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Westpac Banking Corporation - Submissions on Policy and General Questions

Royal Commission into Misconduct in the Banking, Superannuation and Rnancial Services Industry 25 October 2018

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

INTRODUCTION

1. These submissions set out the responses of Westpac Banking Corporation (Westpac) to the Commission's invitation to respond to policy and general questions raised following the insurance round of hearings.

Question 1

Is the current regulatory regime adequate to minimise consumer detriment? If the current regulatory regime is not adequate to achieve that purpose, what should be changed?

2. The current regulatory regime governing general and provides a solid framework of legislation, regulatory standards, guides and industry codes for the governance, stability and conduct of insurers, and for the protection of consumers. In terms of legislation alone, insurance is subject to specific requirements and protections imposed by the Life Insurance Act 1995 (Cth) (Life Insurance Act), the Insurance Act 1973 (Cth) (Insurance Act), and the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act), as well as the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act). The Code of Practice (General Insurance Code) and the Life Insurance Code of Practice (Life Insurance Code) also play a significant role in setting standards for insurer conduct.

3. While the current framework is comprehensive and adequate in striking a balance between the interests of all policyholders, the public and insurers, there are some aspects of the framework that could be enhanced. Westpac recognises that the Commission has identified areas of concern in relation to insurer conduct falling below community standards and expectations. Westpac supports appropriate changes to the current regulatory regime to address the issues identified by the Commission and to prevent the reoccurrence of the types of conduct explored in the case studies. Westpac also supports the simplification of existing legislation to reduce complexity for both consumers and insurers alike.

4. In these submissions, Westpac outlines a number of proposals for regulatory change which it supports and which would help ensure better consumer outcomes. These proposals include:

a. the introduction of a tailored unfair contract terms regime to insurance contracts;

b. increased obligations in relation to claims handling, with corresponding ASIC powers to enforce these obligations;

c. ASIC approval of the industry codes of practice (general and life insurance), and for those codes to be compulsory for all insurers; POL.9006.0001.0176_0003

Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

d. amendments to the Insurance Contracts Act to provide that life insurance contracts can only be avoided in the event of non-fraudulent non-disclosure if the insurer would not have provided cover on any terms; and

e. that there should be consultations in relation to amendments to the duty of disclosure in line with the UK duty to take reasonable care.

5. Each of these reforms would need to be subject to an appropriately thorough consultation process to ensure that there are no unintended consequences which would arise from their implementation. It is important to ensure that proposed changes to the regulatory regime interact as a cohesive whole.

6. Self-regulation should also continue to form a vital part of the regulatory regime. Industry self- regulation is an effective tool in the regulatory framework, as industry codes are timely, quickly adaptable to changing needs and expectations,1 have the potential to deliver increased consumer protection, and set detailed standards which the industry must adhere to in the distribution of products and the management of policies, including the handling of claims. Industry codes complement the critical role that legislation and regulation play in enforcing minimum prudential and conduct requirements.2 Westpac supports all insurers being subscribers to the relevant codes applicable to their business.

7. Westpac General Insurance Limited is a subscriber to the General Insurance Code and Westpac Life Insurance Services Limited is a subscriber to the Life Insurance Code. The next iterations of the General Insurance Code and the Life Insurance Code are expected to contain further enhancements to address consumer detriment, including new requirements relating to vulnerable customers. For the Life Insurance Code, these enhancements are expected to include restrictions on obtaining medical information unrelated to a claim, restricting the right of an insurer to avoid a contract for non-disclosure of a condition unrelated to a claim, and enhanced protections regarding surveillance. As outlined further below in these submissions, Westpac has already adopted a number of these enhancements. Westpac’s superannuation trustees have also committed to adopting the Insurance in Superannuation Voluntary Code of Practice.

1 See Ex #6.404, Statement of Mr Whelan dated 27 August 2018, [214]. 2 See Ex #6.404, Statement of Mr Whelan dated 27 August 2018, [237].

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

A. PRODUCT DESIGN

Question 2

Are there particular products - like accidental death and accidental injury products - which should not be sold?

8. As a general principle, Westpac does not support prohibiting the sale of particular products. Provided that a product provides value to an identified target market, there is clear disclosure of the terms and conditions, including limits and exclusions, and there is robust training, monitoring and auditing to ensure appropriate sales processes and procedures are being followed, a product issuer should have the discretion to determine whether to offer a parti cular product.

9. Specific issues with products currently on sale could be addressed by changes at the product design and distribution stages. For accidental death and injury products, the next iteration of the Life Insurance Code is expected to require insurers who offer stand-alone accidental death and injury products to identify and document the characteristics of people in the target market for each product, and outline why those people may need the product. Insurers will not be permitted to knowingly promote the product to people not in the target market. Westpac supports these changes.

10. In addition, all products will be subject to the general design and distribution obligations, and ASIC's product intervention powers, as contained in the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, which has recently been the subject of a consultation process.3

Question 3

Should the requirements of the Life Insurance Code of Practice in relation to updating medical definitions be extended to products other than on-sale products?

11. Westpac supports the requirements of the Life Insurance Code in relation to updating medical definitions being extended to off-sale products, to reflect changes in diagnostic criteria. That would ensure that people suffering from a parti cular condition have their cl aim determined using the diagnostic criteria which are applied today in relation to that condition.

12. In addition, Westpac would support legislative reforms to facilitate insurers bringing older insurance portfolios in line with more contemporary products through product rationalisation.

3 As identified by ASIC in Report 587, ASIC will monitor consumer outcomes for accidental death insurance, including rates of cooling-off cancellations, short-term lapses, and claims outcomes. If ASIC remains concerned about consumer outcomes and sales practices, they have said they will consider using these additional powers to intervene.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

This approach was recommended by both the Financial System lnquiry4 and the Parliamentary Joint Committee on Corporations and Financial Services' report into the Life Insurance Industry (PJC Life Insurance Report).5 Product rationalisation is needed for life insurers to be able to provide better products to all consumers, as it enables consumers with legacy products no longer suitable for their needs to be more easily transferred to a more suitable product, taking into account benefit and price issues (where those policyholders would be no worse off as a result of the transfer).

13. Westpac believes its current procedures, as set out in the statement of Ms Houghton dated 28 August 2018 in response to Rubric 6-14, already comply with any extension of the requirements in Clause 3.2 of the Life Insurance Code to off-sale products, 6 and would welcome this approach being taken across the industry. Effective 1 March 2018, Westpac Life Insurance Services Limited also provided the benefit of the Minimum Medical Definitions, as prescribed by the Life Insurance Code, for Cancer, Heart Attack and Stroke to all off-sale product policyholders.

B. DISCLOSURE

Question 4

Is the current disclosure regime for financial products set out in Chapter 7 of the Corporations Act 2001 (Cth) and Division 4 of Part IV of the Insurance Contracts Act 1984 (Cth) adequately serving the interests of consumers? If not, why not, and how should it be changed? In answering these questions, address the following matters:

4.1 the purpose(s) that the product disclosure regime should serve;

4.2 whether the current regime meets that purpose or those purposes; and

4.3 how financial services entities could disclose information about financial products in a way that better serves the interests of consumers.

(Despite the reference to the Insurance Contracts Act 1984 (Cth), this question is not limited in scope to contracts of insurance.)

14. The purpose of the product disclosure regulatory regime should be to ensure that customers have easy access to all information which may be relevant to them to make an informed decision in relation to the acquisition of a financial product. It should also ensure that the terms of the agreement are comprehensively set out and clear, if the product is acquired. The disclosure regime under Chapter 7 of the Corporations Act provides for comprehensive

4 Recommendation 43. 5 Recommendation 10.13. 6 Ex #6.128, Statement of Ms Houghton dated 28 August 2018, (48)-(54).

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

discl osure of the terms of financial products and is adequate for this purpose. Australian financial services (AFS) licensees must ensure that customers are provided with a Product Discl osure Statement (PDS) which sets out the full terms and conditions of the product, before the relevant product is provided.

15. Westpac supports research and efforts to make disclosure documents more usable and easier to understand. Any proposed reforms should be subject to appropriate consultation, to ensure that customers continue to be provided with accurate and comprehensive information even while disclosures are simplified or restructured. Financial product terms often have a degree of complexity and length which is unavoidable given the range of possible circumstances to be addressed. That is certainly true of insurance contracts, where it is essential that the policyholder, insurer and any reinsurer have certainty about the scope of cover provided.

16. Westpac supports using summary or "key facts" style documents for financial products in appropriate circumstances. However, the use of such documents should be carefully considered to ensure that they do actually improve understanding. There is a risk that because of the high-level nature of key facts sheets, customers may not be properly informed of exclusions or limits to their cover based on these documents, or be able to fairly compare products. In Westpac's experience, key facts sheets for home and contents insurance under Division 4 of Part IV of the Insurance Contracts Act are not always effective to improve customers' understanding. That is, in part, because the key facts sheet in practice can include only an example of a main condition or exclusion for each insured risk. That does not assist customers because they may not understand that there may be other significant conditions or exclusions, and it is difficult to compare products as insurers might choose different example conditions or exclusions for the key facts sheet.

Question 5

Is the standard cover regime in Division 1 of Part Vofthe Insurance Contracts Act 1984 (Cth) achieving its purpose? If not, why not, and how should it be changed?

17. The standard cover regime in Division 1 of Part V of the Insurance Contracts Act provides that an insurer must provide, at a minimum, a 'standard' level of cover as prescribed by the Act, unless the insurer has disclosed terms establishing a lesser level of cover to the policyholder before the contract of insurance was entered into. In Westpac's view, this regime has in a large part been superseded by the discl osure regime under Chapter 7 of the Corporations Act, which requires insurers (or their representatives) to provide prospective policyholders with a PDS, which comprehensively sets out the terms and conditions of the insurance contract. The provision of a PDS will satisfy the disclosure requirement in the standard cover regime to the extent the policy offers less than the standard cover.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

18. It is appropriate that insurers retain the ability to offer terms that differ from the 'standard' level of cover prescribed by the Insurance Contracts Act, provided that policyholders are properly informed about the terms of the policy. That is consistent with the purpose of the standard cover regime, which is to ensure that terms, limitations or exclusions of a policy which an insured may not have expected are discl osed to them.7 It is in customers' interests that insurers are able to tailor their cover in this way. For example, insurers might offer different levels of cover pursuant to which the less expensive levels might exclude certain types of cover, such as accidental damage to the insured's belongings. The ability to design policies flexibly promotes competition and variety in product offerings, which improves access for more customers to insurance that they can afford and/or best suits their needs.

19. The current regime, that is, a default level of cover unless there is cl ear disclosure to the contrary, strikes an appropriate balance.

Question 6

Is there scope for insurers to make greater use of standardised definitions of key terms in insurance contracts?

20. Westpac supports the greater use of standardised definitions of key terms, where the nature of the parti cular term or the type of product containing that term means it is more amenable to standardisation. Generally, there are benefits in developing standardised definitions for key terms for insured events where there is a risk of different outcomes for a customer depending on the way in which a key term is defined by different insurers.

21. By way of example, in home and contents insurance policies, various definitions are used for a 'bushfire', an event which may impact an entire street or area, where due to different definitions the same event may be treated differently by different insurers, leading to coverage differences between one policyholder and their neighbour.

22. There are a number of examples where the standardisation of terms has been appropriately implemented, either as a complete definition, or by way of establishing a minimum standard. These include:

a. The definition of 'flood': In 2012, the Insurance Contract Regulations 2017 (Cth) were amended in response to the 'National Disaster Insurance Review' to introduce a standard definition of 'flood'. The amendment was regarded as appropriate by the Insurance Council of as there had been delays in the resolution of claims caused by disputes as to whether the cover was triggered by the event.8

7 Revised Explanatory Memorandum to the Insurance Contracts Amendment Bill 2012, page 35. 8 https://www.insurancecouncil.com.au/assets/media/insurance-council-welcomes-standard-definition-of-flood-180612-final. pdf.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

b. Minimum medical definitions: The Life Insurance Code, by agreement of industry participants, prescribes minimum definitions for Cancer, Heart Attack and Stroke, the three most commonly claimed trauma conditions. Insurers have the discretion to use a different and broader definition, but in all instances, customers are entitled to have their claim assessed under the more favourable of the two definitions.

23. Westpac would support the standardisation of further definitions, for example:

a. some of the main exclusions found in home and contents insurance policies, such as: maintenance and building code compliance, wear and tear, and malicious or unlawful acts; and

b. the development of further minimum medical definitions for life insurance policies.

Such changes should be subject to consultation to ensure the wording of any new definitions are appropriate.

24. However, standardisation should only be directed at definitions where it is necessary to address a concern, and where it is appropriate in light of the nature of the term. Given the potential impact on competition and consumer choice, care should be taken before mandating or introducing greater use of standardised definitions. Specifically:

a. Insurers should continue to have sufficient flexibility to design products (including by defining certain key terms) which cater for a range of customer needs and risk tolerances. The mandated standardisation of a broad range of defined terms may deprive customers of the benefits of choice. Customers should be able to select products and cover which best suits their personal circumstances and objectives.

b. Difficulties may arise in achieving the uniformity which is sought from standardised definitions, as they still have to be considered and applied in the context of the relevant policy as a whole.

c. If the definitions of key terms in insurance contracts were to be standardised, the key differentiating feature between insurance policies would increasingly be premium cost. Competition based on scope of coverage as determined by definitions (for example, of bushfire) may be compromised for competition based primarily on price alone, denying consumers choice between policies. Such outcomes would be detrimental to consumers.

25. The adoption of standardised definitions should be considered by the industry on a case-by- case basis to enable a determination to be made in each instance whether the adoption of a standard definition is warranted. This will involve consideration of existing uncertainty or customer detriment against the potentially counter-productive outcomes for customers outlined above. For the reasons indicated above, at this stage, while supporting standardised definitions

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

for some additional terms, the mandating of a broad range of standardised definitions would not be in the overall interests of customers.

C. SALES

Question 8

Should monetary benefits given in relation to life risk insurance products remain exempt from the ban on conflicted remuneration in Division 4 of Part 7. 7A of the Corporations Act 2001 (Cth)? Why shouldn 't the cap on such benefits continue to reduce to zero?

26. The current model for the payment of commissions to financial advisers for the sale of some life risk insurance products is the subject of the Life Insurance Framework (LIF), which came into effect on 1 January2018. The LIF is the culmination of:

a. the Financial System Inquiry report released in December 2014. The report made a number of recommendations, which included " ... ensuring remuneration structures in life insurance ... do not affect the quality of financial advice",9 and the introduction of level commissions;10 and

b. a period of extensive consultation (including with industry) and thorough review chaired by former APRA member, John Trowbridge.

27. The Trowbridge Report specifically noted, "there is extensive evidence to indicate that many prospective policyholders will never purchase life insurance products if they are obliged to pay not only the insurance premium itself but a fee for service as wel/." 11 In summary, the Trowbridge Report recommended level commissions, capped at 20% of premiums and supplemented by an Initial Advice Payment (IAP) payable by the insurer.12

28. Trowbridge stated that the regime would "assist advisers to continue to compete for customers through the quality of their own services and the support they can receive from their licensees and from insurers, but without the terms of their own remuneration interfering with either the competitive offerings of life insurers to customers or the quality of advice and services they offer to their clients."13

9 , Financial System Inquiry Final Report (7 December2014) Recommendation 24. 10 Australian Government, Financial System Inquiry Final Report (J December 2014) at page 220. 11 John Trowbridge, Review of Retail Life Insurance Advice, Final Report (25 March 2015) 36. 12 The IAP will be payable when a client first takes out a life and is capped to an amount of: where annual premiums are below $2,000, 60% of the first year's premium and; where annual premiums are more than $2,000, a maximum of $1,200. An adviser would is only elig ble to receive the IAP once every five years (per client). 13 John Trowbridge, Review of Retail Life Insurance Advice, Final Report (25 March 2015) 8.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

29. Trowbridge concluded that in the absence of an initial payment, advisers would be unable to recoup their costs and it would be “highly likely that large numbers of financial advisers… would cease to offer life insurance advice”,14 exacerbating the underinsurance problem in Australia.

30. The outcomes of the review by John Trowbridge and the LIF reforms suggested that commissions be maintained on life insurance policies because:

a. commissions in relation to life insurance were “a longstanding industry practice reflecting that life insurance has higher arranging costs, such as managing the underwriting process, and that consumers are often not independently motivated to purchase life insurance”.15 That is, the process of recommendation and application, and ongoing time spent in yearly reviews and potential claims is time-consuming, and commissions reduce the fee that would otherwise have to be collected by the financial adviser from the client upfront to allow for their time; and

b. the present commission payment methodology spreads the financial adviser cost to the client over the life of the policy – that is, the client is required to pay the same premium every year, but the adviser is remunerated for his or her work by a higher upfront commission for establishing the policy.

31. The reforms involved amendment to the Corporations Act to remove the blanket exemption from the ban on conflicted remuneration for commissions on life insurance products. The Corporations Regulations 2001 (Cth) (Corporations Regulations) were also amended to prescribe when commissions are permitted. Further, ASIC has been given the power to make legislative instruments which place limits on commissions through setting acceptable ratios between commissions and the cost of the policy (that is, commission caps) and to allow commissions to be clawed back if policies are cancelled (or cover reduced) in their first two years. ASIC has exercised this power and set the commission cap at 80% of the premium in the first year of the policy from 1 January 2018, 70% from 1 January 2019 and reducing to 60% from 1 January 2020, with a maximum trailing commission of 20% of the premium in all subsequent years.16 This is broadly consistent with the Trowbridge recommendations, including a transition period to “allow enough time for insurers, licensees and advisers to modify their systems, procedures and practices…”17

32. The impact of the LIF reforms should be considered and understood before further changes are made. Westpac supports the LIF reforms and does not believe that the existing statutory exemptions to the ban on conflicted remuneration in relation to life insurance commissions

14 John Trowbridge, Review of Retail Life Insurance Advice, Final Report (25 March 2015) 28. 15 Australian Government, Financial System Inquiry Final Report (7 December 2014) 218-219. 16 Westpac considers that the payment of an ongoing trail commission is necessary because insurance policies often require a financial adviser to provide ongoing advice to that client, such as explaining the age and CPI increase that may be applied, explaining other reviews and assisting in the lodgement and processing of claims. 17 John Trowbridge, Review of Retail Life Insurance Advice, Final Report (25 March 2015) 32.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

should be further removed or modified at this time. However, financial advice licensees should ensure that they have adequate controls and protections in place to ensure that financial advisers satisfy their obligation to act in the best interests of their clients. Some controls and protections that financial advice licensees may implement to guard against the inappropriate recommendation of an insurance product or a higher level of insurance cover than may be required include:

a. remuneration structures that encourage a focus on meeting clients’ objectives, financial situation and needs;

b. risk and compliance frameworks to prevent and detect instances of advice that are not in the best interests of clients of the financial advice licensee;

c. education and training of financial advisers on their financial advice and ethical and professional obligations;

d. developing technology-driven tools to assist in the provision of financial advice provided by financial advisers; and

e. the Three Lines of Defence model which involves risk and compliance specialists who have a degree of structural separation from both the financial advice and product businesses.

33. ASIC intends to monitor the impact of the recently implemented LIF reforms and the adequacy of risk management procedures through regular data collection from insurers. ASIC has indicated that it will use this data to act promptly where consumer detriment is identified and will 18 conduct a post-implementation review of the reforms.

34. Westpac will support further reforms to life insurance remuneration should ASIC’s post- implementation review conclude that the quality of life insurance advice is being adversely impacted by commissions. Should ASIC conclude at the end of its review of the LIF reforms that the currently legislated approach to commissions in life insurance is undermining the quality of financial advice, further reforms may be appropriate, such as those recommended by

Trowbridge as referred to above.

18 ASIC, ‘ASIC releases instrument setting the commission caps and clawback amounts as part of the life insurance advice reforms’ (Media Release 17-168MR, 5 June 2017).

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

Question 9

Is banning conflicted remuneration sufficient to ensure that sales representatives do not use inappropriate sales tactics when selling financial products? Are other changes, such as further restrictions on remuneration or incentive structures, necessary?

35. A range of factors influence representatives' conduct in selling financial products, not limited to remuneration.

36. Where sales are performed by retail customer-facing employees of the financial services entity, the broader amendments to remuneration and incentive structures for customer-facing employees recommended by the Sedgwick review, among other things, remove a direct link between sales and variable reward which significantly mitigates any risk that the incentive structure might contribute to inappropriate sales tactics. Key aspects of a remuneration approach consistent with the Sedgwick recommendations (which Westpac has adopted} include reducing any financial key performance indicators (KPls) to no more than 33% (for Westpac, financial KPls represent no more than 30% of a balanced scorecard), increasing the number of KPls which are behaviour and customer focused, and making an employee's entitlement to any variable remuneration subject to them displaying appropriate compliance and customer behaviours (sometimes described as 'gate openers').

37. Those measures reduce the risk that the remuneration structure might inadvertently encourage inappropriate sales tactics, incentivise employees to engage in positive customer and compliance-focused behaviours, where non-compliant conduct has a direct and immediate impact on the employee's remuneration, and meaningfully reinforces a positive culture. The implementation of the Sedgwick recommendations should be accompanied with training of and communication to staff to embed the cultural changes it entails.

38. In that respect, further legislative changes are not necessary, but Westpac supports industry­ wide adoption of the Sedgwick recommendations as soon as possible.

39. Compliance and training systems are also important for ensuring appropriate sales activities. Training and supervision and, in appropriate circumstances, accreditation of employees in sales roles help to ensure that sales activities remain appropriate. This should include clear guidance (such as scripts where appropriate) as to the nature and content of conversations that they may have with prospective customers, to ensure that customers do not misapprehend the nature of the information or advice that is being given to them. Financial institutions should also have regular supervision of sales staff in the business unit (such as audits and reviews), and functionally separate compliance or audit teams to monitor the effectiveness of those practices and identify and rectify potential issues as quickly as possible. Those measures are

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

all consistent with entities' current obligations and the existing legislation and regulatory guidance is adequate.

Question 10

Should the direct sale of insurance via outbound telephone calls be banned? If not, is the current regulatory regime governing the direct sale of insurance via outbound telephone calls adequate to avoid consumer detriment? If the current regulatory regime is inadequate, what should be changed?

40. Westpac recognises the serious concerns raised by the Commission's case studies with respect to outbound sales calls and understands the need for careful regulation of this kind of sales process for insurance.19

41. Specific regulations (including the anti-hawking provisions) are already in place to deal with unsolicited insurance sale practices, in conjunction with other regulations and standards directed at protecting consumer interests more broadly in relation to the sale and distribution of insurance. This regulatory framework should be sufficient to address the issues of concern if working effectively. Westpac supports the effective application of appropriate regulations and standards, and would support changes making the existing regulatory provisions work more effectively. That approach is preferable to a blanket ban on direct sales via outbound calls.

Question 11

Is Recommendation 10.2 from the Productivity Commission's report on "Competition in the Australian Financial System': published in June 2018, sufficient to address the problems that can arise where financial products are sold under a general advice model (for example, the sale of financial products to consumers for whom those products are not appropriate)? If not, what additional changes are required? Are there some financial products that should only be sold with personal advice?

42. Westpac agrees that, as proposed by Recommendation 10.2, "general advice" is not an accurate descriptor of the relevant process. "General advice" as currently described is usually more properly understood as a process in which information relevant to the characteristics of a product is provided to a customer during a sales process. No 'advice' is provided.

43. It would be preferable for the law to identify that advice is a recommendation or statement of opinion as to the suitability of a product, which has regard to a customer's needs, objectives or individual financial circumstances to the extent necessary to the advice being provided based on the customer's specified need. It should identify that any process that does not satisfy that description is not advice. Using the term 'advice' to describe something other than personal advice might give the customer the incorrect impression that they are being provided

19 Westpac also notes and accepts the concerns about direct sales practices outlined in ASIC Report 587.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

information that takes into account their personal situation, which increases the risk that they will be unable to make a properly informed decision when purchasing a product.

44. Financial services entities should have appropriate training, supervision and compliance processes to ensure that an employee does not give the customer the impression that their personal situation is being considered if the employee is not giving ‘personal advice’. That might include an accreditation program for staff in sales roles, and providing employees clear guidance about the types of discussion they may have with customers. However, Westpac considers that existing legislation and regulations are sufficient to ensure that personal advice is not provided in inappropriate circumstances. That said, and as the Commission is aware, Westpac is currently in a test case with ASIC to resolve a difference as to the proper meaning of general advice. The dispute is the subject of a reserved judgment before Gleeson J.20 Further legislative guidance on that issue may be appropriate depending on the outcome of those proceedings.

45. Westpac is not aware of any basis on which to restrict the distribution of particular classes of financial products to a personal advice model (recognising that more complex versions of some products, though, might appropriately be limited to advised customers). Such a restriction may be contrary to customer interests and choice. Customers should be able to access financial products without an adviser if they wish to, provided that they are given sufficient information to make an informed choice. Regulation should be directed to ensuring that the customer experience is appropriate regardless of whether they choose to use an adviser or not. While Westpac considers that financial advice can be beneficial to customers in many circumstances, customers should not be required to use an adviser, recognising that some customers have a higher level of financial experience than others. Entities often design simpler versions of particular types of products to help non-advised customers.

46. Westpac notes that the proposed product design and distribution obligations, including ASIC’s product intervention powers, would provide further protections for customers to ensure that products are appropriate for their target market. Requiring customers to obtain financial advice may unnecessarily increase costs for customers, which might make those products unobtainable for some customers, or otherwise impede or dissuade customers accessing those products (for example, it will limit their ability to access those products online or through branches).

20 Australian Securities and Investment Commission v Westpac Securities Administration Ltd ACN 000 049 472 & Anor (NSD 2204/2016).

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

Question 12

Should all financial services entities that maintain an approved product list be required to comply with the obligations contained in FSC Standard No 24: Life Insurance Approved Product List Policy?

47. Yes, it is appropriate that all financial service entities that maintain an approved product list (APL) comply with the obligations of FSC Standard 24 to ensure consistency of approach across the industry.

D. ADD-ON INSURANCE

Question 13

Should the sale of add-on insurance by motor dealers be prohibited?

48. Westpac does not support a complete prohibition on motor dealer sales of add-on auto insurance products, provided the product and sales process comply with regulatory requirements and the products relate to the vehicl e. Some customers, with full disclosure and an understanding of the product features, will continue to want to purchase add-on insurance products. Obtaining that insurance at the point of sale gives the consumer the benefit of the policy from the moment of purchase of the vehicle, allowing them to secure immediate protection.

49. Westpac would support restrictions which provide that motor dealers could not sell consumer credit insurance (CCI) with a life/risk component, on the basis that the life/risk component of the product is not directly linked to the vehicl e being purchased.

50. Westpac ceased distributing add-on auto insurance (through car dealers and via the call centre under the St.George brand) in 2016. No Westpac entity manufactures add-on auto insurance products. Westpac, through the St.George brand, provides finance covering some add-on insurance products in conjunction with its financing of car loans, subject to restrictions introduced in August 201 6. Under these restrictions Westpac will not finance add-on CCI policies with a lrte component.21

51. Westpac has also adopted an approach whereby it reviews the add-on insurance products sold through motor dealerships providing St.George vehicle finance, to determine whether it will finance those products as a part of the vehicl e financing transaction.

21 In August 2016, the Add-on Insurance Policy was updated to include additional restrictions which provided that Westpac would not finance gap cover policies with respect to a loan with an LVR less than 75%; the total amount financed relating to add-on insurance must not be greater than 25% of the total amount financed; and Westpac would not finance a CCI policy with a life component.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

Question 14

Alternatively, should add-on insurance only be sold via a deferred sales model? If so, what should be the features of that model

52. Westpac supports the implementation of a robust process to ensure customers have had an appropriate time to review product documentation. A deferred sales model may not be appropriate for insurance products where the customer needs coverage immediately, as the delay inherent in this model leaves consumers exposed for an initial period after their car purchase and without coverage they may have wanted to obtain. This is particularly the case for used cars, where there is often no delay between car purchase and pick up.

Alternatives to a deferred sales model

53. Westpac supports alternative options to a deferred sales model for increasing consumer protection where the customer needs coverage immediately at car dealerships, including changes that would increase consumer awareness of the cooling off periods contained in PDSs. In a similar way to a deferred sales model, cooling off periods give customers the time to consider the product more carefully, following purchase and away from the sales environment, and decide whether it provides value to them. However, unlike the deferred sales model, cooling off periods give the customer the immediate protection of insurance. during the cooling off period should be easy and straightforward.

Question 15

Would a deferred sales model also be appropriate for any other forms of insurance? If so, which forms?

54. The deferred sales model is not generally appropriate for other insurance products, where cover is usually sought by a customer with a view to it taking immediate effect. Examples include: , comprehensive motor vehicle cover, and .

55. Westpac notes that the ASIC-approved Banking Code of Practice, which comes into effect on 1 July 2019 (and replaces the existing Code of Banking Practice), introduces a deferred sales model for the sale of CCI products in relation to credit cards and personal loans. As noted in Round 1 General Submissions, Westpac remains conscious of the need to balance a deferred sales model against the risk that the added inconvenience (associated with the delay in obtaining cover and in some cases the need to make a separate application) for those who would like to and may benefit from a CCI product, fail to acquire it. 22

22 Westpac's Round 1 General Submissions at (78)-(79).

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

Question 16

If the ban on conflicted remuneration is not extended to apply to general insurance products, should the payment of commissions for the sale of add-on insurance by motor dealers be limited or prohibited?

56. As Westpac does not manufacture or sell add-on auto insurance, Westpac has no involvement in the payment or receipt of commissions relating to the sale of add-on insurance through motor dealers. Any commissions which do apply should be disclosed to the consumer.

E. CLAIMS HANDLING

Question 17

Should the obligations in section 912A of the Corporations Act 2001 (Cth) apply to all aspects of the provision of insurance, including the handling and settlement of insurance claims?

Question 18

Should ASIC have jurisdiction in respect of the handling and settlement of insurance claims?

57. Westpac supports ASIC having regulatory oversight of cl aims handling. However, prior to any final decision on reforms concerning cl aims handling, Treasury should complete their consultation and review process regarding the removal of Regulation 7 .1.33 from the Corporation Regulations. This is because there are a number of concerns that the removal of the exemption in Regulation 7 .1.33 may result in inadvertent adverse consequences to both consumers and insurers.

58. In particular, the removal of this exemption may inadvertently lead to claims handling staff being deemed to be providing personal financial advice to customers in the ordinary course of handling an insurance cl aim {which Westpac understands was the reason for Regulation 7 .1.33 being implemented). For example, if an insured were to ask a cl aims handler whether they should lodge a claim (e.g. where the value of the claim potentially exceeds their excess), or whether they should consider seeking a cash settlement for their cl aim, the content of this discussion could be construed as personal financial advice in the absence of Regulation 7 .1.33 applying. This may have the effect of restricting the ability of an insurer (and their representatives) to have a meaningful discussion with an insured about their cl aim.23

59. As a preferable alternative to the removal of Regulation 7.1.33, Westpac would support the introduction of obligations into the Insurance Contracts Act which are broadly equivalent to the

23 See also Ex #6.409, Statement of Ms Loane dated 30 August 2018, (31]; Ex #6.404, Statement of Mr Whelan dated 27 August 2018, [249]-(250].

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

obligations of s912A of the Corporations Act. Specifically, insurers should be subject to an obligation to:

a. do all things necessary to ensure that they handle insurance claims efficiently, honestly and fairly;

b. have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to the handling of insurance claims (including in respect of complaints that may subsequently arise);

c. ensure that their representatives are adequately trained and are competent to handle insurance claims; and

d. report significant breaches of those obligations to ASIC.

60. Westpac would also support ASIC having the power to enforce those obligations through the Insurance Contracts Act.

61. The scope and framing of any new obligations would need to be carefully thought through and distinguish between agents of the insurer and third party service suppliers. The operation of any such obligations should be structured so that while they would extend to third party agents, they should not impose any additional liability on insurers for breaches by third party service suppliers. This is particularly the case in general insurance where service suppliers may at times undertake significant aspects of claims handling across different claim types.

62. Under the obligations identified above, it is implicit that insurers would be required to undertake effective oversight over the service suppliers it contracts with for the purposes of claims handling. This may include, for example, a responsibility to take reasonable steps to rectify any fault or act of negligence by a service supplier in a timely manner. This would ensure that consumer detriment was minimised to the extent possible, without creating an obligation that may not be possible for an insurer to effectively comply with.

63. In the event that an insurer might be held in breach of these obligations for the conduct of a service supplier, it would be required to take on a significantly more intensive level of oversight of these service suppliers, effectively assuming control of the service supplier's work. This model would be difficult to implement on a practical level, which may lead to insurers being less willing to carry out, in particular, general insurance repairs, leading to an increase in cash settlement of claims. This could also have cost consequences, may result in slower responses to claims, and may lead to a reduction of suppliers, hindering the effectiveness of claims handling.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

Life Insurance

Question 19

Should life insurers be prevented from denying claims based on the existence of a pre-existing condition that is unrelated to the condition that is the basis for the claim?

64. Considering the way in which life insurers should be able to respond to a pre-existing condition requires an understanding of the remedies currently available to insurers, and the difference between an insurer avoiding or varying the contract and an insurer denying a claim based on the pre-existing condition.

65. Insurers are not allowed to deny a claim on the basis of an undisclosed pre-existing condition that is unrelated to the condition that is the basis of the claim. A claim could only be denied where the pre-existing condition is related to the condition that is the basis of the cl aim and the customer's policy has a pre-existing condition exclusion.

66. An insurer can avoid or vary a policy where there has been a non-disclosure or misrepresentation of a pre-existing condition, either fraudulently or where the policy would not have been issued on the existing terms, irrespective of whether the pre-existing condition is related to a condition which is the subject of the claim. This occurs on very limited occasions24 and would have the practical effect of denying the cl aim.25

67. Westpac supports life insurers retaining the ability to respond to non-disclosure or misrepresentation of pre-existing conditions in limited circumstances.26 The availability of a remedy to avoid or vary a policy for non-disclosure or misrepresentation is important to maintain a policy of fairness for all customers. A customer who fully discloses their health issues and is not provided with any cover as a result should not be disadvantaged relative to a customer who failed to disclose an unrelated condition and received cover.

68. Additionally, the payment of claims on policies that would not have been issued rt full discl osure was made could adversely affect other customers. It may result in premiums increasing across the insured pool, which would be unfair to those having to pay higher premiums to accommodate the customers who did not disclose their health conditions, as well as creating a

24 From 1 July 2013 to 30 June 2018, Westpac declined a total of 152 claims as a result offraudulent or non-fraudulent non­ disclosure or misrepresentation (approximately 1.1 % of claims in this period). In addition to non-disclosure or misrepresentation of an unrelated condition, this figure would also include non-disclosure or misrepresentation of a related condition and/or where the non-disclosure or misrepresentation was not in relation to a pre-existing condition. 25 For example, a policy may be avoided in circumstances where it has been identified that a claimant fraudulently misrepresented the status of their health, by not disclosing that they had suffered from a serious health condition such as having suffered a heart attack. 26 See also Westpac's response to question 31 below which supports amendments to the existing provisions of the Insurance Contracts Act which govern the insurer's ability to avoid a contract for non-disclosure or misrepresentation.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

perverse incentive for customers to not fully disclose their health conditions. The importance of full disclosure is discussed further in response to Question 32 below.

69. For these reasons, in the event of fraudulent or non-fraudulent non-disclosure or misrepresentation in relation to a pre-existing condition, the insurer should continue to be entitled to avoid or vary the contract. This approach also assists in deterring fraudulent behaviour.

70. As a matter of practice, in cases involving non-fraudulent non-disclosure or misrepresentation of an unrelated pre-existing condition, Westpac seeks to put the insured in the position that they would have been in had the non-disclosure or misrepresentation not occurred. Westpac only seeks to avoid a contract for non-fraudulent non-disclosure or misrepresentation of an unrelated pre-existing condition in cases where Westpac would not have issued a policy on any alternative terms if the non-disclosure or misrepresentation had not occurred.

71. If Westpac would have issued a policy on alternative terms had the appropriate level of disclosure occurred {where the non-disclosure or misrepresentation was non-fraudulent and is in respect of an unrelated pre-existing condition), Westpac will accept the claim and reduce its liability to the extent to which it has been prejudiced by the non-disclosure (e.g. the recovery of additional premiums which would have been payable had full disclosure occurred).

72. This approach balances the interests of the insured, other policyholders and applicants, and the insurer, and is the appropriate approach to dealing with non-fraudulent non-disclosure or misrepresentation. The next iteration of the Life Insurance Code is expected to require all subscriber life insurers to apply this approach (as discussed in Question 31 below).27

Question 20

Should life insurers who seek out medical information for claims handling purposes be required to limit that information to information that is relevant to the claimed condition?

73. The need to deter non-disclosure or misrepresentation (as outlined in response to Question 19) is dependent on reasonable but appropriate access to medical information at cl aim time beyond the claimed condition, where there are reasonable grounds to suspect non-disclosure or misrepresentation.

74. Westpac agrees that there should be appropriate parameters on a life insurer's ability to seek out medical information for cl aims handling purposes where that information may not relate to the basis of the claim. In accordance with the recommendation made in the PJC Life Insurance Report, the Financial Services Council (FSC) and the Royal Australian College of General

27 Clause 8.8A.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

Practitioners (RACGP) are currently collaborating to prepare and implement agreed protocols for requesting and providing medical information. In addition, cl aimants should be given full discl osure at claim time as to the types of medical information that an insurer may seek and obtain in the investigation of their claim.

75. Westpac would support a self-regulatory approach whereby an insurer may only ask for medical information for claims handling purposes which is limited to information that is relevant to the claimed condition, except in circumstances where the insurer has reasonable grounds to suspect there has been non-disclosure or misrepresentation. The current draft of the protocol effects this position. The draft protocol is currently open for public consultation, and input will be considered by the FSC and RAC GP.

76. Westpac supports the ongoing process between the FSC and the RACGP, which is the most appropriate mechanism to ensure appropriate limitations are in place on insurers seeking medical information at the time a claim has been lodged.

Question 21

Should life insurers be prevented from engaging in surveillance of an insured who has a diagnosed mental health condition or who is making a claim based on a mental health condition? If not, are the current regulatory requirements sufficient to ensure that surveillance is only used appropriately and in circumstances where the surveillance will not cause harm to the insured? If the current regulatory requirements are not sufficient, what should be changed?

77. The use of surveillance, including desktop surveillance (namely, searches of publicly available information, including business searches where applicable), should continue to be available as a tool to combat , for use in limited cases. In every case, it needs to be used with care and appropriately, having first considered alternative options. In this regard, among other requirements for the use of surveillance, Westpac's practice is that:

a. surveillance is only used where there is a reasonable suspicion of fraud or misrepresentation by the insured. In particular, physical surveillance is generally only used if:

i. the insured cl aims that they are not working but there is evidence to suggest that they are, or

ii. there are material inconsistencies in relation to the insured's functional capability;

b. there must be evidence based reasons for surveillance to be utilised, and alternatives to using surveillance should first be explored; and

c. if there is a likelihood of harm being caused, surveillance should not be employed.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

78. Westpac supports the additional protections in relation to the surveillance of people with mental health conditions which are expected to be included in the next iteration of the Life Insurance Code, including that:

a. surveillance will only be used in circumstances where the insurer is unable to reconcile inconsistencies in the information they have about a claim through other means; and

b. insurers will cease surveillance if they receive evidence from an independent medical practitioner that it is having a negative impact on the insured’s health.

79. In addition, Westpac supports physical surveillance of claimants with a mental health condition being limited to cases where:

a. the insured claims that they are not working but there is evidence to suggest that they are, or

b. there are material inconsistencies in relation to the insured’s functional capability unrelated to their mental health condition.

80. Westpac also supports enhanced standards for investigators and a greater uniformity of the regulation and standards applicable to surveillance, including for private investigators and insurers.28

81. Westpac has made significant changes in the last few years in its approach to and use of surveillance. Following the implementation of the Life Insurance Code, Westpac implemented a Code guide which required surveillance to be used only in exceptional circumstances and not to be considered unless there is a specific trigger to do so.29 Such a trigger could be inconsistent evidence of earnings or financial activity, where a determination of the customer's position cannot be made by any other means. Most of Westpac Life’s surveillance practices are undertaken using ‘desktop’ surveillance, and not by physical surveillance.

28 Private investigators also may be subject to various industry self-regulatory schemes. For example, the Australian Institute of Private Detectives (AIPD) requires its members to be bound by an AIPD Code of Practice, Code of Ethics, standards and guidelines. 29 Ex #6.128, Statement of Ms Houghton dated 28 August 2018, [199].

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

Question 22

Should the General Insurance Code of Practice be amended to provide that, when making a decision to cash settle a claim, insurers must:

22.1 act fairly; and

22.2 ensure that the policyholder is indemnified against the loss insured (as, for example, by being able to complete all necessary repairs)?

82. With respect to Question 22.1, Westpac supports the view that all insurers should "act fairly" when making decisions to cash settle claims. However, a specific addition to the General Insurance Code to that effect is not required, given that the Code already includes an obligation of fairness when dealing with the insured (clause 1.3), and an obligation of fairness that applies specifically to cl aims handling (clause 7.2). Adding a further specific requirement to the General Insurance Code may unnecessarily add a further layer of complexity to the obligations that apply. FOS already has jurisdiction to consider an insurer's behaviour in relation to the cash settlement of claims.

83. It should be recognised that determining the content of any obligation of fairness in cash settlements poses challenges and potential uncertainty, given that consumers and insurers may have very different views on the appropriate amount for a cash settlement, based on differences of view on issues such as the builder to be engaged, the repairs required, or the level of workmanship. Fairness cannot be determined based on whether the insured and insurer agree on the amount of the settlement. It should be based on an objective and commercial assessment of fairness.

84. No addition to the General Insurance Code on the terms proposed in Question 22.2 is necessary or appropriate. Westpac agrees that cash settlements should not be used unfairly as a mechanism for an insurer to avoid indemnifying an insured for the full amount to which they are entitled under the contract of insurance.

85. However, it is also in customers' interests that the option of obtaining cash settlement remains available and viable for insurers. While, as above, Westpac agrees with the general principle which underlies Question 22.2, it does not support an addition to the General Insurance Code on those terms. It would risk unduly restricting an insurer's ability to cash settle claims or, at the least, might result in confusion or dispute on the part of a policyholder about the effect of a cash settlement, because of the potential for unintended consequences or ambiguity in a reference to indemnifying a customer for all repairs necessary (noting that insurers are necessarily already required, pursuant to the contract of insurance, to indemnify the policyholder for the loss insured). It should be recognised that cash settlements are often preferred by customers or

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

may be the most appropriate way to settle the claim for a variety of reasons, some of which may complicate the determination of the cost of the repairs. For example:

a. a customer may prefer to have their claim cash settled because they wish to perform renovations or further works which go beyond repairing the damage covered by the insurance policy, such that the cash settlement should not be expected to cover all elements of the construction (given that the repairs are not required solely because of the peril insured against);

b. building damage may be partly attributable to maintenance or building defect issues which are not covered. The insurance policy would not cover all the repairs necessary to the building, and so cash settlement may be an appropriate means to indemnify the cost of the repairs to the extent they are attributable to the covered damage;

c. if a customer wishes to use their own builder, and the insurer agrees to a cash settlement, the insurer is not responsible for, and the insurance cover would not extend to, the conduct of the builder selected by the customer (for example, if the builder's actions caused further repairs to be required). If the ultimate cost is more than the cash settlement, the insurer should not be required to indemnify the whole cost of repairs if the increased costs are attributable to the actions of the customer’s builder; and

d. general insurance contracts often provide cover up to a defined amount (the sum insured) rather than on a total replacement basis. Cash settlement may be appropriate where the total cost of repairs would exceed the amount of the sum insured.

86. In those circumstances, adding an obligation to the effect set out in Question 22.2 risks creating added complexity, which is not necessary given the general requirement for an insurer to act fairly when handling claims.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

F. INSURANCE IN SUPERANNUATION

Question 23

Should universal:

23. 1 minimum coverage requirements; and/or

23.2 key definitions; and/or

23.3 key exclusions,

be prescribed for group life policies offered to MySuper members?

87. Westpac supports prescribing key definitions, exclusions and coverage, where doing so does not lead to detrimental outcomes to members. The terms or practices that could be prescribed with minimal detrimental impact are included at paragraph 89 below and following. The matters that have been identified are instances where addressing the potential shortcomings currently experienced by MySuper members outweighs potential detrimental impacts.

88. Some detrimental outcomes MySuper members may face from the prescription of universal coverage requirements, definitions and exclusions include:

a. Increased premiums. Group life insurance policies currently provide insurance coverage to higher risk members by requiring them to meet more stringent criteria to obtain insurance benefits. Prescribing a universal definition through which all members of the fund are able to access insurance benefits would increase premium costs for all members. This is because insurers would face a higher risk in making insurance available under the group life policy, which they would seek to recover through increased premiums charged to members.

b. Lack of coverage. The requirement for all members under a group life policy to benefit from coverage in the same circumstances means that insurers may decline to cover certain members (such as those in high risk occupations). It would be more appropriate for these members to receive coverage on the right terms (albeit on a more restrictive basis) than no coverage at all.

c. Restrictions on the ability to customise cover. Similar to the outcomes included within Question 6, setting universal definitions applicable to all MySuper members would have undesirable consequences such as:

i. Restricting the ability of employers to tailor the insurance coverage that group life insurers offer employees. Employers often negotiate premiums and policy terms specific to their employees and industry or agree to meet part of the cost of their

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

employees’ insurance premiums. Prescribing universal definitions would limit the ability of members to benefit from this practice.

ii. Limiting the ability of superannuation trustees to make decisions regarding insurance coverage based on the demographic composition of members in funds as required under section 52(7)(a)(iii) of the SIS Act. Section 52(7) requires superannuation trustees to consider the cost and level of cover in determining the level of insurance. For example, members in particular industries or those who undertake specific types of work (such as those in heavy blue collar occupations) have different coverage considerations to other types of members. Prescribing universal definitions would abrogate a trustee’s responsibility to ensure that insurance cover is suitable for the demographic composition of its membership, and does not come at an undue cost to a member (or class of member).

d. Unintended outcomes of prescribing definitions. This is discussed in further detail in the response to Question 24 below. Prescribing universal definitions and coverage requirements is likely to affect existing group life policies that have been negotiated between superannuation trustees and insurers. In the event changes are recommended, Westpac submits that the transition period should be sufficient so as to enable negotiation and implementation of new terms.

e. Reduction in competition. If the terms of group life policies were to be prescribed, the key differentiating feature between group life insurance policies would be premium costs to members. As discussed above in Question 6, a consequence of prescribing terms of insurance policies is likely to be that the current environment of competition based on quality of cover would be compromised, with insurers competing largely on price. Similar to the outcomes identified in our response to Question 6, group life insurers will be less likely to offer superannuation trustees group life policies that have stronger and more robust policy terms and only larger group life insurers would be able to continue providing insurance as a result of their benefits of scale. Over time, this would result in poorer outcomes for members.

Circumstances where members have multiple insurance policies via superannuation accounts

89. Some group life policies (that are issued by insurers other than Westpac) restrict the benefit paid to members where they have multiple Death, and Total and Permanent Disablement (TPD) policies with the same insurer. For example, if a member had two superannuation accounts with TPD insurance – one that provided benefits of $200,000 and another with benefits of $500,000, some insurers only pay members a benefit of $300,000 in respect of the second policy (that is, the difference between $500,000 and $200,000) despite the member having paid insurance premiums on the second policy for the full sum insured of $500,000. As

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

a result, members would not receive the full benefit for which they have paid a premium. This issue is of particular relevance to MySuper members who may inadvertently have multiple life insurance policies via superannuation accounts.

90. Members should receive the full amount of their Death and TPD insurance benefits despite having multiple policies within multiple superannuation accounts across different superannuation funds. Superannuation trustees have an existing obligation under section 108A of the SIS Act to put in place procedures that identify MySuper members with multiple accounts (and associated insurance) with it. Upon identifying these accounts, the superannuation trustee is required to consider merging these accounts if it is in the members best interests to do so. Westpac also supports the Productivity Commission’s recommendation which would assist members maintaining their existing default account and associated insurance where they change employers. This would reduce the risk of a member having duplicate accounts (and insurance).

91. To ensure that members are protected, it would be appropriate to implement a universal coverage term to ensure that superannuation trustees do not enter into group life policies for MySuper members that have terms such as the above.

Communication of features of group life insurance policies

92. Many of the issues that MySuper members may currently experience with insurance offered through their superannuation accounts may be addressed through improved member communication and education.

93. There are two ways in which the communication of details of group life policies to MySuper members may be improved:

a. Format of disclosure of information

The industry does not disclose coverage information to members in a uniform way. This reduces transparency and makes comparison of coverage between superannuation products difficult.

Westpac considers that these issues can be addressed by requiring all superannuation trustees to publish short ‘high level’ documents that uniformly disclose the same information. Details that might be disclosed in these high level documents include:

i. identification of the type of cover and when benefits are made available;

ii. how much cover members hold;

iii. when special definitions may apply;

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

iv. the impact paying premiums might have on members' retirement savings; and

v. how members might change or cancel their level of coverage.

The guidelines that inform the standardised format should be carefully considered to ensure that details are communicated in a clear and concise way. The document should be designed to ensure that it is not confusing or unhelpful to members.

b. Improving communication regarding cancellation of insurance coverage.

Communicating to members about the circumstances in which their default cover will cease (for example, where no contributions have been received for thirteen months, unless the member advises otherwise) would assist members making decisions regarding their insurance cover. This measure would be of particular benefit to younger members who generally move employers more frequently and may not be aware they have insurance cover through more than one account.

This measure is part of the Insurance in Superannuation Voluntary Code of Practice, which Westpac has committed to implementing.

Question 24

Should group life insurance policies offered to MySuper members be permitted to use a definition of "total and permanent incapacity" that derogates from the definition of «permanent incapacity" contained in regulation 1.03C of the Superannuation Industry (Supervision) Regulations 1994 (Cth)?

94. Group life insurance policies offered to MySuper members should be permitted to use a definition of "total and permanent incapacity" that provides further meaning to the definition currently included within the Superannuation Industry (Supervision) Regulation 1994 (Cth) (SIS Regulations).

95. The current definition of 'permanent incapacity' contained in regulation 1.03C of the SIS Regulations is imprecise and open to interpretation (for example, the meaning of 'ill health' in regulation 1.03C). Therefore, to make insurance coverage available to members at a reasonable cost, further definitions need to be specrried by insurers. In the absence of doing so, members would be faced with uncertain outcomes and the provision of insurance benefits is likely to be the subject of increased litigation.

96. If superannuation trustees were required to enter into group life policies that replicated the definition of 'permanent incapacity' contained in the regulation, it may lead to the following unintended consequences:

a. Unreasonable cost. Under section 52(7) of the SIS Act, superannuation trustees are required to balance the cost of insurance and the coverage available to members

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

(articulated within trustees' insurance strategies). As discussed in paragraph 88 above, the superannuation trustee may enter into group life policies that provide for higher risk members to obtain insurance cover by requiring them to meet a higher threshold to receive insurance benefits.

One example of this is the insurance offer structure where members in designated high risk occupations are only able to claim under more restrictive limbs of the TPD definition (such as the 'activities of daily living' (AOL) limb). While Westpac does not support the ADL limb being a precondition for all members to receive TPD benefits, it does consider that requiring higher risk members to satisfy a more onerous definition enables it to continue providing insurance cover to those members at a reasonable cost.

b. Lack of coverage. Alternatively as explained in paragraph 88.a above, adopting the current definition of 'permanent incapacity' in the SIS Regulations may mean that group life insurers do not insure higher risk members at all. It would be more appropriate for these members to receive coverage (albeit on a more limited basis) than no coverage.

c. Limitations in the current definition. The introduction of the current definition had the effect of reducing the amount of benefits that superannuation trustees were able to pay to members. The current definition within the regulation only permits insurance benefits to be paid by a superannuation trustee where a member is not able to perform any occupation that they are reasonably qualified by education, training or experience. Prior to this, superannuation trustees had negotiated more favourable terms with group life insurers under which members were paid benefits where they were not able to perform their own occupation.

Question 25

Should RSE Licensees be obliged to ensure that their members are defaulted to statistically appropriate rates for insurance required to be offered through the fund under section 68AA(1) of the Superannuation Industry (Supervision) Act 1993 (Cth)?

97. Westpac agrees that RSE Licensees should be required to ensure that their members are defaulted to statistically appropriate rates for insurance. That being said, where RSE Licensees are provided member information that may assist in determining appropriate coverage, it should use that information. For example, this could be achieved by employers being more proactive in providing accurate and up-to-date information to RSE Licensees.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

Question 26

Should RSE Licensees be prohibited from engaging an associated entity as the fund's group life insurer?

Question 27

Alternatively, should RSE Licensees who engage an associated entity as the fund's group life insurer be subject to additional requirements to demonstrate that the engagement of the group life insurer is in the best interests of beneficiaries and otherwise satisfies legal and regulatory requirements, including the requirements set out in paragraphs 22 to 24 of Prudential Standard SPS 250, Insurance in Superannuation?

98. It is appropriate for RSE Licensees to engage an associated entity that is a group lrte insurer, if it is in the best interests of members to do so.

99. Current legislation and prudential standards stipulate matters that superannuation trustees are required to take into account when appointing group lrte insurers. These measures ensure that the selection of group life insurers and policies is in the best interests of members. There are risks to members if superannuation trustees do not appoint group lrte insurers based on a consideration of the best interests of members. These risks are not unique to circumstances where a superannuation trustee and group life insurer are in the same corporate group.

100. Current legislation therefore already addresses the manner in which superannuation trustees are to deal with any conflicts of interest, including those that may arise from the group lrte insurer being an associated entity. In considering what restrictions might be appropriate to place on superannuation trustees appointing services providers, Parliament considered that it was appropriate for a superannuation trustee to appoint a related party provider rt the trustee had satisfied its existing statutory duties to ensure that doing so was in the best interests of its members.30

101 . To engage any insurer (including a related party), the superannuation trustee is required to:

a. Prioritise the interests of members. Section 52(2) of the SIS Act and a trustee's obligations at general law require that it performs its duties and exercises its powers in the best interests of members and prioritise the interests of members over other interests (including its own or those of an associated entity).

b. Formulate an insurance strategy. Section 52(7) of the SIS Act requires a superannuation trustee to formulate in its insurance strategy the method by which an

30 The Supplementary Explanatory Memorandum to the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2012 states that: " .. .provided a trustee complies with all relevant Acts, legislative instruments, prudential and operational standards, governing rules and statutory covenants, the trustee may enter into service provider and investment arrangements (and undertake the preliminary dealings necessary to do so) even though this might otherwise breach general law conflict of interest prohibitions ... " because the trust deed does not expressly authorise the appointment ofa related party (as such a clause may contravenes.SBA of the SIS Act).

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

insurer is to be determined. Paragraphs 22 to 24 of Superannuation Prudential Standard 250 – Insurance in Superannuation (SPS 250) set out the considerations that a superannuation trustee must have regard to in selecting and managing a group life insurer. These requirements include:

i. consideration of the features of the insurance cover provided by the group life insurer (including terms, exclusions, claims philosophy, reasonableness of premiums and terms of delegations);

ii. undertaking a due diligence review of the selected insurer;

iii. the ability to demonstrate to APRA the appropriateness of the selection process;31

iv. satisfying itself and APRA that the engagement of the insurer is conducted on an arm’s length basis and is in the interests of members; and

v. that the RSE Licensee has sufficient resources to manage and monitor its relationship with the insurer.

Conflicts may exist regardless of whether the group insurer is related or not. These requirements apply regardless of whether the group life insurer is an associated entity or third party of the superannuation trustee.

c. Identify and manage conflicts of interest. Section 52(2)(d) of the SIS Act requires a superannuation trustee to prioritise the interests of its beneficiaries. Superannuation Prudential Standard 521 – Conflicts of Interest (SPS 521) requires that trustees identify, manage and monitor potential conflicts in accordance with a conflicts management framework.

d. Comply with Corporations Act duties. Section 912A(1)(a) of the Corporations Act requires that a financial services licensee (which may include a RSE Licensee) do all things necessary to ensure that financial services are provided efficiently, honestly and fairly and section 912A(1)(aa) of the Corporations Act requires that a financial services licensee have in place adequate arrangements for the management of conflicts of interest.

102. It is appropriate for a superannuation trustee to appoint an associated entity as a group life insurer where it has conducted steps such as:

31 For example, APRA has conducted two reviews of superannuation trustees that considered (amongst other matters) the circumstances of appointing an associated entity as a group life insurer. On 29 May 2018, APRA released a report into its thematic review of related party service provision arrangements. APRA also conducted a review into conflicts of interests in 2014.

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a. made appropriate enquiries of group life insurers in the market (including, if relevant conducted a tender process);

b. received and assessed information from related and third party group life insurers;

c. determined that the appointment of the associated entity group life insurer is in the best interests of its members; and

d. recognised the potential for a conflict of interest to arise when considering the associated supplier and subsequently managed it in accordance with its conflicts management framework (pursuant to SPS 521 ).

103. Members would obtain sub-optimal outcomes if a superannuation trustee is not permitted to appoint an associated entity group life insurer that provides group lrre insurance that is in the best interests of its members. Implementing a prohibition on appointing a related party group life insurer may result in detrimental effects for members while not providing benefits, given the current protections provided by the law and prudential standards.

104. As well as the requirements of SPS 250, in relation to the trustee's insurance arrangements, other current prudential standards, such as SPS 521 , also have the effect of requiring the superannuation trustee to implement robust governance frameworks and appropriate controls when appointing a group life insurer, monitoring that insurer's operations and managing conflicts. This is the case regardless of whether the entity appointed is an associated entity of the superannuation trustee. Existing obligations under common law, legislation and prudential standards already require superannuation trustees to implement governance frameworks that ensure (and necessarily document) that appointing a group life insurer is in the best interests of its members. These obligations also extend to requiring that a superannuation trustee monitor an insurer to ensure that its policy terms are appropriate, monitor insurers' cl aims decisions, and where there is a reasonable prospect of success, pursue those claims decisions on behalf of members.

Question 28

Are the terms set out in the Insurance in Superannuation Voluntary Code of Practice sufficient to protect the interests offund members? If not, what additional protections are necessary?

105. The Insurance in Superannuation Voluntary Code of Practice improves the protection of fund members if all of its sections are implemented by superannuation trustees and group life insurers (including parts of the Code that are stated as being optional for implementation). This, together with the enhancements discussed above (being the measures described in paragraph 90 and addressing gaps as part of implementation), should be sufficient to protect the interests of fund members. Westpac has expressed its intention to comply with the

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Voluntary Code and intends to implement it in its entirety, including those parts that are expressed as being optional.

G. SCOPE OF THE INSURANCE CONTRACTS ACT 1984 (CTH)

Question 29

Is there any reason why unfair contract terms protections should not be applied to insurance contracts in the manner proposed in "Extending Unfair Contract Terms Protections to Insurance Contracts': published by the Australian Government in June 2018?

106. Westpac broadly supports extending unfair contract terms (UCT) protections to insurance contracts as stated in the proposals paper issued by the Australian Government in June 2018.32

107. Westpac also supports the submissions put forward by the FSC and the ICA in response to the proposals paper.33 These submissions identified a number of changes to the manner in which the UCT protections should be extended to insurance contracts. While Westpac considers that each suggested change contained in the respective submissions warrants further consideration, Westpac in particular wishes to draw attention to the following suggested changes which it supports:

a. The proposed UCT protections should exist as a stand-alone set of protections in the Insurance Contracts Act which largely mirror those in the ASIC Act. This would better complement the existing regime of remedies for insurance contracts which are pri marily found in the Insurance Contracts Act. It would also allow for the UCT provisions to be implemented in a manner which could take into account the existing requirement of utmost good faith and cl arify how these two obligations would interact. A specific UCT regime for insurance contracts is also appropriate given the fundamental difference between insurance contracts and other financial contracts (such as loan contracts). Unlike other financial contracts (which may include a risk of the other party not complying with their obligations), in an insurance contract, the risk is the very subject matter of the contract. It is therefore vital that both the customer and the insurer are able to document accurately the precise nature and extent of the risk being transferred.

b. Under the terms of the proposals paper, the UCT laws will not apply to the 'main subject matter' of the contract. The 'main subject matter' of an insurance contract should be defined broadly to include terms that define, or have the effect of defining, the scope of

32 Extending Unfair Contract Term Protections to Insurance Contracts - Proposals Paper - June 2018: https:l/static.treasury. gov. au/uploads/sites/1/2018/061t284394_ U CT _lnsu ranee_ Contracts_ Proposals_Paper_ Aug .pdf. 33 ICA submission "Extending Unfair Contract Terms (UCT) Protections to General Insurance Contracts", dated 24 August 2018 (http:l/www.insurancecouncil.eom.au/assets/submission/2018/2018_08_24_1CA_SUB_UCT _ FINAL.PDF ), and FSC submission "Extending Unfair Contract Terms Protections to Insurance Contracts - Submission", dated 7 September 2018 (https://www.fsc.org .au/resources/resource-detail/?documentid=8898454f-18b7-e81 1-815f-480fcff12ac1 ).

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cover. This is essential to provide insurers (and their reinsurers) with certainty that the core of the commercial basis of the insurance contract would not be undermined or uncertain, as failure to do so may affect the availability of in the Australian insurance market. Consistent with the UK and European approach, this should include the following exemption for the subject matter of insurance contracts:

“…the terms which clearly define or circumscribe the insured risk and the insurer's liability shall not be subject to such assessment since these restrictions are taken into account in calculating the premium paid by the consumer”.34

In some circumstances, the scope of the cover will also be defined by the exclusions.

c. The proposals paper provides that terms setting the contract’s upfront price will be excluded from review under the UCT protections. Clarification should be provided that the ‘upfront price’ will include the premium, as well as additional premiums, fees or charges that are payable by the policyholder, regardless of the stage in the policy's life. This is a more appropriate summary of what terms constitute the upfront price of an insurance contract.

d. For life policies, clarification should be provided that a term which provides a life company with the ability to unilaterally increase premiums should not be unfair where the increase is related to the management of the insurer’s risk and is consistent with the requirements of the Life Insurance Act. This is to ensure that an insurer is able to appropriately price changes in risk.

e. ASIC should be given the power to exempt or declare that a life insurance product or a term of a life insurance product is not subject to the UCT regime or that it is not subject to the UCT regime in particular circumstances. This power would provide flexibility for the operation of the UCT protections and ensure that there was an effective mechanism to efficiently remedy any inadvertent negative effect of these protections being implemented.

108. These suggested changes are to ensure that the extension of these protections does not cause adverse unintended consequences for consumers, as uncertainty caused by the extension of the protections, if not carefully managed, could potentially lead to insurers offering more restricted ranges of insurance contracts, including the possible withdrawal of more affordable contracts that provide relatively less cover purely because the scope of cover is limited. This is because insurers may take a proactive risk-averse approach to dealing with any uncertainty, consistent with their prudential and risk management obligations, as well as the possible risk that the uncertainty may lead to a decrease in the availability of reinsurance arrangements,

34 European Council Directive (93/13/EEC).

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

restricting the capacity of insurers to offer policies with a wider scope. This has the potenti al to limit choice for consumers and to make cover more expensive, as insurers may also be forced to increase premiums pre-emptively to protect against the risk of contractual uncertainty.

Question 30

Does the duty of utmost good faith in section 13 of the Insurance Contracts Act 1984 (Cth) apply to the way that an insurer interacts with an external dispute resolution body in relation to a dispute arising under a contract of insurance? Should it?

109. The duty of utmost good faith in section 13 of the Insurance Contracts Act does cover the way in which an insurer interacts with an external dispute resolution body in relation to a dispute arising under a contract of insurance. Insurers should follow the principles of the obligation to act with the utmost good faith to the insured in respect of the entirety of the handling of a claim, including where the claim progresses to IDR or EDR. Westpac sees the handling of the claim through those processes as an extension of the process of dealing with a claim.

110. Westpac does not see it as necessary to make any regulatory change to achieve the objective suggested, given the obligations imposed on insurers in the existing framework governing EDR. Westpac's obligations to FOS are governed by the FOS Terms of Reference (with the obligations to AFCA to be governed by the AFCA Rules). The Terms of Reference are binding upon Financial Services Providers (FSP)35 and contain obligations for the FSP to provide any information that FOS considers necessary, and to do anything else that FOS considers may assist FOS.36

111. The ability for FOS to request information from the FSP is also set out in the Operational Guidelines37 to the Terms of Reference, and in fact sheets. ASIC has expressed the view that a scheme member does not have the discretion to withhold documents or information from a complainant or disputant of the scheme.38

112. These obligations are supported by a number of responses available to FOS as well as the administrative responses available to ASIC for non-compliance by an FSP with FOS's Terms of Reference. Specifically, FOS may take such steps as it considers reasonable and may draw an adverse inference from the failure to comply with a request,39 and where the FSP breaches any of its obligations under the Terms of Reference and FOS proposes to terminate the FSP's membership, FOS must report that to ASIC.•0 In response, ASIC might impose or vary licence conditions, including imposing a condition that requires ongoing compliance with an approved

35 FOS Terms of Reference 1.3(a). 36 FOS Terms of Reference 7.2 and 7.3, and 16.2 and 16.3. 37 httpsJ l www. fos.org .au/custom/files/docs/fos-0perational-guidelines-updated-11-decem ber- v3. pdf. 38 ASIC Regulatory Guide RG 139.113. 38 FOS Terms of Reference 16.5. 40 FOS Terms of Reference 11.3; ASIC Regulatory Guide RG 139.221.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

scheme's rules, or suspend or revoke the licence for the failure of the licensee to conduct business efficiently, honestly and fairly.41

113. The relationship between an insurer and the incoming AFCA should be governed by the AFCA Rules. Pursuant to the AFCA Rules:

a. Insurers must comply with AFCA requirements to provide information within the timeframe specified by AFCA (A.9.1 ). This is a wide ranging obligation which allows AFCA a broad discretion to ask for any material it considers is relevant to the complaint;

b. Insurers must do anything else that AFCA considers may assist AFCA's consideration of the complaint (A.9.3); and

c. the AFCA Rules and a decision by AFCA are binding upon insurers (A.15.3).

Question 31

Have the 2013 amendments to section 29 of the Insurance Contracts Act 1984 (Cth) resulted in an "avoidance" regime that is unfairly weighted in favour of insurers? If so, what reform is needed?

114. The 2013 amendments to section 29 of the Insurance Contracts Act, which provide a life insurer with remedies for non-disclosure or misrepresentation, were designed to enable an insurer to vary a contract in prescribed circumstances and to be put in the position that they would have been in if the non-disclosure or misrepresentation had not occurred. The modified remedies balanced the interests of insureds and insurers, insofar as, prior to the amendments, an insurer's remedies were limited to avoiding a policy or reducing the sum insured.

115. The 2013 amendments have weighted the remedies in favour of insurers, possibly inadvertently. Westpac notes that in relation to non-fraudulent non-disclosure or misrepresentation by a customer, in summary:

a. Before 28 June 2014, an insurer could only avoid a contract (within 3 years of entering into the contract) if the insurer would not have been prepared to enter into a contract on any terms if the non-disclosure or misrepresentation had not occurred; and

b. As of 28 June 2014, an insurer could avoid a contract commencing after that date (within 3 years of entering into the contract) if the insurer would not have been prepared to enter the specific contract if the non-disclosure or misrepresentation had not occurred.

116. In effect, the removal of the words "on any terms" meant that an insurer is no longer required to demonstrate that it would not have entered into a policy on alternative terms had the non-

41 ASI C Regulatory Guide RG 139.222.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

discl osure or misrepresentation not occurred. Westpac supports a position that insurers should only be allowed to avoid a contract for non-fraudulent non-disclosure in cases where the insurer would not have issued a policy on alternative terms if the non-disclosure or misrepresentation had not occurred.

117. Westpac understands that this issue will also be addressed in the next iteration of the Life Insurance Code as it is expected that it will require insurers to apply a proportionate remedy where that remedy is available in law, and only allowing avoidance of a policy for non­ fraudulent non-disclosure or misrepresentation to occur in circumstances where the policy would not have been offered 'on any terms'. While the expected effect of the new Life Insurance Code will be to rectify this issue, Westpac supports any legislative reforms that would also reflect this approach.

Question 32

Does the duty of disclosure in section 21 of the Insurance Contracts Act 1984 (Cth) continue to serve an important purpose? If so, what is that purpose? Would the purpose be better served by a duty to take reasonable care not to make a misrepresentation to an insurer, as has been introduced in the United Kingdom by section 2 of the Consumer Insurance (Disclosure and Representations) Act 2012 (UK)?

118. The duty of disclosure does continue to serve an important purpose.

119. The duty of disclosure has a number of purposes. It is intended to enable the insurer to obtain accurate information to determine whether to insure the risk, and if so, on what terms, including the premium payable and any specrnc conditions, exclusions or limitations which should apply to the contract. The duty of disclosure is key to ensuring that pricing and risk can be taken into account for underwriting. This also feeds into prudential requirements, enabling an insurer to manage underwriting risk consistent with its obligations under APRA Prudential Standard CPS 220: Risk Management. Non-disclosure in breach of the duty may also allow the insurer to vary the contract, to put the insured and the insurer in the position that they would have been in had the non-disclosure not occurred, or to avoid the contract in cases of fraud. For all of these reasons it is important to ensure that applicants for insurance take care to make proper discl osures in their insurance applications.

120. Westpac considers that the duty of disclosure continues to reflect the purposes set out above and continues to provide a clear statement of legal obligation and a reminder to people seeking insurance that they must make full disclosures to insurers where relevant. While recognising the difficulties insurers may face in proving a breach of the duty,42 Westpac nevertheless

42 Currently, an applicant for insurance in Australia is generally required to disclose what the insured knows to be a 'matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms' or what a 'reasonable person in the circumstances could be expected to know to be a matter of relevance to the insurer' (unless the insurer intentionally or unintentionally waives compliance with the duty of disclosure). For a non-disclosure the insurer has the onus of proving that the

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

considers the provision has continuing value, notwithstanding the fact that the remedies available for a breach of that duty will vary depending on the particular type of insurance, the nature of the non-disclosure, and the associated underwriting and underwriter discretion.

121. To assist applicants for insurance to comply with their duty of disclosure, insurers generally ask a series of questions about the person’s knowledge of matters which would be relevant to the insurer’s decision whether to accept the risk and, if so, on what terms. As a result, the person seeking insurance will generally be responding to those questions, and as a result, the remedies generally exercised by insurers for non-disclosure under the Insurance Contracts Act are based on misrepresentation, rather than non-disclosure.

122. The Commission has also asked whether the purpose of the duty of disclosure would be better served by a duty to take reasonable care not to make a misrepresentation to an insurer, as adopted in the UK. Westpac understands that in the UK, an applicant for insurance does not have a duty of disclosure equivalent to that in section 21 of the Insurance Contracts Act, but is subject to a duty to answer any question asked by the insurer to the best of their knowledge and belief and “to take reasonable care not to make a misrepresentation to the insurer”.43

123. Westpac would support a process of consultation with the industry and relevant stakeholders in relation to whether the Australian legislative framework should be amended along the lines of the UK position. The consultation would need to cover not just issues relating to whether a misrepresentation had occurred, such as how to assess whether the person had met the standard of ‘reasonable care’ which would apply, but also the consequences and options open to an insurer where a misrepresentation has occurred. That process could also consider whether there is a need for further guidance around assessing misrepresentations, or on proportionate responses, to ensure fair outcomes for insureds in cases of non-fraudulent misrepresentation.

124. Any legal review of the issue of when misrepresentation has occurred is tied to the issue of remedies, and whether they fairly balance the interests of insureds, other members of the public, and insurers. Unless remedies for misrepresentation are clear and available to insurers, their weakness or absence would be likely to discourage full disclosure by applicants, as they may decide not to provide certain details at the time of application which could affect whether they obtain the policy, or its terms, if their failure to do so is unlikely to impact their ability to claim in future. Such an outcome would disadvantage customers who provide full disclosure to the benefit of those who do not.

person knew the undisclosed fact was relevant to the underwriting decision, and is required to advise applicants as to the type of facts that are relevant. 43 The Consumer Insurance (Disclosure and Representations) Act 2012 (UK) (UK Act) s. 2(2). The UK model is more prescriptive as to the circumstances constituting misrepresentation and the requirement to take ‘reasonable care’ not to make a misrepresentation. Unlike the 3 year avoidance regime for misrepresentation in the Australian legislation, the UK Act imposes proportionate reduction provisions in the case of misrepresentation.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

125. The remedies for non-disclosure or misrepresentation should be based on the principles that

a. In the event of non-fraudulent non-disclosure or misrepresentation, the insured should be put in the position that the insured would have been in had the non-disclosure or misrepresentation not occurred. This balances the interests of insureds, other members of the public and insurers; and

b. In the event of fraudulent non-disclosure or misrepresentation, the insurer should be entitled to avoid the contract, so as to deter fraudulent behaviour.

126. This is consistent with the position outlined in response to Question 19 above.

H. REGULATION

Question 33

Should the Life Insurance Code of Practice and the General Insurance Code of Practice apply to all insurers in respect of the relevant categories of business?

127. It should be mandatory for all insurers to subscribe to the relevant and applicable Code. This will maximise the benefits to customers and the insurance industry as a whole through the lifting of standards, and having the processes and procedures of non-subscribed insurers brought into compliance with the Codes.

128. The relevant Westpac entities are subscribers to both Codes, and strongly support the Codes, and their role and function in the regulation of the conduct of insurers, particularly as to their dealings with their customers.

129. The Codes provide guidance and expectations for insurers and consumers on issues which are not prescribed in regulation. This includes, for example, timeframes for customer contact, rules around surveillance and minimum standard definitions. Westpac considers that the Codes have played a significant role in lifting standards and will continue to do so as they are further developed. This includes the Codes being ASIC approved, which Westpac supports.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

Question 34

Should a failure to comply with the General Insurance Code of Practice or the Life Insurance Code of Practice constitute:

34.1 a failure to comply with financial services laws (for the purpose of section 91 2A of the Corporations Act 2001 (Cth));

34.2 a failure to comply with an Act (for example, the Corporations Act 2001 (Cth) or the Insurance Contracts Act 1984 (Cth))?

130. A failure to comply with the General Insurance Code or the Life Insurance Code should not in itself constitute a failure to comply with financial services laws or a failure to comply with an Act.

131. Industry codes have a very different nature and purpose to legislation. Codes usually provide standards which are detailed and specific in nature, imposing requirements with respect to conduct and performance which go beyond the requirements set by legislation. As such, codes are able to enhance the regulatory regime, using a mechanism which is easier to change, and has a greater agility to adapt to the market and respond to community expectations.

132. The General Insurance Code and the Life Insurance Code were created following extensive industry consultation to:

a. clearly articulate detailed best practice service standards for a range of issues not prescribed in regulation, such as timeframes for customer contact;

b. provide consistent benchmarks for insurers' practices; and

c. respond to changing customer needs and community expectations. The Codes are living documents, which can be amended and updated as and when necessary.

133. Codes are, by their very nature, prescriptive in their detail in many instances. The standards and benchmarks they set cover a range of service standards which would not ordinarily be canvassed by legislation and regulation.

134. If the Codes were to be enforced as breaches of the law, their purpose and function would be significantly compromised, and their value in enhancing standards reduced. If a breach of a provision of a Code were to attract legal penalties or sanctions, the Codes would need to be re­ examined to determine which of the standards they impose should be retained, because they warrant legal penalties or sanctions.

135. In particular, if a failure to comply with a minor, administrative standard set by a Code (such as missing a timeframe by a short period) constituted a failure to comply with financial services laws or a failure to comply with an Act, this may lead to a disproportionate penalty for a breach.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

Regulatory action may also have to be undertaken by a regulator with powers of enforcement, such as ASIC, and would add to the burden of regulators in circumstances where the breach itself is administrative in nature.

136. Westpac considers that the primary burden of monitoring and enforcing compliance with the Codes should remain with the relevant industry bodies. Each Code's compliance committee has sufficient powers, processes and procedures to adequately monitor and enforce compliance with the Code and offer redress for consumers affected by those breaches. In this respect, Westpac notes the committees have the following powers:44

a. to use targeted monitoring tools such as annual compliance statements produced by members, mystery shopping and desktop audits;

b. to investigate and review concerns regarding possible breaches of the Code which may be referred from consumers, customer advocates, external dispute resolution bodies and industry associations; and

c. to issue sanctions or require Code subscribers to implement corrective measures which may include redressing financial or non-financial impacts on customers for a Code breach.

137. Westpac refers the Commission to its response to Question 39 below in relation to the approval of, subscription to, and monitoring of, the Codes.

138. Code obligations are also key considerations within internal and external dispute resolution decision making processes, where determinations can be made against the insurer taking into account a breach of the Code.

Question 35

What is the purpose of infringement notices? Would that purpose be better achieved by increasing the applicable number of penalty units in section 12GXC of the Australian Securities and Investments Commission Act 2001 (Cth)? Should there be infringement notices of tiered severity?

139. Infringement notices are appropriate in limited circumstances. They provide ASIC with a mechanism for responding to and sanctioning relatively minor offences quickly and efficiently.

140. There are limited formal procedures for a licensee to present its case before an infringement notice is issued. That process is appropriate for minor contraventions and absolute liability offences, where it should be clear that a contravention has occurred. It is not an efficient or fair

44 ASIC Enforcement Review - Position and Consultation Paper 4; Joint Submission - Code Compliance Committee Chairs, 1 August 2017.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

process for more serious matters, because a licensee is not given adequate opportunity to respond to the allegations before a sanction is formally issued.

141. ASIC already has a range of other powers which are more appropriately suited to responding to serious potential contraventions, such as commencing civil proceedings or negotiating enforceable undertakings. Those mechanisms give the opportunity for the issues, and serious differences of opinion about the law, to be considered more fairly, and allow sanctions or other consequences that are more appropriately tailored to the conduct.

142. For these reasons, the infringement notice mechanism is not an appropriate means for addressing more serious potential contraventions of the law and their application should not be expanded by increasing the financial penalty or introducing tiers of severity. Their use should be limited to relatively minor offences.

I. COMPLIANCE AND BREACH REPORTING

Question 36

Is there sufficient external oversight of the adequacy of the compliance systems offinancial services entities? Should ASIC and APRA do more to ensure that financial services entities have adequate compliance systems? What should they do?

143. ASIC and APRA have extensive oversight of financial services entities' approach to compliance. In Westpac's experience, ASIC and APRA regularly review how those entities manage compliance in the course of their supervisory activities and make recommendations or require changes where appropriate. Regulators regularly exercise their powers to compel entities to provide information and documents relevant to their compliance approach. They also routinely meet with representatives of financial services entities to understand that approach, any issues that may arise, and to provide guidance about how those approaches should be changed. In addition, the law compels licensees and their auditors to notify the regulators of compliance-related issues in a number of circumstances. As discussed in response to Question 37 below, the regulators already have a range of powers that they can exercise if they consider there to be issues with an entity's approach to compliance. That is complemented by the ACCC's growing supervision of the industry from a competition perspective.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

Question 37

Should there be greater consequences for financial services entities that fail to design, maintain and resource their compliance systems in a way that ensures they are effective in:

37.1 preventing breaches offinancial services laws and other regulatory obligations; and

37.2 ensuring that any breaches that do occur are remedied in a timely fashion?

144. Financial services entities are required to design, maintain and resource effective compliance systems, given the obligations imposed by section 912A of the Corporations Act, which operate as conditions of an entity holding an AFS license. Those obligations require (among other things) licensees to do all things necessary to ensure that the financial services are provided efficiently, honestly and fairly, and are directed to ensuring that licensees have systems in place to ensure that financial services are provided in manner that complies with the law.

145. Breaches of section 912A attract a range of serious consequences, including:

a. Significant breaches of section 912A must be notified to ASIC under section 9120. A failure to notify in accordance with that obligation can attract significant consequences for the entity and individuals involved in the contraventions, including penalties and imprisonment;

b. the imposition of license conditions and compliance plans; and

c. in serious circumstances, revocation of the license.

146. Westpac considers that remediating any breach of section 912A, and doing so in a timely fashion, forms part of the obligations imposed by section 912A. Accordingly, the existing law has adequate consequences in respect of a failure to have systems to ensure that breaches are remedied in a timely fashion.

147. APRA also has significant powers to encourage and require changes to the way in which a regulated entity manages compliance, including heightened supervisory intensity, increasing regulatory capital requirements, imposing rectification plans and licence conditions or revoking licences (noting that prudential standard CPS 220 sets out in detail APRA's expectations of a licensees' risk management process).

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation - Round 6 Insurance Submissions on Policy and General Questions

Question 38

When a financial services entity identifies that it has a culture that does not adequately value compliance, what should it do? What role, if any, fil!!1 financial services laws and regulators play in shaping the culture offinancial

services entities? What role~ they play?

148. In the event that a financial services entity identifies a cultural issue with respect to compliance, the appropriate response will depend on the precise nature of the issue. It should ensure that it has in place processes and systems for identifying and escalating those issues and formulating a response in a timely fashion. It should also consult regulators in appropriate circumstances.

149. In accordance with APRA's Prudential Standards CPS 220 and SPS 220: Risk Management, APRA-regulated institutions should have systems for identifying, measuring, evaluating, monitoring, reporting and controlling of risks. These systems, together with the structures, policies and processes make up the institution's risk management framework. The Board, with the assistance of management, is required to form a view of risk culture of the institution, identify any desirable changes to the risk culture and ensure that it takes steps to address those changes. Management and the Board should receive reporting that identifies any potential cultural issues, and the causes of those issues, and outlines an appropriate response. The appropriate response will, of course, depend on the precise nature of the problem, but may include implementing new forms of training, issuing communications to staff, restructuring parts of the business, altering the entity's approach to consequence management, or taking disciplinary action against parti cular employees.

150. In addition, financial services entities should be in regular contact with regulators. If the entity identifies a cultural issue which has the potenti al to affect its compliance with laws and regulations, it would be appropriate to consult with regulators depending on the nature of the issue.

151. The way in which the financial services law is framed and how it is regulated can play a potentially signrricant role in helping to foster and maintain a strong risk and compliance culture. In that respect, the law should be as clear and simple as possible, which helps by to promote a positive compliance culture by making expectations on financial services providers and their representatives clear, and reducing the scope for contraventions because of ambiguous or poorly understood obligations.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation -Round 6 Insurance Submissions on Policy and General Questions

Question 39

Are there any recommendations in the "ASIC Enforcement Review Taskforce Report': published by the Australian Government in December 2017, that should be supplemented or modified?

152. Westpac is generally supportive of the work of the Taskforce and the process of enhancing or reforming ASIC's enforcement powers to ensure they are fit for purpose, subject to considering the specific details of any proposed changes to legislation.

153. During the consultation period, Westpac made a number of submissions to the Taskforce concerning their proposed recommendations. Westpac maintains its position made in these submissions to the Taskforce. Westpac also contributed to the submissions provided by the ICA, the FSC and the Australian Banking Associ ation, and is generally supportive of these submissions.

154. Westpac is generally supportive of the Taskforce's recommendations, save that in respect of the recommendations contained in Chapter 4 of the Taskforce's report concerning industry codes in the financial sector, which may result in overly prescriptive requirements on how industry codes are to be developed, are approved and how they monitor risks. This may undermine the core benefits of industry codes, which are designed to be flexible, agile to change, responsive to the issues of the day, and reflect industry participant concerns.

155. Taskforce Recommendation 18 ·ASIC approval should be required for the content of and governance arrangements for relevant codes: In principle, Westpac supports approval of industry codes by ASIC and any steps that would achieve a strengthening of industry codes. Westpac supported the process of the ABA obtaining approval from ASIC for the Code of Banking Practice, and is supportive of the intention of the ICA and the FSC to seek ASIC approval over time for the General Insurance Code and Life Insurance Code respectively. Nevertheless, approval is a matter for each of the respective industry associ ations to consider and it should not be a mandatory requirement imposed across all industries. Not all industries and codes are likely to be appropriate for the operation of this requirement.

156. There are a number of reasons why an industry association may choose not to seek ASIC approval at a specific point in time. In particular, the process of gaining approval under Regulatory Guide 183 is often a lengthy and complex process, and an industry association may determine that it is a better course of action to first release an industry code before progressively working towards obtaining an ASIC approval. This allows the industry association to obtain insight into the practical operation of the code, which is a valuable tool that can be used to enhance an industry code over time.

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Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Westpac Banking Corporation – Round 6 Insurance Submissions on Policy and General Questions

157. Taskforce Recommendation 19 - Entities should be required to subscribe to the approved codes relevant to the activities in which they are engaged: Westpac supports this position in principle, particularly in respect of the general and life insurance industry. However, there are practical reasons why this should not be mandatory in all instances and should be considered on a case-by-case basis. The content of an industry code is primarily formulated through the subscribing members who will be bound by the code (subject to feedback and input from various stakeholders), which is generally subject to periodic independent review. In the event that all entities were required to subscribe to a code, it would raise concerns about:

a. whether this would apply to all entities irrespective of whether they would otherwise only have a small proportion of their business potentially subject to a code’s jurisdiction or where only parts of the code would apply to their business;

b. how non-members views would be captured in formulating the content of the code; and

c. how non-members or ‘compelled subscribers’ could be required to contribute to the cost of updating and managing codes as well as the costs involved in compliance governance bodies.

158. Taskforce Recommendation 22 - The code monitoring body should be required to monitor the adequacy of the code and industry compliance with it over time, and periodically report to ASIC on these matters: Westpac supports the use of a strong and independent code monitoring body to ensure there is ongoing compliance with the code. Westpac also supports the code monitoring body reporting to ASIC in certain circumstances, including whether there has been a systemic breach of the code or misconduct, and where a member has failed to rectify a systemic breach of the code or misconduct. Periodic reporting to ASIC on overall compliance should be conducted on a thematic basis which could then inform areas the regulator may want to make more detailed enquiries into.

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