SUBMISSION ON FINANCIAL OMBUDSMAN SERVICE LIMITED (FOS) PROPOSED CHANGES TO THE TERMS OF REFERENCE (TOR)

Transcription

1 NATIONAL INSURANCE BROKERS ASSOCIATION OF AUSTRALIA (NIBA) SUBMISSION ON FINANCIAL OMBUDSMAN SERVICE LIMITED (FOS) PROPOSED CHANGES TO THE TERMS OF REFERENCE (TOR) ABOUT NIBA NIBA is the voice of the insurance broking industry in Australia. NIBA represents 400 member firms and over 3000 individual Qualified Practising Insurance Brokers (QPIBS) throughout Australia. Brokers handle almost 90% of the commercial insurance transacted in Australia, and play a major role in insurance distribution, handling an estimated $18 billion in premiums annually and placing around half of Australia s total insurance business. Insurance brokers also place substantial insurance business into overseas markets for large and special risks. Over a number of years NIBA has been a driving force for change in the Australian insurance broking industry. It has supported financial services reforms, encouraged higher educational standards for insurance brokers and introduced a strong independently administered and monitored code of practice for members. The 400 member firms all hold an Australian financial services (AFS) licence under the Corporations Act that enables them to deal in or advise on risk insurance products. NIBA appreciates the opportunity to be able to provide comments on FOS s proposed changes to its TOR. ABOUT INSURANCE BROKERS The role of insurance brokers The traditional role of insurance brokers is to: assist customers to assess and manage their risks, and provide advice on what insurance is appropriate for the customer's needs; assist customers to arrange and acquire insurance; and assist the customer in relation to any claim that may be made by them under the insurance. In doing the above the insurance broker acts on behalf of the customer as their agent. Insurance brokers offer many benefits to customers and consumers: assistance with selecting and arranging appropriate, tailored insurance policies and packages 1

2 detailed technical expertise including knowledge of prices, terms and conditions, benefits and pitfalls of the wide range of insurance policies on the market; assistance in interpreting, arranging and completing insurance documentation; experience in predicting, managing and reducing risks; and assistance with claims and a higher success rate with settlements (about 10 per cent higher than claims made without a broker). In limited cases insurance brokers may act as agent of the insurer not the insured but where such a relationship exists the customer is clearly advised up front. FOS TERMS OF REFERENCE PROPOSED CHANGES AND NIBA RESPONSE EXECUTIVE SUMMARY The following is a summary of the changes that NIBA believes could affect insurance brokers in relation to risk insurance and its response: Proposal 1.1 Adjudicators NIBA supports a process intended to improve decision making timeframes, subject to the persons appointed as Adjudicators having the requisite experience to appropriately make binding determinations. NIBA is concerned with the lack of clarity for members on what value of disputes adjudicators will be able to determine and the fact that complete control as to the powers is left to the discretion of the Chief Ombudsman. In effect industry is left to trust the decision of the Chief Ombudsman and appears to have no say in any changes that may be made from time to time. Proposal 2.1 Redesign FOS s Registration and Acceptance processes so that all lodged disputes are referred to the financial services provider s (FSP s) internal dispute resolution process. This appears to provide a broader opportunity for insurance broker s to resolve a dispute if a customer makes a complaint with FOS so NIBA supports this. We note that FOS has stated that it will provide clear guidance on specific timeframes in the Operational Guidelines (OGs) and/or relevant publications. The timeframes may vary according to the nature of the dispute and may be changed over time to take into account changing circumstances. FOS will continue to communicate and consult extensively with stakeholders about these timeframes and any future changes to them. 2

3 FOS has not yet provided any details of the proposed timeframes for resolving the dispute, these should be provided and included in the consultation pack before these changes are agreed to so that an informed decision about the impact of the changes can be made. In relation to the other changes to clause 6.4 FOS provide no guidance when it may consider it appropriate to commence investigating or otherwise progressing the Dispute immediately. These guidelines should also be provided as part of the consultation process. It is not clear what charges may be applied if it is referred back to IDR and then resolved without further reference to FOS. Proposal 3.1 Take a more assertive approach to help produce more timely resolution for disputes that are outside FOS s jurisdiction: o replace the standard 30 day timeframe to object to a jurisdictional assessment with a timeframe nominated by FOS o allow FOS the ability to reduce (as well as increase) any timeframe imposed by the TOR, to provide greater flexibility. NIBA notes that the amendments to clause 7.4 to enable FOS to reduce timeframes imposed under the TOR and FOS should provide details of when it will consider it appropriate to reduce timeframes in these circumstances so an informed decision can be made in relation to the proposed changes. Proposal 6 Expand FOS s jurisdiction over disputes between insurance brokers and small businesses to cover any general insurance policy other than an Excluded Policy (restoring FOS s jurisdiction to pre-2010 levels). NIBA strongly opposes this change for a number of reasons, being: o o o o the change will impose unnecessary costs and exposure to insurance brokers with no evidence provided in support of such a change; the FOS jurisdiction is intended to be focussed on retail type products and the extension will apply the terms to a type of client that was never intended to be protected by the scheme; the change will create unexpected mid-term professional indemnity risks and exposures for insurance brokers and increased costs that have not been properly considered or consulted on; and the change creates an uneven playing field between insurance broker and noninsurance broker intermediaries. The scope of coverage for insurance brokers is already greater than that which applies to insurers and their non-insurance broker agents. None of the above are identified or commented on in the inquiry or by FOS. 3

4 NIBA requests that FOS provide evidence for the need for such an extension, especially where the FOS jurisdiction is principally intended to focus on retail client business (the reason insurance brokers must belong to FOS in the first place). For example, what evidence does FOS have of any consumer detriment that has arisen by reason of the current scope of coverage and the number of complaints refused within this range to support its reasoning for seeking an increase in this scope and limit? NIBA is also not aware of any cost benefit analysis performed by FOS in order to support such a change. The proposed change is in NIBA s view inconsistent with good regulatory practice principles which FOS should seek to follow. FOS and the review does not appear to have considered such matters and NIBA believes any such change should not progress without a proper consideration of the issues and impact. See the detailed submission below for more information. Proposal 6 Increase FOS s jurisdiction over small business insurance disputes from 1 January 2016, to include: loss of profits/business interruption insurance, and an exceptional circumstances discretion so that FOS can, where appropriate, consider a dispute in relation to an excluded category of insurance. NIBA supports further consultation on this. There needs to be better certainty as to which insurance products fall within the FOS domain and which don t. Any discretion for FOS to determine whether a matter is an exceptional circumstance is likely to cause concerns for PI insurers of insurers and their agents and create uncertainty. Proposal 7 Allow FOS to consider third party motor vehicle disputes where the insured driver has not yet paid the excess, and increase the compensation cap for these disputes from $3,000 to $5,000. NIBA has not identified any concerns with this proposal. Proposal 8 Exclude disputes about rating factors and weightings used to determine excess or policy conditions as well as the base premium. NIBA supports further consultation on this. Proposal 9 Require Applicants being assisted by a fee-for-service agent to provide any required information at the time they lodge a dispute. NIBA has not identified any concerns with this proposal. 4

5 Proposal 10 Consider creating a separate monetary limit for income stream insurance claims disputes. NIBA supports further consultation on this. Proposal 11 Give FOS the discretion to allow an FSP to sell an asset the subject of a dispute (as well as or instead of other action to preserve it). NIBA has not identified any concerns with this proposal. Proposal 13 Index the current compensation caps in accordance with the current paragraph 9.8, and change paragraph 9.3 to relocate the consequential loss cap to a new Schedule 3. This is a format change, rather than a change to the content of the TOR. The format change will make clearer which compensation caps will apply to disputes lodged at different times. NIBA supports this proposal. Proposal 14 Consider increasing and indexing the jurisdictional limit as recommended by the Senate Committee (Recommendation 6). NIBA makes no comment on this proposal. See Attachment A for NIBA s detailed response on the above. If you would like to discuss any aspect of this matter further do not hesitate to contact us. Dallas Booth Chief Executive Officer Direct: +61 (0) dbooth@niba.com.au National Insurance Brokers Association of Australia 5

6 Attachment A NIBA S DETAILED RESPONSE The following sets out each of the changes and NIBA s detailed response. 6

7 Proposal 1.1 Create the role of Adjudicators, as distinct from Ombudsmen. Although Adjudicators will share similar powers to that of an Ombudsman, their authority will be limited to issuing Determinations and Jurisdictional Decisions on simpler, lower value disputes that will be considered under the proposed streamlined process. The Chief Ombudsman will set limits on the scope of Adjudicators powers based on FOS s experience with the streamlined process over time. Amend clause 2.2 and insert new clauses 2.4 and 2.5 to allows Adjudicators to make determinations. This is intended to expedite the complaint resolution process and NIBA supports such a process subject to the persons appointed as Adjudicators having the requisite experience to appropriately make binding determinations. NIBA notes that the Chief ombudsman has the power to set the limits on Adjudicators based on FOS s experience over time. NIBA is concerned with the lack of clarity for members on what value of disputes adjudicators will be able to determine and the fact that complete control as to the powers is left to the discretion of the Chief Ombudsman. In effect industry is left to trust the decision of the Chief Ombudsman and has no say in any changes that may be made from time to time. This may create some inconsistency in decision making and the low value threshold of disputes to be determined by Adjudicators should be set out in the TOR document with an ability to amend after appropriate consultation with relevant stakeholders. Proposal 2.1 Redesign FOS s Registration and Acceptance processes so that all lodged disputes are referred to the financial services provider s (FSP s) internal dispute resolution process. This will provide the FSP with a final chance This appears to provide a broader opportunity for insurance broker s to resolve a dispute if a customer makes a complaint with FOS so NIBA supports this. We note that FOS has stated that it will provide clear guidance on specific timeframes 7

8 to resolve the dispute before FOS considers it. in the Operational Guidelines (OGs) and/or relevant publications. The timeframes may vary according to the nature of the dispute and may be changed over time to take into account changing circumstances. FOS will continue to communicate and consult extensively with stakeholders about these timeframes and any future changes to them. FOS has not yet provided any details of the proposed timeframes for resolving the dispute, these should be provided and included in the consultation pack before these changes are agreed to so that an informed decision about the impact of the changes can be made. In relation to the other changes to clause 6.4 FOS provide no guidance when it may consider it appropriate to commence investigating or otherwise progressing the Dispute immediately. These guidelines should also be provided as part of the consultation process. Proposal 3.1 Take a more assertive approach to help produce more timely resolution for disputes that are outside FOS s jurisdiction: replace the standard 30 day timeframe to object to a jurisdictional assessment with a timeframe nominated by FOS It is not clear what charges may be applied if it is referred back to IDR and then resolved without further reference to FOS. Amendments to clause 5.3 will not affect insurance brokers as these are timeframes between FOS and an Applicant. The amendments to clause 7.4 to enable FOS to reduce timeframes imposed under the TOR may impact insurance brokers if timeframes are reduced at FOS s discretion. 8

9 allow FOS the ability to reduce (as well as increase) any timeframe imposed by the TOR, to provide greater flexibility. Proposal 6 Expand FOS s jurisdiction over disputes between insurance brokers and small businesses to cover any general insurance policy other than an Excluded Policy (restoring FOS s jurisdiction to pre-2010 levels). FOS should provide details of when it will consider it appropriate to reduce timeframes in these circumstances so an informed decision can be made in relation to the proposed changes. FOS applies has a different jurisdiction for General Insurance Brokers than it does for insurers and intermediaries that are not General Insurance Brokers. A General Insurance Broker is effectively defined as an Australian Financial Services Licensee that has the insurance broker condition in relation to general insurance. Currently FOS can only consider a dispute in relation to a General Insurance Policy that is a: Retail General Insurance Policy ; Residential Strata title Insurance Product ; Small Business Insurance Product ; Medical Indemnity Insurance Product The Retail General Insurance Policy definition is currently broader for General Insurance Brokers than for insurers and non-insurance brokers. For brokers it is defined to cover the Corporations Act retail client products and any other covers built into a product containing retail cover) other than Excluded Products. A Small Business Insurance Product means one thing for General Insurance Broker disputes and another for non-general insurance broker disputes (ie those with insurers 9

10 and agents of insurers that aren t General Insurance Brokers ). It catches such brokers whether acting for the client or for the insurer. For General Insurance Brokers a Small Business Insurance Product is currently limited to small business disputes relating to Retail General Insurance Policies (for brokers this is defined to cover the Corporations Act retail client products and any other covers built into a product containing retail cover) other than Excluded Products. FOS is extending its terms to all products ie it will now include all wholesale types (not only if part of a package, including a retail type) which is broader than the coverage applicable to insurers and non-general insurance broker intermediaries. In short, the proposed changes extend disputes for insurance brokers from 1 January 2015 (a year before the insurer/non-general insurance broker intermediaries changes) to all General Insurance Policies ie those caught by the insurance Contracts Act other than an Excluded Product. Excluded Product means a product that is not a financial product for the purposes of Part 7.1, Division 3 of the Corporations Act In particular, any state underwritten insurance and reinsurance won t be caught. The above creates significant unfair playing field between Insurance Broker licensees and non-insurance broker licensees which is inappropriate. 10

11 For example, an insurance broker acting as agent of an insurer is subject to greater coverage under the TOR than a non-broker agent of insurer. This is clearly inappropriate and has not been identified or considered by FOS. In addition to the above, we are not aware of FOS having directly consulted with professional indemnity insurers or NIBA about the impact of such an expansion of jurisdiction. For example, any policy with a FOS aggregate limit will be affected by the change exposing the insurance broker to an unexpected exposure. In addition, the change may also have an impact on whether the professional indemnity insurance of an insurance broker continues to meet the ASIC compensation requirements and the ultimate cost of such insurance given the increased coverage. The proposed changes are as a result of the recommendations made in the 2013 Independent Review of FOS. The Independent Review noted that the FOS TOR s for small business insurance disputes with insurance brokers is narrower than provided under the old IBD TOR s and recommended reinstating the IBD position. Recommendation 11 provided: 11

12 FOS should commence the necessary consultation steps to amend the Terms of Reference to expand its jurisdiction to disputes between insurance brokers and small businesses about any general insurance policy other than an Excluded Policy (thereby restoring its jurisdiction to that of the antecedent scheme, the Insurance Brokers Dispute Facility). FOS will engage with stakeholders with the view to amending its Terms of Reference and expanding its jurisdiction to deal with these disputes. The review ignored the fact that the IBD jurisdiction was not followed for a number of reasons: the significant differences between the IBD NIBA managed scheme and the FOS scheme; the lack of any evidence in support of a need for maintaining the IBD scope, especially where the scope of coverage was broader than that applying to insurers and their non-insurance broker agents under the FOS TOR; because of the increased limits and FOS role which created professional indemnity issues and potential increased costs for insurance brokers. NIBA notes that there is no evidence or reasoning provided in support of the proposed change beyond the fact it is different to the old IBD scheme. Historically the IBD Terms of Reference for small business applied to all general 12

13 insurance products (other than excluded products), however the IBD jurisdiction was limited to claims up to $100K. A higher jurisdictional limit of $150K ($168K from 1 Jan 15) now applies which means the changes have a significant impact for insurance brokers and their professional indemnity arrangements. NIBA opposes the changes and requests that FOS provide evidence for the need for such an extension, especially where the FOS jurisdiction is principally intended to focus on retail client business (the reason insurance brokers must belong to FOS in the first place). For example, what evidence does FOS have of any consumer detriment that has arisen by reason of the current scope of coverage and the number of complaints refused within this range to support its reasoning for seeking an increase in this scope and limit. NIBA is also not aware of any cost benefit analysis performed by FOS in order to support such a change. Is there a reason FOS is adopting a process which is inconsistent with the good regulation practices the current Government is seeking to follow? Insurance brokers join FOS as part of their AFSL requirements. Technically the obligation is to join an EDR scheme that covers complaints against the licensee made by 13

14 retail clients in connection with the provision of all financial services covered by the licence. FOS and the review does not appear to have considered such matters and NIBA believes any such change should not progress without a proper consideration of the issues and impact. Proposal 6 Increase FOS s jurisdiction over small business insurance disputes from 1 January 2016, to include: loss of profits/business interruption insurance, and an exceptional circumstances discretion so that FOS can, where appropriate, consider a dispute in relation to an excluded category of insurance. For insurers and their non-insurance broker agents a change will be made from 1 January 2016 and is: Inclusion of Loss of Profits/Business Interruption; and exceptional circumstance discretion. There needs to be better certainty as to which insurance products fall within the FOS domain and which don t. Any discretion for FOS to determine whether a matter is an exceptional circumstance is likely to cause concerns for PI insurers of insurers and their agents and create uncertainty. FOS propose that exceptional circumstances may exist in the following circumstances: The issues in dispute are analogous to those FOS normally deals with, and The Applicant would be disadvantaged by pursuing the Dispute in a more traditional forum, such as the Courts. 14

15 For instance, FOS commonly deals with disputes involving non-disclosure, misrepresentation, policy interpretation or causation issues. Accordingly, a claim being denied on one of these bases should be dealt with by FOS if the Applicant is disadvantaged pursuing the Dispute in a more traditional forum. As a guide, FOS will consider an applicant to be disadvantaged if the business is a small operation (e.g. limited owners with minimal turnover) and their financial ability to pursue the Dispute elsewhere is limited. This argument is based on financial ability of the Applicant and does not take into account whether it will be detrimental to a member for the matter to be determined by FOS. It will also create uncertainty for PI insurers about FOS s jurisdiction. Proposal 7 Allow FOS to consider third party motor vehicle disputes where the insured driver has not yet paid the excess, and increase the compensation cap for these disputes from $3,000 to $5,000. Proposal 8 Exclude disputes about rating factors and weightings used to determine excess or policy conditions as well as the base premium. NIBA has not identified any concerns with this proposal. Note: this proposed change is subject to consultation. The effect of this change would be to exclude further matters from FOS s jurisdiction in relation to rating factors for general insurance products. NIBA supports further consultation on this matter. 15

16 Proposal 9 Require Applicants being assisted by a fee-for-service agent to provide any required information at the time they lodge a dispute. Proposal 10 Consider creating a separate monetary limit for income stream insurance claims disputes. Note: FOS Summary Table notes this change is proposed to clause 6.2d), however the amendments are marked as 6.1d) in the FOS marked up Terms of Reference. NIBA has not identified any concerns with this proposal. The life insurance industry has previously raised concerns about the mismatch between FOS s $500,000 lump-sum jurisdiction limit and the monthly nature of income stream insurance disputes. FOS s experience suggests it may be appropriate to restrict income stream insurance claims disputes by reference to the monthly benefit (rather than just a lump sum amount). If this was followed through, it would align closely with the previous jurisdictional provisions that applied to income stream insurance disputes prior to However, depending on the way it is worded, such a change could reduce FOS s jurisdiction in this area. We would suggest the limits do not require change. They provide cover in effect for 5 & a 1/2 years if benefits up to the $500K jurisdictional limit. If anything a lower compensation limit should be introduced for these products. NIBA supports further consultation. 16

17 Proposal 11 Give FOS the discretion to allow an FSP to sell an asset the subject of a dispute (as well as or instead of other action to preserve it). Proposal 13 Index the current compensation caps in accordance with the current paragraph 9.8, and change paragraph 9.3 to relocate the consequential loss cap to a new Proposal 13 Schedule 3. This is a format change, rather than a change to the content of the TOR. The format change will make clearer which compensation caps will apply to disputes lodged at different times. Proposal 14 Consider increasing and indexing the jurisdictional limit as recommended by the Senate Committee (Recommendation 6). This amendment will provide the opportunity for FOS to allow an insurance broker to sell assets the subject of a dispute (if applicable). NIBA has not identified any concerns with this proposal. NIBA has not identified any concerns with this proposal. NIBA makes no comment on this proposal. 17