf they are providing such services. Generally, evidence of such disclosure is found in the business documents that are used by that person. [PS ] Business documents refer to letterheads, cover notes, business cards and promotional material that are used in the conduct of a broking business. They also include other disclosure documents that are required under the relevant conduct standards applicable to life insurance brokers under the Code of Practice for Advising, Selling and Complaints Handling in the Life Insurance Industry (Life Code), such as the disclosure of capacity and customer advice record. [PS ] We do not intend to unnecessarily restrict the content or form of any business documents used by registered brokers and persons acting as their representatives. However, to be able to demonstrate that a person is in fact acting as a representative when providing broking services to clients on behalf of a registered broker, the business documents used by that person must: 5

6 [PS ] ASIC POLICY STATEMENTS (a) (b) set out in clear and easy to understand terms the identity of the relevant registered broker who is responsible for the services provided by that person; and not create the impression that that person is conducting a broking business as a principal in their own right. [PS ] For example, if the identity of the person providing the broking service as a representative is more prominently displayed in a business document (eg in a letterhead used) than the identity of the relevant registered broker, that business document may give the impression that that person, rather than the registered broker, is conducting the relevant broking business. In such a situation, that person should be able to demonstrate through other evidence that the identity of the registered broker is made clearly known to the client. [PS ] Under franchise agreements, generally the persons acting as a representative (franchisee) will use a business name registered in the name of a registered broker (franchisor). In the case of franchises, the franchisee must clearly state the identity of the relevant broker to avoid the possibility that clients may see the franchisee as conducting the broking business in their own right as a principal. [PS ] For example, if XYZ Broker Services is the business name which is franchised, the use of the term XYZ Broker Services alone in the business documents used by a franchisee is generally not sufficient to indicate the identity of the relevant registered broker. Similarly, if the franchisee s identity alone is disclosed with the name XYZ Broker Services in the business documents used by that franchisee without any reference to the identity of the relevant registered broker, the use of those documents may suggest that the franchisee is not acting as a representative of the broker. Handling of clients funds [PS ] Registered brokers are subject to specific requirements under IABA when they handle clients funds. They have to deposit clients funds, such as premiums paid by clients and claims settlement funds received from insurers, in insurance broking accounts. Only registered insurance brokers are authorised to handle clients funds under IABA and they must maintain insurance broking accounts for this purpose. [PS ] Therefore, if a person acting as a representative of a registered broker is allowed to receive funds from clients in the course of providing insurance broking services, the broker must have internal procedures to ensure that those funds are immediately deposited in the relevant insurance broking accounts maintained by that broker. [PS ] A person is not acting as a representative of a registered broker if that person is allowed to handle clients funds other than as a mere 6

7 ASIC POLICY STATEMENTS [PS ] conduit, eg where that person can retain such funds for a period of time by depositing the funds in the accounts they maintain. [PS ] Such conduct may amount to a breach by: (a) the registered broker, of their specific obligations relating to insurance broking accounts under IABA; and (b) the person handling funds in this way, of the prohibition in IABA against the conduct of an unregistered insurance broking business. Monitoring and supervising [PS ] A registered broker who provides broking services to clients through representatives must adequately monitor and supervise the activities of the representatives to be able to meet their obligations to clients under IABA and common law. [PS ] Adequate monitoring and supervision of the activities of representatives is an express key requirement under the FSR regime. [PS ] If a registered broker allows other persons to provide broking services on their behalf with minimal monitoring and supervision under a franchise or other contract, this strongly suggests that those persons are not acting as the broker s representatives. [PS ] Terms and conditions in a franchise or other agreements such as the following may generally indicate situations which are inconsistent with IABA: (a) the franchisee is free to conduct its business activities as it wishes ; (b) there will be minimal interference by the broker in the conduct of the franchisee s activities ; or (c) the franchisee has the benefits of running its own business without having to hold its own registration. [PS ] Adequate monitoring and supervision of a representative s activities is a question of fact and will be determined on a case by case basis. For example, where a person is permitted to provide all the services needed by a client when arranging contracts of insurance for that client (eg all negotiations with insurers and communications with the clients) without appropriate controls, there is a higher risk that such a person may be carrying out those activities as a principal in their own right rather than as a representative of the broker. [PS ] To demonstrate that persons permitted to act as representatives in fact provide broking services as representatives of a registered broker, the broker must have adequate monitoring and supervision procedures that address risks such as a representative: 7

8 [PS ] ASIC POLICY STATEMENTS (a) (b) (c) (d) not making adequate disclosure of the relevant registered broker s identity to clients; making representations or giving the impression to clients that the representative provides the service in their own right rather than on behalf of the relevant registered broker; exceeding any specific authority given; and not having adequate competencies to conduct the activities which they are authorised to carry out. Ownership of client information [PS ] If a person is providing broking services to clients as a representative of a registered broker, the clients remain at all times the clients of that broker. It is the registered broker who provides the broking services to the clients, although the service is provided through a representative. Therefore, all client information such as client lists and files generally belongs to the registered broker and not to the representative. [PS ] We recognise that as an incentive for generating more business, registered brokers may agree to give persons acting as their representatives a share in the increased profits of the business, which may include prospects of receiving a share of ownership of the business/client information. [PS ] We do not intend to unnecessarily restrict commercial arrangements that are designed to provide added incentives to persons acting as representatives, provided they do not detract from the ability of a registered broker and their representatives to meet their obligations under IABA and common law. [PS ] Registered brokers who provide such commercial incentives should be able to clearly demonstrate through other evidence that persons permitted to provide insurance broking services on their behalf in fact provide those services as representatives. [PS ] The other relevant evidence we will look at in this context includes: (a) how the relevant registered broker s identity is revealed to clients in the business documents used by a person acting as a representative; (b) coverage of the services provided by a person acting as a representative under the relevant registered broker s PI policy and alternative dispute resolution scheme membership; and (c) the adequacy of the monitoring and supervision of the representatives activities by the registered broker when providing the services: see [PS ]. 8

9 ASIC POLICY STATEMENTS [PS ] Underlying principles [PS ] These guidelines are based on the requirements in IABA and some applicable common law principles and are consistent with the requirements under the FSR regime. Explanations What is an insurance broking business? [PS ] The regulatory regime under IABA applies to carrying on business as an insurance broker (an insurance broking business). [PS ] Section 9 of IABA defines the terms: (a) insurance broker as a person who...carries on the business of arranging contracts of insurance, whether in Australia or elsewhere, as agent for intending insureds ; and (b) insurance intermediary as a person who...(a) for reward; and (b) as an agent for... intending insureds; arranges contracts of insurance in Australia or elsewhere, and includes an insurance broker. [PS ] The term carrying on business is not defined in IABA and therefore, the common law principles become relevant. A particular activity conducted with system, repetition and continuity amounts to the conduct of a business under common law (see Taylor v White (1963) 110 CR 129, Edgelow v MacElwee (1918) 1 KB 205 and Hyde v Sullivan (1956) 56 SR NSW 113). [PS ] The combined effect of the relevant definitions in IABA and the common law requirements is that for a person to be considered as carrying on business as an insurance broker that person must: (a) arrange insurance contracts for intending insureds; (b) as agent of those intending insureds; (c) for reward; and (d) with system, repetition and continuity. [PS ] Insurance broking business can relate to a general insurance business, life insurance business or both. How does IABA regulate insurance broking business? [PS ] IABA regulates the conduct of an insurance broking business through certain prohibitions and specified conduct standards. Section 19 of IABA sets out the main prohibition against the conduct of an insurance broking business unless the person is registered under Part III of IABA. This section provides that: 9

10 [PS ] ASIC POLICY STATEMENTS A person (whether an individual or a corporation) shall not,..., carry on business as an insurance broker, whether alone or in partnership, in relation to life insurance business or general insurance business: a) unless the person is registered under Part III in respect of life insurance business or general insurance business, as the case may be; b) if there are liabilities prescribed for the purposes of this paragraph unless there is in force an acceptable contract of professional indemnity insurance within the meaning of s9b: and c) if the person carries on business as an insurance broker in relation to a class of general insurance business that, under the regulations, is domestic or personal insurance business and there is in force an arrangement, approved by the regulator, for dealing with complaints against persons carrying on business as insurance brokers in relation to that class of general insurance business unless the person is a party to the arrangement. 1 [PS ] Section 39 of IABA prohibits a person, unless registered as an insurance broker, from describing their activities in a way that would likely lead other persons to believe that they are insurance brokers. [PS ] IABA also sets out other specific conduct requirements that apply to registered brokers. These obligations extend to persons through whom registered brokers provide their broking services such as their employees and representatives. Some of the key conduct requirements include: (a) what information a registered broker must provide to intending insureds, eg: (i) when the broker is acting under a binder or other authority issued by an insurer (s16); (ii) any associations which the broker or its associates (ie directors, employees or agents) have with an insurer with whom insurance contracts are arranged for clients (s38); (iii) disclosure of fees and, where the client requests that information, any commissions and other benefits that are derived by the broker from an insurer (s32); and (b) the prohibition against receiving volume based remuneration (benefits or rewards) for arranging contracts of insurance by registered brokers (s35). 1 Life insurance brokers are subject to a similar requirement for membership in an ASIC approved Alternative Dispute Resolution (ADR) scheme under the Life Code. 10

11 ASIC POLICY STATEMENTS [PS ] What are the legal obligations of a broker for the conduct of their representatives? [PS ] IABA does not contain express provisions that hold registered brokers liable for the acts of their representatives (as opposed to the liability of insurers for the acts of their agents under s11 of IABA). However, such liability arises under the common law principles of agency that apply to brokers and their representatives. [PS ] Under the common law principles of agency, a registered broker who provides insurance broking services to clients through their representatives incurs liability to clients where: (a) the representative has acted within either their actual or apparent authority; or (b) where the principal has ratified the acts of the representative. [PS ] Where a registered broker uses representatives, generally a wide range of activities conducted by the representative will fall within, if not the actual authority, the apparent authority of the representative. Therefore, the broker will incur liability to clients for the representative s conduct in these areas. [PS ] Under the common law principles, the scope of a representative s apparent authority will generally be determined by: (a) the nature of duties entrusted to the representative; and (b) the circumstances of each case. [PS ] Because a representative is conducting the business of the relevant registered broker (whether by express authorisation or under apparent authority), the obligations under IABA relating to registered brokers extend to the activities of their representatives. Therefore, a registered broker using representatives to conduct their insurance broking business must ensure that the activities conducted through the representatives fully comply with the requirements in IABA: see [PS ]. [PS ] For example, IABA requires a broker to notify clients where it is acting under a binder (s16). Therefore, a broker acting under a binder must ensure that when their representatives arrange insurance contracts for clients, the representatives advise the clients about the binder. A failure to do so may amount to a breach by the broker of s16. What is the effect of the FSR regime? [PS ] Under the FSR regime, brokers are subject to a single licensing regime which requires them, as persons dealing in or providing advice on financial products (defined to include insurance contracts), to operate under an Australian Financial Services licence. Such licensees are 11

12 [PS ] ASIC POLICY STATEMENTS also subject to uniform conduct standards when providing their financial services. [PS ] The guidelines in this IPS are consistent with the new requirements under the FSR regime. In particular, the FSR regime clearly envisages that only persons providing financial services as principals need to be licensed. Persons who provide financial services as representatives of an AFS licensee (such as employees and authorised representatives) are not required to be separately licensed in order to provide financial services on behalf of a licensee. This means that a licensee is clearly accountable for the provision of financial services through their representatives. [PS ] To ensure that consumer protection is maintained where licensees provide their financial services through representatives, the FSR regime also contains specific monitoring, supervision and training requirements which all licensees must comply with for their representatives. Brokers will be subject to these conduct standards where they provide financial services through their representatives. The guidelines in this IPS are consistent with the adequate monitoring and supervision of representatives expected of licensees under the FSR regime. B How we will enforce IABA Our policy [PS ] We expect registered brokers providing broking services to clients through their representatives to follow these guidelines. [PS ] In conjunction with relevant professional bodies of registered brokers such as the National Insurance Brokers Association (NIBA), we will monitor compliance with these guidelines by registered brokers and persons who act or purport to act as representatives of brokers. [PS ] If we become aware that a registered broker has representatives who are conducting their own rather than the business of the broker, we may either revoke registration or not renew the registration of the relevant broker on the basis that the broker has failed to discharge its obligations when acting through representatives. [PS ] If we become aware that a person is conducting their own business while purporting to act as a representative of a registered broker, we may initiate enforcement action against that person for breach of the prohibition in IABA against the conduct of an unregistered insurance broking business. If such a person is also found to be describing or holding out the services they provide to clients as a registered insurance business, we may also take enforcement action against that person for breaches of the prohibitions in IABA and the ASIC Act (against misleading and deceptive conduct). 12

13 ASIC POLICY STATEMENTS [PS ] Key terms [PS ] In this policy statement: ADR schemes mean alternative dispute resolution schemes approved by ASIC; ASIC Act means the Australian Securities and Investments Commission Act 1989; acting as an agent of the client refers to a registered broker (and its representatives) arranging contracts of insurance as agents of intending insureds, and does not refer to representatives acting as an agent of a registered broker; broker means a person registered under Part III of IABA as a life insurance broker, general insurance broker or both and is also referred to as a registered broker ; business documents include letterheads, cover notes, business cards and other promotional material issued by a product or service provider including a registered broker; contractual arrangement includes any contract including franchise arrangements and is also referred to as an agency arrangement ; client information includes client lists and files; FSR regime means the regulatory regime under the Financial Services Reform legislation 2000; IABA means the Insurance (Agents & Brokers) Act 1984; Life Code means the Code of Practice for Advising, Selling and Complaints Handling in the Life Insurance Industry, including the amendments under G.II.2 and G.II.6; NIBA means the National Insurance Brokers Association; PI policy means professional indemnity insurance policy and is also referred to as PI cover ; representative means a person authorised or permitted to act as an agent or sub-agent of a registered broker and includes a corporate entity or a natural person acting under an agency arrangement with a registered broker; registered broker is a person registered under IABA as a life insurance broker, general insurance broker or both and is also referred to as a broker; the Law means the Corporations Law. 13

14 [PS ] ASIC POLICY STATEMENTS Related information [PS ] Policy statements and practice notes [PS 117] Investment advisory services: acting as a representative Legislation Insurance (Agents & Brokers) Act 1984: Sections 9, 11, 16, 19, 32, 35 and 39 Cases Taylor v White (1963) 110 CR 129, Edgelow v MacElwee (1918) 1 KB 205 and Hyde v Sullivan (1956) 56 SR NSW 113) 14