New CTH Act For Additional Consumer Protections Following the Banking Royal Commission

The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2020 (Cth) (“the Act") was assented to on February 17.  The Bill was originally introduced to the House of Representatives by Treasurer John Frydenberg on 28 November 2019.  The Bill passed both houses of parliament with no additional amendments on 6 February 2020.

The Act makes a number of amendments following several recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (“the Royal Commission”). The Royal Commission and its interim report were discussed in an earlier Timebase article. The Royal Commission's final report was submitted to the Governor-General on 1 February 2019.

The Act aims to implement four recommendations:

• To extend the unfair contract terms protections to cover insurance contracts
• To ensure that funeral expense policies are covered under consumer protection provisions
• To introduce a duty of best interest as a requirement for mortgage brokers
• To reform remuneration of mortgage brokers

Additional Protection for Insurance Contracts

Schedule 1 of the Act contains amendments to extend the unfair contract terms protections under the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”) to insurance contracts under the Insurance Contract Act 1984 (Cth) (“the Insurance Contract Act”). These amendments aim to renew consumer confidence in the industry, provide a remedy where unfair terms are found, and to deter insurers from drafting unfair terms into future standard contracts.

The unfair contract terms regime was first introduced in 2010 to protect consumers who entered into standard form contracts. Under these laws, if a court found that a term in a standard form contract was unfair, the term would be declared to be void. However, the contract would continue to bind both parties, if it is capable of operating without the term. These protections were extended to also include small business contracts in 2016. This regime applies only to standard form contracts, which are contracts prepared by one party and not subject to negotiation. Individually negotiated contracts are not covered, and insurance contracts regulated under the Insurance Contract Act are also currently excluded.

Under the new Act, general and life insurance products purchased by consumers and small businesses will no longer be excluded from these protections. The Act also contains provisions that clarify the application of the unfair contract terms regime in regards to insurance contracts. Firstly, terms that define the main subject matter in insurance contracts will be limited to the description of what is being insured. This means that a party cannot argue for a broader definition of what is covered under the insurance contract.

Secondly, so long as they are presented transparently, terms that set the amount of excess or deductible in an insurance contract are excluded from the unfair contract terms regime. For example, excesses or deductibles chosen by the insured  to vary the payable premium under an insurance contract will not be subject to challenge. Finally, third party beneficiaries of insurance contracts will be allowed to bring actions against insurers under the unfair contract terms regime. Usually, only a party to the contract can bring an action.

These new protections will apply to new or renewed insurance contracts following the commencement of Schedule 1 of the Act. Terms that are varied after the commencement of these provisions will also be covered.

Funeral Expense Policies

Schedule 2 of the Act contains amendments to both the ASIC Act and Corporations Act 2001 (Cth) (“the Corporations Act”) to ensure that the consumer protection provisions under the ASIC Act apply to funeral expenses policies. Prepaid funerals, however, are not impacted by these amendments, and will continue to operate as funeral benefits.

Funeral expense policies provide a payout for funeral costs up to the nominated amount. This payout only covers the cost of the funeral and related incidental costs. In its final report, the Royal Commission found that these policies caused harm to vulnerable consumers as policy providers adopted poor sales practices when selling them. The Royal Commission found that the policies were harmful to consumers in that:

• The cost of the actual funeral incurred could be less than the nominated limit under the policy
• The amount of premiums paid over the life of the policy may in actuality exceed the amount payable as a benefit

Currently, section 12BAA of the ASIC Act provides that funeral benefits are not financial products, and therefore are not subject to the unconscionable conduct and consumer protection provisions contained in Part 2, Division 2 of the ASIC Act. The Act amends section 12BAA to expressly specify that funeral expense policies are not funeral benefits for the purposes of the ASIC Act, and therefore not excluded from the consumer protection provisions. These changes will ensure that funeral expense policy providers fall under the scrutiny of the Australian Securities Investment Commission.

The Act also makes similar amendments to the Corporations Act, in which funeral expense policies will no longer be excluded from the definition of financial products. Following these amendments, funeral expense policy providers will now be subject to the Australian financial services licensing regime, general conduct obligations under section 912A of the Corporations Act, and anti-hawking provisions within the Corporations Act.

Mortgage Brokers

Schedule 3 of the Act contains amendments to the National Consumer Credit Protection Act 2009 (Cth) (“the Credit Act”) which introduces a requirement to mortgage brokers to act in the best interests of their client and addresses conflicted remuneration. Schedule 3 also contains new definitions to clarify who is a mortgage broker or mortgage intermediary, within the meaning of the Credit Act.

The proposed best interest obligations are to apply to mortgage brokers within the new meaning under the Credit Act. These obligations apply in relation to credit assistance in any credit contract provided by the mortgage brokers. This duty to act in the consumer’s best interest is a principle-based standard and does not prescribe the required conduct, but will be decided on the individual circumstances of each case.

The Act also provides for restrictions on conflicted remuneration. The Act includes prohibitions on both accepting and giving conflicted remuneration. Conflicted remuneration means any monetary or non-monetary benefit that:

• Can influence the credit assistance provided to a consumer
• Could be reasonably expected to influence how the licensee or representative acts as an intermediary

These new amendments are intended to strengthen protections for consumers, and attempt to ensure that advice provided by a mortgage broker prioritises the consumer's interests.

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Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2020 (Cth), Bill and supporting documents available from TimeBase's LawOne Service

Unfair contract term protections for consumers (Australian Securities and Investments Commission)