Compliance: Theory and Practice in the Financial Services Industry

13. Insurance, Superannuation and RSAs

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IMPORTANT NOTE: These slides have been provided primarily for the use and benefit of students taking the "Compliance: Theory and Practice in the Financial Services Industry" course at Sydney University Law School. They are a summary only of the subject matter covered and are not intended to be, nor should they be relied upon as, a substitute for legal or other professional advice. In particular, it should be noted that the slides are not always verbatim quotes from the underlying source material and that material may have been abridged or paraphrased for presentational purposes. There also may have been legislative, regulatory or other developments since these slides were last updated that are not incorporated.

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Outline

   Definitions
   Overview of Insurance Act 1973
   Overview of Life Insurance Act 1995
   Overview of Insurance Contracts Act 1984
   Overview of Superannuation Industry (Supervision) Act 1993
   Overview of Retirement Savings Account Act 1997
   Marketing Insurance and Superannuation Products
   Insurance Agents and Brokers
   Insurance Premiums
   Industry Codes of Practice
   The Superannuation Complaints Tribunal

 


Definitions

CA s764A(1) - Things that are Financial Products
Subject to subdivision D (s765A), the following are financial products for the purposes of Chapter 7: ...
(d)   a contract of insurance that is not a life policy, or a sinking fund policy, within the meaning of the Life Insurance Act 1995;
(e)   a life policy, or a sinking fund policy, within the meaning of the Life Insurance Act 1995, that is a contract of insurance;
(f)   a life policy, or a sinking fund policy, within the meaning of the Life Insurance Act 1995, that is not a contract of insurance;
(g)   a superannuation interest within the meaning of the Superannuation Industry (Supervision) Act 1993;
(h)   an RSA (retirement savings account) within the meaning of the Retirement Savings Accounts Act 1997.

These products are defined in s761A to be "general insurance products", "life risk insurance products", "investment life insurance products", "superannuation products" and "RSA products" respectively.

Excluded from (d), (e) and (f) above are contracts of insurance that: (i) provide for a benefit to be provided by an association of employees that is registered as an organisation, or recognised, under the meaning of the Fair Work (Registered Organisations) Act 2009 for a member of the organisation or a dependant of a member; (ii) provide for benefits, pensions or payments described in s11(3)(c) of the Life Insurance Act 1995 (ie, superannuation benefits, pensions or payments to employees or their dependants  on retirement, disability or death that are provided by an employer or by employees, or by both, wholly through an organisation established by the employer or employees or by both); (iii) provide for the provision of a funeral benefit; or (iv) are issued by an employer to an employee of the employer. The exclusions in (i)-(iv) are further reinforced by specific exclusions to similar effect in CA s765A(1)(u), (v) and (w) declaring these types of products not to be "financial products" for the purposes of Chapter 7.

Also excluded by CAs765A(1) are: (c) health insurance provided as part of a health insurance business (as defined in Division 121 of the Private Health Insurance Act 2007); (ca) insurance provided as part of a health-related business (as defined by s131-15 of that Act) that is conducted through a health benefits fund (as defined by s131-10 of that Act); (d) insurance provided by the Commonwealth; (e) State insurance or Northern Territory insurance, including insurance entered into by a State or the Northern Territory and some other insurer as joint insurers; (f) insurance entered into by the Export Finance and Insurance Corporation, other than a short-term insurance contract within the meaning of the Export Finance and Insurance Corporation Act 1991; and (g) reinsurance.

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Overview of Insurance Act 1973

IA ss 9 and 10 - Requirement to Register
To carry on insurance business in Australia, a person must:
     be a body corporate that is authorised under s12 to carry on business as a general insurer;
     be a Lloyd's underwriter; or
     have an exemption under s7(1).
Maximum penalty: 60 penalty units.

Click here for a copy of the Insurance Act 1973.

Under IA s12(3), APRA may refuse to grant an authority to a body corporate under s12 to carry on insurance business in Australia if it is a subsidiary of another body corporate and that other body corporate is not an authorised NOHC.

IA s3(1) defines "NOHC" or "non‑operating holding company", in relation to a body corporate, to mean a body corporate: (a) of which the first body corporate is a subsidiary; (b) that does not carry on a business (other than a business consisting of the ownership or control of other bodies corporate); and (c) that is incorporated in Australia.

IA s18 establishes a regime for APRA to grant authorisation for a body corporate to be a NOHC for a general insurer.

In The Barclay MIS Group of Companies Pty Ltd v ASIC [2002] FCA 1606, the Federal Court held that certain risk management products aimed at protecting landlords against loss of rent and damage to property caused by tenants were insurance contracts and that the issuer of the products was therefore required to be registered as a general insurer under the Insurance Act 1973 and to have a financial services licence under the Corporations Act.

IA s3(1) Definition of Insurance Business
Insurance business means the business of undertaking liability, by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, and includes any business incidental to insurance business as so defined, but does not include:
(a)   life insurance business;
(b)   accident insurance business undertaken solely in connection with life insurance business;
(c)   pecuniary loss insurance business carried on solely in the course of carrying on banking business and for the purposes of that business by an ADI;
(d)   business in relation to the benefits provided by a friendly society or trade union for its members or their dependants;
(e)   business in relation to the benefits provided for its members or their dependants by an association of employees or of employees and other persons that is registered as an organisation, or recognised, under the Fair Work (Registered Organisations) Act 2009;
(f)   business in relation to a scheme or arrangement under which superannuation benefits, pensions or payments to employees or their dependants (and not to any other persons) on retirement, disability or death are provided by an employer or an employer's employees or by both, wholly through an organization established solely for that purpose by the employer or the employer's employees or by both;
(g)   business in relation to a scheme or arrangement for the provision of benefits consisting of:
  (i)   the supply of funeral, burial or cremation services, with or without the supply of goods connected with any such service; or
  (ii)   the payment of money, upon the death of a person, for the purpose of meeting the whole or a part of the expenses of and incidental to the funeral, burial or cremation of that person;
  and no other benefits, except benefits incidental to the scheme or arrangement;
(h)   business undertaken by a person, being a carrier, carrier's agent, forwarding agent, wharfinger, warehouseman or shipping agent, relating only to the person's liability in respect of goods belonging to another person and in the possession, or under the control, of the first-mentioned person for the purpose of the carriage, storage or sale of those goods;
(i)   business undertaken by a person, being an innkeeper or lodging-house keeper, relating only to the person's liability in respect of goods belonging to another person and in the possession or under the control of a guest at the inn or lodging-house of which the first-mentioned person is the innkeeper or lodging-house keeper or deposited with the innkeeper or lodging-house keeper for safe custody;
(j)   the business of insuring the property of a registered religious institution (within the meaning of the Fringe Benefits Tax Assessment Act 1986) where the person carrying on the business does not carry on any other insurance business;
(ja)  health-related business within the meaning of s131-15 of the Private Health Insurance Act 2007 carried on by a private health insurer within the meaning of that Act through a health benefits fund within the meaning of s131-10 of that Act; or
(k)   health insurance business within the meaning of Division 121 of the Private Health Insurance Act 2007 carried on by a private health insurer within the meaning of that Act.

ICA s3A provides that the regulations may also specify things that are not "insurance business" for the purposes of the Act.

IA ss32 and 35 - Obligation to Comply with the Prudential Standards
APRA may determine prudential standards for general insurers, authorised NOHCs and their subsidiaries, with which they are legally obliged to comply.

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Overview of Life Insurance Act 1995

LIA s17(1) Requirement to Register
A person other than a company registered under this Act must not intentionally:
(a)  issue a life policy; or
(b)  undertake liability under a life policy.

Click here for a copy of the Life Insurance Act 1995.

LIA s9 Definition of Life Policy
Each of the following constitutes a life policy for the purposes of this Act:
(a)   a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;
(b)   a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life;
(c)   a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life;
(d)   a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the prescribed term in the regulations (currently 10 years: LIR 2.01);
(e)   a continuous disability policy;
(f)   a contract (whether or not it is a contract of insurance) that constitutes an investment account contract;
(g)   a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract.

LIA s9(2) excludes a contract that provides for the payment of money on the death of a person if the duration of the contract is to be not more than one year and payment is only to be made in the event of death by accident or death resulting from a specified sickness.

"Continuous disability policy" is defined in s9A. "Investment account benefits" and "investment-linked benefits" are defined in s14.

LIA s234(1) - Mixed Insurance Business Prohibited
A life company must not intentionally carry on any insurance business other than life insurance business.
Penalty: 300 penalty units.

LIA s234(2) provides a safe harbour for life companies that were carrying on general insurance business before the commencement of the Act.

LIA s11 Definition of Life Insurance Business
A reference in this Act to life insurance business is a reference to:
(a)   business that consists of any or all of the following:
  (i)   the issuing of life policies;
  (ii)   the issuing of sinking fund policies;
  (iii)   the undertaking of liability under life policies;
  (iv)   the undertaking of liability under sinking fund policies; and
(b)   any business that relates to business referred to in (a).

The Dictionary in the Schedule to the LIA defines "sinking fund business" to mean business that consists of: (a) the issuing of sinking fund policies or the undertaking of liability under sinking fund policies; or (b) any related business. It defines "sinking fund policy" to mean a contract under which: (a) the company issuing the policy undertakes to pay money on one or more specified dates; and (b) neither the payment of that money nor the payment of premiums is dependent on the death or survival of the person to whom the policy is issued or of any other person.

LIA s12 divides life insurance business into two classes: (1) ordinary business; and (2) superannuation business. The Dictionary in the Schedule to the LIA defines "ordinary business" to mean life insurance business other than superannuation business and "superannuation business" to mean life business that consists of: (a) the issuing of superannuation policies or the undertaking of liability under superannuation policies; or (b) any related business. It further defines "superannuation policy" to mean: (a) a life policy that is maintained for the purposes of a superannuation or retirement scheme and is owned by the trustee under the scheme; or (b) a life policy of a kind prescribed by the regulations for these purposes.

LIA s31 - Requirement to Have Statutory Funds
A life company:
(a)   must at all times have at least one statutory fund in respect of its life insurance business but may have more statutory funds if it chooses to do so;
(b)   that carries on life insurance business consisting of the provision of investment-linked benefits must maintain a statutory fund or statutory funds exclusively for that business so far as it is carried on in Australia;
(c)   that carries on life insurance business outside Australia (other than an eligible foreign life insurance company) must have a statutory fund or statutory funds exclusively in respect of that business, except so far as paragraph (d) applies or APRA approves otherwise ...

For these purposes, "eligible foreign life insurance company" means a company that: (a) is a foreign corporation within the meaning of s51(xx) of the Constitution; (b) is authorised in a foreign country, or part of a foreign country, to carry on life insurance business; (c) has established, or proposes to establish, an Australian branch; (d) is not an existing life company that is registered under LIA s21; and (e) satisfies the conditions specified in the regulations (LIA s16ZD).

LIA s31(d), referenced in s31(c) above, is a transitional provision. It provides that a life company may only maintain a statutory fund in respect of both life insurance business carried on outside Australia and life insurance business carried on in Australia if: (i) the statutory fund was established before the commencement of the LIA; (ii) so far as it relates to business carried on outside Australia, the fund relates only to business carried on in a country or countries in which the company was carrying on life insurance business immediately before the commencement of the LIA; and (iii) the company is not an "eligible foreign life insurance company".

LIA s30 - Outline of Requirements Regarding Statutory Funds
The principal requirements in relation to statutory funds may be summarised as follows:
(a)   all amounts received by a life company in respect of the business of a fund must be credited to the fund;
(b)   all assets and investments related to the business of a fund must be included in the fund;
(c)   all liabilities (including policy liabilities) of the company arising out of the conduct of the business of a fund must be treated as liabilities of the fund;
(d)   the assets of a fund are only available for expenditure related to the conduct of the business of the fund;
(e)   statutory funds may not be restructured or terminated without the approval of APRA;
(f)   profits and losses of a statutory fund may only be dealt with in accordance with Divisions 5 and 6 (the object of those Divisions being to ensure that such profits and losses are dealt with in a manner that protects the interests of policy owners and is consistent with prudent management of the fund).

 

LIA s48 - Duty of Directors in Relation to Statutory Funds
A director of a life company has a duty to the owners of policies referable to a statutory fund of the company to take reasonable care, and use due diligence, to see that, in the investment, administration and management of the assets of the fund, the life company:
(a)   complies with LIA Part 4 (requirements applicable to statutory funds); and
(b)   gives priority to the interests of owners and prospective owners of policies referable to the fund.
This duty overrides any duty the directors owe to the shareholders of the life company.
If the directors breach this duty, they are jointly and severally liable to compensate the life company for any resulting loss to its statutory fund.

A person cannot be made liable both under this section and under s50 in respect of the same act or omission of a life company (s48(10)).

LIA s50 - Liability of Directors for Failure to Comply with APRA Notice
If:
(a)   APRA has given a notice to a life company under s49 [to remedy a contravention of Part 4];
(b)   the contravention has resulted in a loss to a statutory fund; and
(c)   the company has failed to comply with the notice ;
the persons who were the directors of the company when the contravention occurred are jointly and severally liable to pay the company an amount equal to the amount of the loss unless they can prove that they used due diligence to ensure that the company complied with the notice.

 

LIA s188 - Liability of Directors in Winding Up
If:
(a)   a life company contravenes this Act in relation to a statutory fund;
(b)   the contravention results in a loss to the statutory fund; and
(c)   ... the Court orders that the company be wound up ...;
the persons who were the directors of the company when the contravention occurred are jointly and severally liable to pay to the company an amount equal to the amount of the loss unless they can prove that they used due diligence to prevent the occurrence of such a contravention.

A person cannot be made liable both under this section and under Division 2 of Part 4 in respect of the same contravention (s188(4)).

LIA s198 - ASIC May Require Changes to Life Proposals and Policy Documents
(1)   ASIC may give a life company written notice requiring the company to submit to ASIC any form of proposal or policy document ordinarily used by the company in Australia.
(2)   If ASIC thinks that a form submitted in answer to a notice under s198(1) does not comply with this Act or is likely to mislead, ASIC may give the life company written notice:
  (a)   setting out particulars of the way in which the form fails to comply with this Act or is likely to mislead; and
  (b)   inviting the life company to make submissions to ASIC on any matter set out in the notice.
(3)   If:
  (a)   at least 14 days have elapsed since ASIC gave notice to the life company; and
  (b)   either: (i) the company has not made any submissions to ASIC; or (ii) having taken into account the submissions made by the life company, ASIC is satisfied that the form in question fails to comply with this Act or is likely to mislead;
  ASIC may give the life company a written direction to change the form in the way specified in the direction.
(4)   A life company must not make use of a form in respect of which ASIC has given a direction under s198(3), or allow such a form to be used by a representative of the company, unless the form has been changed in accordance with the direction.

Note that there are a number of provisions in LIA Part 10 (ss198-230) regulating life insurance contracts in general. These include provisions regulating the capacity of persons under 18 to obtain life insurance; assignments and mortgages; surrender and forfeiture; protection of policy proceeds from the claims of creditors; payment of policy proceeds; lost or destroyed policy documents; the effect of suicide and the like. We don't need to go into that level of detail for the purposes of this course.

LIA s230A - Prudential Standards
APRA may determine prudential standards to be complied with by life insurers, authorised NOHCs and their subsidiaries. A failure to comply with a standard is not an offence, but it may lead to a direction being given by APRA under s230B.

Failure to comply with a direction under s230B is a criminal offence (s230F).

LIR r4.00A(1) - Derivatives Risk Management Statements
A life company may give a charge over, or in relation to, an asset of a statutory fund if:
(a)   the charge is given in relation to a derivative to which the life company, or an agent acting on behalf of, on instructions of, on account of or for the benefit of the life company, is a party;
(b)   the charge complies with rr4.00A(1A), (1B) or (1C);
(c)   the life company has in place a risk management statement that sets out:
  (i)   policies for the use of derivatives that include an analysis of the risks associated with the use of derivatives within the investment strategy of the company;
  (ii)   controls on the use of derivatives that take into consideration the expertise of staff; and
  (iii)   compliance processes to ensure that the controls are effective (for example, reporting procedures, internal and external audits and staff management procedures); and
(d)   the investment to which the charge relates is made in accordance with the risk management statement.

Click here for a copy of the Life Insurance Regulations.

LIR r4.00A operates as an exception to LIA s38(3), which prohibits a life company from mortgaging or charging any of the assets of a statutory fund except: (a) to secure a bank overdraft; (b) in connection with the undertaking of a major development project and in accordance with s40; or (c) for such other purposes, and subject to such other conditions, as are prescribed by the regulations. It is needed because many exchanges require clients or their brokers to lodge margin which is charged in favour of the relevant exchange or clearing house to secure performance of the client's obligations under derivatives and futures contracts.

LIR rr4.00A(1A), (1B) and (1C), referred to in (b) above, identify the types of situations where charges are typically imposed under the law or the rules of the relevant exchanges or clearing houses.

LIR r4.00A(2) and schedule 7 define "approved body" to include various stock and futures exchanges including the ASX, ASX 24 and their associated clearing houses. LIR r4.00A(2) also defines "derivative" as meaning a derivative (within the meaning of CA Chapter 7), a foreign exchange contract (within the meaning of that Chapter) and an arrangement that is a forward, swap or option, or any combination of those things, in relation to one or more commodities, but not to include any arrangement that is of a kind mentioned in r6(2) of the Payment Systems and Netting Regulations 2001 (r6(2) identifies obligations that are not eligible obligations in relation to a close‑out netting contract and includes credit facilities, reciprocal purchase agreements (otherwise known as repurchase agreements), sell‑buyback arrangements, securities loan arrangements, contracts of insurance and managed investment schemes).

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Overview of Insurance Contracts Act 1984

ICA ss10 and 11 - Contracts of Insurance
     Contract of life insurance means a contract that constitutes a life policy within the meaning of the Life Insurance Act 1995 (ICA s11(1)).
     Contract of general insurance is a contract of insurance that is not a contract of life insurance (ICA s11(6)).
     A reference to a contract of insurance includes a reference to a contract that:
  (a)   would ordinarily be regarded as a contract of insurance although some of its provisions are not by way of insurance; and
  (b)   includes provisions of insurance in so far as those provisions are concerned, although the contract would not ordinarily be regarded as a contract of insurance (ss10(1) and (2)).

Click here for a copy of the Insurance Contracts Act 1984.

The ICA applies to both general insurance and life insurance. It contains a number of modifications to the common law relating to insurance contracts (eg it removes the  requirement for an insurable interest, removes the right of an insurer to be subrogated to rights of insured in certain circumstances where the action is against an employee of the insured or a family member of the insured) and regulates the contents of certain policies, procedures for their cancellation, payment of claims, rights of contribution etc. It is beyond the scope of this course to consider these provisions in detail.

ICA s11A provides that ASIC is responsible for the general administration of the ICA.

ICA s11C(1) - ASIC may Obtain Insurance Documents
ASIC may by notice in writing given to an insurer, require the insurer to give to ASIC, within 30 days of receipt of the notice, or such longer period as is specified in the notice, copies of:
(a)   documents specified in the notice relating to insurance cover provided, or proposed to be provided, by the insurer; or
(b)   documents relating to insurance cover of a kind specified in the notice provided, or proposed to be provided, by the insurer.

 

ICA s11D(1) - ASIC may Review Administrative Arrangements
ASIC may by notice in writing given to an insurer, require the insurer to give to ASIC, within 30 days of receipt of the notice or such longer period as is specified in the notice:
(a)   written particulars of the organisational structure and administrative arrangements of the insurer either generally or in a particular area of insurance;
(b)   statistics relating to the nature and volume of the insurance business of the insurer either generally or in a particular area of insurance; or
(c)   copies of any training guides, work manuals or other materials of a similar nature used by an insurer in instructing its employees or any insurance intermediaries dealing with persons who have, or may be likely to seek, insurance cover from the insurer.

 

Duty of Utmost Good Faith
     A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith (s13).
     If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision (s14(1)).

 

ICA s21 - Insured's Duty of Disclosure
(1)   Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:
  (a)   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
  (b)   a reasonable person in the circumstances could be expected to know to be a matter so relevant.
(2)   The duty of disclosure does not require the disclosure of a matter:
  (a)   that diminishes the risk;
  (b)   that is of common knowledge;
  (c)   that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or
  (d)   as to which compliance with the duty of disclosure is waived by the insurer.
(3)   Where a person:
  (a)   failed to answer; or
  (b)   gave an obviously incomplete or irrelevant answer to;
  a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.

In working out what a reasonable person could be expected to know is relevant for the purposes of (1)(b) above, one must have regard to the nature and extent of the insurance cover to be provided under the relevant contract of insurance and the class of persons who would ordinarily be expected to apply for insurance cover of that kind (s21(1)(b)(i) and (ii)).

In Permanent Trustee Australia Limited v FAI General Insurance Company Limited (in Liq) [2003] HCA 25, the majority of the High Court found that an insured's disclosure obligations under ICA s21 relate only to those matters which the insured knows, or a reasonable person in the circumstance could be expected to know, are relevant to the insurer's assessment of risk. It does not extend to matters of a commercial nature, such as whether the insured intends to renew the insurance with that insurer in the future.

ICA s22 - Insurer to Inform of Duty of Disclosure
(1)   The insurer must, before a contract of insurance is entered into, clearly inform the insured in writing:
  (a)   of the general nature and effect of the duty of disclosure;
  (b)   if s21A or 21B applies to the contract, of the general nature and effect of that section;
  (c)   if the contract is a contract of life insurance, of the effect of s31A; and
  (d)   that the duty of disclosure applies until the proposed contract is entered into.
(2)   If the proposed contract is a contract of life insurance, the insurer must also, before the contract is entered into, clearly inform, in writing, any person (other than the insured) who, under the contract, would become a life insured of the matters referred to in (1).
(3)   If:
  (a)   an insurer complies with (1) in relation to a proposed contract of insurance;
  (b)   the insurer accepts an offer by the insured to enter into the proposed contract, or makes a counter-offer to enter into another contract of insurance with the insured; and
  (c)   the insurer's acceptance or counter-offer is made more than 2 months after the insured's most recent disclosure for the purpose of complying with the duty of disclosure in relation to the proposed contract;
  then the insurer must give to the insured, with the acceptance or counter-offer, a reminder notice stating that the duty of disclosure applies until the proposed or other contract is entered into.
(4)   If the regulations prescribe a form of writing to be used for informing a person of the matters referred to in (1), or for the reminder notice referred to in (3), the writing to be used may be in accordance with the prescribed form.
(5)  

An insurer who has not complied with (1) and, if applicable, (2) may not exercise a right in respect of a failure to comply with the duty of disclosure unless that failure was fraudulent.

(6)   An insurer who has not complied with (3) above may not exercise a right in respect of a failure to comply with the duty of disclosure in relation to a new matter relating to the contract, unless the failure was fraudulent.
(7)   For the purposes of (6), a "new matter" relating to a contract of insurance is a matter of which the insured first becomes aware after the insured's most recent disclosure for the purpose of complying with the duty of disclosure in relation to the contract.

ICA ss21A and 21B, referred to in (1)(b) on the slide above, further qualify the duty of disclosure for "eligible contracts of insurance". These are defined in Insurance Contracts Regulations r2B to include those insurance contracts declared for the purposes of Part V Division 1 of the ICA (ie those insurance contracts subject to prescribed minimum standards of cover, being motor vehicle, home buildings, home contents, sickness and accident, consumer credit and travel insurance - see below) where the contract is for new business. It also includes any other type of insurance contract where the contract is for new business and the insurer, before the contract is entered into, gives to the insured: (i) a written notice in accordance with the form set out in Part 3 of Schedule 1; (ii) an oral notice in accordance with the words set out in Schedule 2; or (iii) a notice otherwise complying with ICA s22(1) of the Act clearly informing the insured of the general nature and effect of the duty of disclosure and the general nature and effect of ICA s21A.

ICA s21A deals with the disclosures that must be made before an eligible contract of insurance is originally entered into. Under ICA s21A(2), before the contract is originally entered into, the insurer may request the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. If the insurer does not make a request in accordance s21A(2), they are taken to have waived compliance with the duty of disclosure in relation to the contract (s21A(3)). If the insurer does make a request in accordance s21A(2) and also requests the insured to disclose to the insurer any other matter that would be covered by the duty of disclosure in relation to the contract, then the insurer is taken to have waived compliance with the duty of disclosure in relation to that other matter (s21A(4)).

If the insurer does make a request in accordance s21A(2) and, in answer to each specific question included in the request, the insured discloses each matter that: (i) is known to the insured; and (ii) a reasonable person in the circumstances could be expected to have disclosed in answer to that question, then the insured is taken to have complied with the duty of disclosure in relation to the contract (s21A(5)).

ICA s21B deals with the disclosures that must be made before an eligible contract of insurance is renewed. Under ICA s21B(3), before the contract is renewed, the insurer may: (a) request the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; and/or (b) give the insured a copy of any matter previously disclosed by the insured in relation to the contract and request the insured (i) to disclose to the insurer any change to that matter or (ii) to inform the insurer that there is no change to that matter. If the insurer does not make a request in accordance with s21B(3)(a) or give the insured a copy of any matter previously disclosed by the insured and make a request in accordance with s21B(3)(b), then the insurer is taken to have waived compliance with the duty of disclosure in relation to the renewed contract (s21B(4)).

ICA ss21B(5) and following then address other situations when an insurer is deemed to have waived compliance with the duty of disclosure in relation to the renewed contract and when the insured is deemed to have complied with that duty.

ICA s31A, referred to in (1)(c) on the slide above, deals with non-disclosure in relation to a contract of life insurance under which a person (other than the insured) would become a life insured. It provides that if, during the negotiations for the contract but before it was entered into, the person (the life insured) failed to disclose to the insurer a matter that was known to the life insured, being a matter that: (a) the life insured knew to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) a reasonable person in the circumstances could have been expected to know to be a matter so relevant, the ICA has effect as if the failure to disclose the matter had been a failure by the insured to comply with the duty of disclosure in relation to the matter. This does not apply, however, in relation to a failure by the life insured to disclose a matter: (a) that diminishes the risk; (b) that is of common knowledge; (c) that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or (d) as to which compliance with the duty of disclosure is waived by the insurer.

ICR r3(2)(a) and Part 1 of ICR Schedule 1 prescribe the following non-mandatory form of writing to inform an insured of the matters referred to in s22(1) for a contract of general insurance that is not an eligible contract of insurance:

    

Your duty of disclosure
Before you enter into an insurance contract, you have a duty to tell us anything that you know, or could reasonably be expected to know, may affect our decision to insure you and on what terms.
You have this duty until we agree to insure you.
You have the same duty before you renew, extend, vary or reinstate an insurance contract.
You do not need to tell us anything that:
  reduces the risk we insure you for; or
  is common knowledge; or
  we know or should know as an insurer; or
  we waive your duty to tell us about.
If you do not tell us something
If you do not tell us anything you are required to, we may cancel your contract or reduce the amount we will pay you if you make a claim, or both.
If your failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed.

ICR r3(2)(b) and Part 2 of ICR Schedule 1 prescribe the following non-mandatory form of writing to inform an insured of the matters referred to in s22(1) for a contract of life insurance:

    

Your duty of disclosure
Before you enter into a life insurance contract, you have a duty to tell us anything that you know, or could reasonably be expected to know, may affect our decision to insure you and on what terms.
You have this duty until we agree to insure you.
You have the same duty before you extend, vary or reinstate the contract.
You do not need to tell us anything that:
  reduces the risk we insure you for; or
  is common knowledge; or
  we know or should know as an insurer; or
  we waive your duty to tell us about.
If you do not tell us something
In exercising the following rights, we may consider whether different types of cover can constitute separate contracts of life insurance. If they do, we may apply the following rights separately to each type of cover.
If you do not tell us anything you are required to, and we would not have insured you if you had told us, we may avoid the contract within 3 years of entering into it.
If we choose not to avoid the contract, we may, at any time, reduce the amount you have been insured for. This would be worked out using a formula that takes into account the premium that would have been payable if you had told us everything you should have. However, if the contract has a surrender value, or provides cover on death, we may only exercise this right within 3 years of entering into the contract.
If we choose not to avoid the contract or reduce the amount you have been insured for, we may, at any time vary the contract in a way that places us in the same position we would have been in if you had told us everything you should have. However, this right does not apply if the contract has a surrender value or provides cover on death.
If your failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed.

ICR r3(2)(c) and Part 3 of ICR Schedule 1 prescribe the following non-mandatory form of writing to inform an insured of the matters referred to in s22(1) for the original entering into of an eligible contract of insurance:

    

Your duty of disclosure
Before you enter into an insurance contract, you have a duty of disclosure under the Insurance Contracts Act 1984.
If we ask you questions that are relevant to our decision to insure you and on what terms, you must tell us anything that you know and that a reasonable person in the circumstances would include in answering the questions.
You have this duty until we agree to insure you.
If you do not tell us something
If you do not tell us anything you are required to tell us, we may cancel your contract or reduce the amount we will pay you if you make a claim, or both.
If your failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed.

ICR r3(2)(d) and Part 4 of ICR Schedule 1 prescribe the following non-mandatory form of writing to inform an insured of the matters referred to in s22(1) for the renewal of an eligible contract of insurance:

    

Your duty of disclosure
Before you renew this contract of insurance, you have a duty of disclosure under the Insurance Contracts Act 1984.
If we ask you questions that are relevant to our decision to insure you and on what terms, you must tell us anything that you know and that a reasonable person in the circumstances would include in answering the questions.
Also, we may give you a copy of anything you have previously told us and ask you to tell us if it has changed. If we do this, you must tell us about any change or tell us that there is no change.
If you do not tell us about a change to something you have previously told us, you will be taken to have told us that there is no change.
You have this duty until we agree to renew the contract.
If you do not tell us something
If you do not tell us anything you are required to tell us, we may cancel your contract or reduce the amount we will pay you if you make a claim, or both.
If your failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed.

ICR r3(3) prescribes as the non-mandatory form of writing that may be used to inform another person who may become a life insured of the matters mentioned in s22(1) of the Act the form in Schedule 1A.

ICR r3A(2) prescribes as the non-mandatory forms of writing that may be used to remind an insured of the matters mentioned in s22(1) of the Act for a contract of general insurance that is not an eligible contract of insurance the form in Part 1 of Schedule 1B, for a contract of life insurance the form in Part 2 of Schedule 1B, and for an eligible contract of insurance the form in Part 3 of Schedule 1B.

ICR r3B(2) and ICR Schedule 2 prescribes as the non-mandatory words that may be used to inform an insured orally of the matters mentioned in s22(1) for the original entering into of an eligible contract of insurance the form in Schedule 2.

 

ICA s23 - Ambiguous Questions
Where:
(a)   a statement is made in answer to a question asked in relation to a proposed contract of insurance or the provision of insurance cover in respect of a person who is seeking to become a member of a superannuation or retirement scheme; and
(b)   a reasonable person in the circumstances would have understood the question to have the meaning that the person answering the question apparently understood it to have;
that meaning shall, in relation to the person who made the statement, be deemed to be the meaning of the question.

 

ICA s24 - Warranties of Existing Facts to be Representations
A statement made in or in connection with a contract of insurance, being a statement made by or attributable to the insured, with respect to the existence of a state of affairs does not have effect as a warranty but has effect as though it were a statement made to the insurer by the insured during the negotiations for the contract but before it was entered into.

This stops insurers bootstrapping representations into warranties in or conditions of a contract which, if breached, might otherwise entitle the insurer to terminate the contract.

ICA s26 - Certain Statements Not Misrepresentations
(1)   Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that the person held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation.
(2)   A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.

Under ICA s26(3), this extends to the provision of insurance cover in respect of a person who is seeking to become a member of a superannuation or retirement scheme or who is a holder, or is applying to become a holder, of an RSA.

ICA s27 - Failure to Answer Questions
A person shall not be taken to have made a misrepresentation by reason only that the person failed to answer a question included in a proposal form or gave an obviously incomplete or irrelevant answer to such a question.

 

ICA s28 Right to Rescind General Insurance Contract
If the insured under a contract of general insurance:
(a)  fails to comply with the duty of disclosure; or
(b)  makes a misrepresentation to the insurer before the contract was entered into;
and the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.
This does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.

ICA s28(3) provides that if the insurer is not entitled to avoid the contract or, being entitled to avoid the contract has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.

ICA s33 provides that these rights are exclusive and that the insurer has no other rights in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into and in respect of a misrepresentation or incorrect statement.

ICA s29 Right to Rescind Life Insurance Contract
If the insured under a contract of life insurance:
(a)   fails to comply with the duty of disclosure; or
(b)   makes a misrepresentation to the insurer before the contract was entered into;
the insurer may avoid the contract:
(A)   if the failure was fraudulent or the misrepresentation was made fraudulently, at any time; or
(B)   otherwise, within 3 years if the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made.
This does not apply where the insurer would have entered into the contract even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into or where the failure or misrepresentation was in respect of the date of birth of one or more of the lives insured.

ICA s29(4) provides that if the insurer has not avoided the contract, it may, by notice in writing given to the insured before the expiration of 3 years after the contract was entered into, vary the contract by substituting for the sum insured (including any bonuses) a sum that is not less than the sum ascertained in accordance with the formula specified in that section.

ICA s30 provides a formula for reduction in the amount of cover where there has been a misstatement as to the age of a life insured.

Again, ICA s33 provides that these rights are exclusive and that the insurer has no other rights in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into and in respect of a misrepresentation or incorrect statement.

ICA Some Other Obligations
     An insurer must provide a Key Facts Sheet for certain prescribed contracts (home buildings and home contents insurance) in the circumstances and manner prescribed in the regulations (s33C and rr4A-4C).
     For certain prescribed insurance contracts (motor vehicle, home buildings, home contents, sickness and accident, consumer credit and travel insurance), an insurer is obliged to provide the prescribed minimum standard cover unless it gives a clear notice in writing to the insured beforehand that its insurance contract provides less than the prescribed standard cover or it can otherwise show that the insured knew, or a reasonable person in the circumstances could be expected to have known, that the cover was less than the prescribed standard cover (s35).
     In all other insurance contracts, the insurer must give prior notice to the insured of any "unusual terms" or else it cannot rely on them (s37).
     Prescribed contracts (home buildings, home contents, small business and strata title insurance) must use a prescribed standard definition of "flood" (s37B and r29C).
     Compulsory arbitration provisions are void, but once a dispute arises the parties can agree to arbitration (s43).
     A provision in an insurance contract which entitles the insurer to vary it to the prejudice of any other person is void, subject to exemptions in the regulations (s53).
     An insurer under a renewable contract of general insurance must notify the insured at least 14 days before expiry of the fact that the policy is about to expire. Failure to do so may result in the policy continuing beyond its due date for expiry (s58).
     If an insured so requests in writing, the insurer must supply a complete copy of the insurance contract (s74).
     Where an insurer does not accept an offer to enter into, cancels, proposes not to renew, or (because of some special risk relating to the insured or to the subject-matter of the contract) to renew on less advantageous terms than the insurer would otherwise offer, a contract of insurance, the insurer must, if requested in writing by the insured, give the insured a statement in writing setting out its reasons for so doing (s75).

Note this is not an exhaustive list of ICA obligations.

The purpose of the Key Facts Sheet is to allow consumers to quickly and easily check the basic terms of the insurance policy, including the nature of cover and any key exclusions.

In relation to the second bullet point (ICA s35), the prescribed minimum standard cover can be found in Part 5 (rr5-29) of the Insurance Contracts Regulations. This part prescribes the types of events that must be covered by the different types of prescribed insurance contracts (including the permitted exclusions from cover) and the minimum amount that must be paid out if one of those events occurs.

Return to Outline


Overview of Superannuation Industry (Supervision) Act 1993

SISA s10 Superannuation Entities
Superannuation entity means:
(a)   a regulated superannuation fund ("RSF");
(b)   an approved deposit fund ("ADF"); or
(c)   a pooled superannuation trust ("PST").

Click here for a copy of the Superannuation Industry (Supervision) Act 1993.

Most SISA provisions apply generally to superannuation entities, as defined above. Particular provisions regulating RSFs are found in parts 7, 8 and 9, ADFs in part 10 and PSTs in part 11.

Broadly speaking, RSFs fall into 4 main categories:

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public offer funds - funds that are not standard employer-sponsored funds (s18);

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standard employer-sponsored funds - funds to which contributions are made by an employer for their employees (s16);

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small APRA funds - funds with less than 5 members that are regulated by APRA rather than the ATO and that receive some concessional treatment because of their size; or

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self managed superannuation funds ("SMSFs") - funds with less than 5 members that satisfy certain conditions set out in the definition of that term in s17A and that are regulated by the ATO rather than APRA.

Certain public sector funds listed in schedule 1AA of the Superannuation Industry (Supervision) Regulations are exempted from the operation of SISA.

 

SISA s19 Regulated Superannuation Funds
A regulated superannuation fund is a superannuation fund:
(a)   which has at least one trustee;
(b)   either of the following apply:
  (i)   the trustee of the fund is a constitutional corporation pursuant to a requirement contained in the governing rules; or
  (ii)   the governing rules provide that the sole or primary purpose of the fund is the provision of old-age pensions; and
(c)   the trustee or trustees have given to APRA, or such other body or person as is specified in the regulations, an irrevocable written notice that is:
  (i)   in the approved form; and
  (ii)   signed by the trustee or each trustee;
  electing that SISA is to apply in relation to the fund.

Significant taxation concessions (in the form of a 15% tax rate) are available for exempt public sector superannuation funds and for resident regulated superannuation funds, self managed superannuation funds, ADFs and PSTs that are "complying superannuation funds". Private sector funds and non-exempt public sector super funds that want to receive the tax concessions therefore have to comply with s19 and either have a corporate trustee or limit themselves to providing old-age pensions. That then gives the federal government the capacity to regulate their activities, using its power to legislate with respect to corporations (s51(xx) of the Constitution) and old-age pensions (s51(xxiii) of the Constitution). In this way, the Federal government has been able to substantively regulate the provision of superannuation benefits even though it does not have direct legislative power to do so.

SISA Core Regulatory Obligations for all Superannuation Entities
     Trustees of a "registrable superannuation entity" must hold an RSE licence (part 2A).
     Each registrable superannuation entity must be registered with APRA (part 2B).
     A licensee that wishes to offer a "MySuper" product must obtain an authority from APRA to do so (Part 2C).
     Superannuation entities must comply with published operating standards (part 3).
     Certain prescribed covenants are deemed to be included in the governing rules of a superannuation entity and other provisions are deemed to be void (part 6).
     Trustees are subject to various additional statutory duties (part 12).
     Borrowing money is prohibited except in very limited circumstances (ss67, 95, 97).
     Trustees and investment managers must invest on arm's length terms (s109).
     Trustees, custodians and investment managers of superannuation entities must meet certain eligibility criteria and may be disqualified from acting if they don't (part 15).

The definition of "registrable superannuation entity" captures all RSFs, ADFs and PSTs other than SMSFs (SISA s10(1)).

"MySuper" products are simple products sharing common characteristics. The ability of an RSE licensee to offer a MySuper product is significant for the purposes of the Superannuation Guarantee (Administration) Act 1992. Under that Act, employers must pay contributions for an employee who has no chosen fund into a fund that offers a MySuper product, in order to meet the choice of fund requirements and so avoid an increased individual superannuation guarantee shortfall for the employee.

SISA Core Regulatory Obligations for RSFs
For regulated superannuation funds:
     Trustee must ensure that fund is maintained solely for the core purpose of providing benefits upon death or retirement of members (s62).
     Funds are generally prohibited from lending money to members or their relatives (s65).
     Funds are prohibited from intentionally acquiring assets from members, employer-sponsors or their associates except in very limited circumstances (s66).
     Funds are limited to holding no more than 5% of assets in "in-house assets" loans to or investments in a member, employer-sponsor or their associates (part 8).
     Standard employer-sponsored funds must have equal representation of employers and members (part 9).

 

SISA s34 - Prescribed Operating Standards Must be Complied With
(1)   The trustee of a superannuation entity must ensure that the prescribed standards applicable to the operation of the entity are complied with at all times.
(2)   A person who intentionally or recklessly contravenes s34(1) is guilty of an offence punishable on conviction by a fine not exceeding 100 penalty units.
(3)   A contravention of s34(1) does not affect the validity of a transaction.

 

SISA s52(1) and (2) Deemed General Covenants
If the governing rules of a registrable superannuation entity do not contain the following covenants, they are taken to contain covenants to such effect by each trustee of the entity:
(a)   to act honestly in all matters concerning the entity;
(b)   to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments;
(c)   to perform the trustee's duties and exercise the trustee's powers in the best interests of the beneficiaries;
(d)   where there is a conflict between the duties of the trustee to the beneficiaries, or the interests of the beneficiaries, and the duties of the trustee to any other person or the interests of the trustee or an associate of the trustee:
  (i)   to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons;
  (ii)   to ensure that the duties to the beneficiaries are met despite the conflict;
  (iii)   to ensure that the interests of the beneficiaries are not adversely affected by the conflict; and
  (iv)   to comply with the prudential standards in relation to conflicts;
(e)   to act fairly in dealing with classes of beneficiaries within the entity;
(f)   to act fairly in dealing with beneficiaries within a class;
(g)   to keep the money and other assets of the entity separate from any money and assets, respectively:
  (i)   that are held by the trustee personally; or
  (ii)   that are money or assets, as the case may be, of a standard employer-sponsor, or an associate of a standard employer-sponsor, of the entity;
(h)   not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee's functions and powers;
(i)   if there are any reserves of the entity - to formulate, review regularly and give effect to a strategy for their prudential management, consistent with the entity's investment strategies and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due; and
(j)   to allow a beneficiary of the entity access to any prescribed information or any prescribed documents.

Of course, the fact that regulated superannuation entities are required by SISA to be structured as trusts with trustees imports all of the common law duties of trustees. We considered these duties in lecture 10 when we looked at the common law fiduciary duties of REs of managed investment schemes. Many of these statutory covenants replicate and codify those common law duties.

The obligations of a trustee under (d) override any conflicting obligations an executive officer or employee of the trustee has under Part 2D.1 of the Corporations Act 2001 or Subdivision A of Division 3 of Part 2‑2 of the Public Governance, Performance and Accountability Act 2013 (which deals with general duties of officials) or any rules made for the purposes of that Subdivision (SISA s52(4)).

The trustees of SMSFs are subject to a lesser, but not dissimilar, range of deemed general covenants under SISA s52B. There are deemed covenants equivalent to (a), (c), (g), (h), (i) and (j) (see s52B(2)(a), (c), (d), (e), (g) and (h) respectively). In lieu of the covenant in (b) above, the trustees of SMSFs are subject to a covenant "to exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide" (s52B(2)(b)).

Under SISA s55(1), a person must not contravene a covenant contained, or taken to be contained, in the governing rules of a superannuation entity. A contravention of s55(1) is not an offence and does not result in the invalidity of a transaction (s55(2)). However, a person who suffers loss or damage as a result of conduct by another person in contravention of s55(1), may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention (s55(3)). Such an action may be begun at any time within 6 years after the day on which the cause of action arose (s55(4)).

A trustee of a regulated superannuation fund that includes a MySuper product has additional statutory obligations under s29VN and, if it is a corporation, its directors have additional statutory obligations under s29VO. If those obligations are breached, anyone who suffers loss or damage as a result can recover that amount under ss29VP and 29VPA.

It is a defence to an action for loss or damage suffered by a person as a result of the making of an investment by or on behalf of the trustee of a superannuation entity, or as a result of the management of any reserves by the trustee of a superannuation entity, if the defendant establishes that it has complied with all of the covenants referred to in ss52 to 53 and prescribed under s54A, and all of the obligations referred to in ss29VN and 29VO, that apply to the defendant in relation to each act, or failure to act, that resulted in the loss or damage (ss55(5) and (6)). These defences apply in relation to any action for loss or damage, whether brought under s55(3), s29VP or otherwise (s55(7)).

SISA s52(1) and (6) Deemed Investment Strategy Covenants
If the governing rules of a registrable superannuation entity do not contain the following covenants, they are taken to contain covenants to such effect by each trustee of the entity:
(a)   to formulate, review regularly and give effect to an investment strategy for the whole of the entity, and for each investment option offered by the trustee in the entity, having regard to:
  (i)   the risk involved in making, holding and realising, and the likely return from, the investments covered by the strategy, having regard to the trustee's objectives in relation to the strategy and to the expected cash flow requirements in relation to the entity;
  (ii)   the composition of the investments covered by the strategy, including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification;
  (iii)   the liquidity of the investments covered by the strategy, having regard to the expected cash flow requirements in relation to the entity;
  (iv)   whether reliable valuation information is available in relation to the investments covered by the strategy;
  (v)   the ability of the entity to discharge its existing and prospective liabilities;
  (vi)   the expected tax consequences for the entity in relation to the investments covered by the strategy;
  (vii)   the costs that might be incurred by the entity in relation to the investments covered by the strategy; and
  (viii)   any other relevant matters;
(b)   to exercise due diligence in developing, offering and reviewing regularly each investment option; and
(c)   to ensure the investment options offered to each beneficiary allow adequate diversification.

The trustees of SMSFs are subject to not dissimilar deemed covenants to those in (a)(i), (ii), (iii) and (v) above - see ss52B(2)(f)(i), (ii), (iii) and (iv) respectively.

The obligation to "give effect to" an investment strategy effectively creates an obligation to ensure that the fund's investment activities accord with that strategy.

SISA s52(1) and (7) Deemed Insurance Covenants
If the governing rules of a registrable superannuation entity do not contain the following covenants, they are taken to contain covenants to such effect by each trustee of the entity:
(a)   to formulate, review regularly and give effect to an insurance strategy for the benefit of beneficiaries of the entity that includes provisions addressing each of the following matters:
  (i)   the kinds of insurance that are to be offered to, or acquired for the benefit of, beneficiaries;
  (ii)   the level, or levels, of insurance cover to be offered to, or acquired for the benefit of, beneficiaries;
  (iii)   the basis for the decision to offer or acquire insurance of those kinds, with cover at that level or levels, having regard to the demographic composition of the beneficiaries of the entity; and
  (iv)   the method by which the insurer is, or the insurers are, to be determined;
(b)   to consider the cost to all beneficiaries of offering or acquiring insurance of a particular kind, or at a particular level;
(c)   to only offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries; and
(d)   to do everything that is reasonable to pursue an insurance claim for the benefit of a beneficiary, if the claim has a reasonable prospect of success.

 

SISA s52(1) and (8) Deemed Risk Covenants
If the governing rules of a registrable superannuation entity do not contain the following covenants, they are taken to contain covenants to such effect by each trustee of the entity:
(a)   to formulate, review regularly and give effect to a risk management strategy that relates to:
  (i)   the activities, or proposed activities, of the trustee, to the extent that they are relevant to the exercise of the trustee's powers, or the performance of the trustee's duties and functions, as trustee of the entity; and
  (ii)   the risks that arise in operating the entity; and
(b)   to maintain and manage in accordance with the prudential standards financial resources (whether capital of the trustee, a reserve of the entity or both) to cover the operational risk that relates to the entity.

 

SISA s52A Deemed Covenants by Directors
If the governing rules of a registrable superannuation entity of which a trustee is a body corporate do not contain the following covenants, they are taken to contain covenants to such effect by each director of the trustee:
(a)   to act honestly in all matters concerning the entity;
(b)   to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation entity director would exercise in relation to an entity where he or she is a director of the trustee of the entity and that trustee makes investments on behalf of the entity's beneficiaries;
(c)   to perform the director's duties and exercise the director's powers as director of the trustee in the best interests of the beneficiaries;
(d)   where there is a conflict between the duties of the director to the beneficiaries, or the interests of the beneficiaries, and the duties of the director to any other person or the interests of the director, the trustee or an associate of the director or trustee:
  (i)   to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons;
  (ii)   to ensure that the duties to the beneficiaries are met despite the conflict;
  (iii)   to ensure that the interests of the beneficiaries are not adversely affected by the conflict; and
  (iv)   to comply with the prudential standards in relation to conflicts;
(e)   not to enter into any contract, or do anything else, that would:
  (i)   prevent the director from, or hinder the director in, properly performing or exercising the director's functions and powers as director of the trustee; or
  (ii)   prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee's functions and powers as trustee of the entity; and
(f)   to exercise a reasonable degree of care and diligence for the purposes of ensuring that the trustee carries out the covenants referred to in s52.

These covenants operate as if the director were a party to the governing rules (s52A(6)).

The obligations of the director under (d) override any conflicting obligations the director has under Part 2D.1 of the Corporations Act 2001 or Subdivision A of Division 3 of Part 2‑2 of the Public Governance, Performance and Accountability Act 2013 (which deals with general duties of officials) or any rules made for the purposes of that Subdivision (s52A(3)).

The reference in (f) to a reasonable degree of care and diligence is a reference to the degree of care and diligence that a superannuation entity director would exercise in the circumstances of the corporate trustee (s52A(5)).

In the case of SMSFs, the directors of a corporate trustee are subject to a lesser covenant in s52C that each director will exercise a reasonable degree of care and diligence for the purposes of ensuring that the trustee carries out the covenants referred to in s52B. The reference in this context to a reasonable degree of care and diligence is a reference to the degree of care and diligence that a reasonable person in the position of director of the corporate trustee would exercise in the corporate trustee's circumstances (s52C(3)). This covenant also operates as if the director were a party to the governing rules (s52C(4)).

The right to recover damages for breach of a statutory covenant under ss55(1) and (3), mentioned in the notes to the slide about deemed general covenants above, explicitly operate in relation to the deemed covenants by the directors of a corporate trustee of a registrable superannuation entity under s52A (see ss55(4A) - (4D)) and, implicitly, to the deemed covenants by the directors of a corporate trustee of an SMSF under s52C. Accordingly, the directors of a corporate trustee of a regulated superannuation entity can be personally liable to members if they do not comply with these covenants. However, in the case of an action against a director of a registrable superannuation entity for breaching the covenants contained in s52A, the leave of the court is required for a claimant to bring an action against the director for such a breach (ss55(4A) and (4B)).

SISA - Obligations in Relation to Investment Managers
     The trustee of a superannuation entity must not make a non-written appointment of an investment manager of the entity (s124).
     An individual cannot act as an investment manager of a superannuation entity other than a SMSF (s125).
     The trustee of a superannuation entity must ensure that any agreement with an investment manager contains adequate provision to enable the trustee to require the investment manager to provide: (i) appropriate information as to the making of, and return on, the investments of the entity; and (ii) such information as is necessary to enable the trustee to assess the capability of the investment manager to manage the investments of the entity (s102).
     Despite anything in the governing rules of a superannuation entity, any provision of an agreement between the trustee of the entity and an investment manager that purports to exempt the investment manager from liability for negligence, or to limit that liability, is void (s116).
     An investment manager of a superannuation entity must not appoint or engage a custodian of the entity without the written consent of the trustee of the entity (s122).
     Investment managers must also comply with ss65 (prohibition on lending to members of RSF or their relatives), 66 (prohibition on acquisition of assets from related parties of RSF), 98 (prohibition on lending to unitholders in PST) and 109 (investments to be on arm's length terms).

"Investment manager" is defined in SISA s10 to mean a person appointed by the trustee of a fund or trust to invest on behalf of the trustee. These provisions need to be borne in mind if you are ever negotiating an investment management agreement between the trustee of a super fund and an investment manager.

Note that the Financial Services Council has a standard investment management agreement, which can be accessed from the FSC web site, which serves as a useful starting point for commercial negotiations between a superannuation trustee and fund manager. The agreement sets out the duties and powers of the manager, including compliance with the investment instructions provided by the trustee, and regular reporting on investment performance.

SISA s101(1) - Complaints Arrangements
The trustee of a regulated superannuation fund other than a self managed superannuation fund, or of an approved deposit fund, must take all reasonable steps to ensure that there are at all times in force arrangements under which:
(a)   a person referred to in s101(1A) has the right to make an inquiry or a complaint of the kind specified in that section in relation to that person; and
(b)   an inquiry or complaint so made will be properly considered and dealt with within 90 days after it was made. ...

SISA ss101(1A) provides that for the purposes of (1)(a) above, (a) a beneficiary or former beneficiary of a regulated superannuation fund may make an inquiry into, or complaint about, the operation or management of the fund in relation to that person; (b) the executor or administrator of the estate of a former beneficiary of such a fund may make an inquiry into, or complaint about, the operation or management of such a fund in relation to the former beneficiary; and (c) any person may make an inquiry into, or complaint about, a decision of a trustee of such a fund that relates to the payment of a death benefit if: (i) the person has an interest in the death benefit; or (ii) the person claims to be, or to be entitled to death benefits through, a person referred to in (i).

The trustee must also take al reasonable steps to ensure that if a person referred to in s101(1A) makes a complaint that relates to the payment of a death benefit: (i) the person is given written reasons for a decision made by the trustee in relation to the complaint when the person is given notice of the decision; or (ii) if no decision is made in relation to the complaint within 90 days after the complaint is made, the person may, by giving notice in writing to a trustee of the fund, request written reasons for the failure to make a decision in relation to the complaint within that period (s101(1)(c)).

The trustee must further take al reasonable steps to ensure that if a person referred to in s101(1A) makes a complaint of another kind specified in that subsection in relation to the person, the person may, by giving notice in writing to a trustee of the fund, request written reasons for: (i) a decision made by the trustee in relation to the complaint; or (ii) if no decision is made in relation to the complaint within 90 days after the complaint is made, the failure to make a decision in relation to the complaint within that period (s101(1)(d)).

If a notice requesting written reasons is given in the circumstances set out in s101(c)(ii) or (d), the trustee must take al reasonable steps to ensure that the written reasons are given to the person within 28 days after the notice is given, or such longer period as the Regulator, in writing, permits (s101(1)(e)).

SISA s155 - Fair Dealing on Issue or Redemption
The trustee of a public offer entity which is considering issuing a superannuation interest in the entity to, or redeeming a superannuation interest in the entity held by, a person, where either:
(i)   the trustee believes on reasonable grounds that the price at which, under the governing rules of the entity, the interest would be issued or redeemed would not, in the circumstances, be fair and reasonable as between the person and the beneficiaries of the entity; or
(ii)   the trustee cannot, for whatever reason, work out the price at which, under the governing rules of the entity, the interest should be issued or redeemed,
must not do so except at a price that is fair and reasonable as between the person and the beneficiaries of the entity.

SISA s155(3) provides that if the trustee issues or redeems the interest at such a price, the trustee is taken to have acted in accordance with the governing rules of the entity. A contravention of s155 is not an offence, but it may give rise to civil liability under s156.

SISR r13.15A(1) - Derivatives Risk Statements
A trustee may give a charge over, or in relation to, an asset of a fund if:
(a)   the charge is given in relation to a derivative to which the trustee, or an agent acting on behalf of, on instructions of, on account of or for the benefit of the trustee, is a party;
(b)   the charge complies with rr13.15A(1A), (1B) or (1C);
(c)   the fund has in place a derivatives risk statement that sets out:
  (i)   policies for the use of derivatives that include an analysis of the risks associated with the use of derivatives within the investment strategy of the fund;
  (ii)   restrictions and controls on the use of derivatives that take into consideration the expertise of staff; and
  (iii)   compliance processes to ensure that the controls are effective (for example, reporting procedures, internal and external audits and staff management procedures); and
(d)   the investment to which the charge relates is made in accordance with the derivatives risk statement.

Click here for a copy of the Superannuation Industry (Supervision) Regulations.

SISR r13.15A operates as an exception to SISR r13.14, which prescribes as a standard applicable to the operation of all RSFs and ADFs that the trustee of a fund must not give a charge over, or in relation to, an asset of the fund. Again, it is needed because many exchanges require clients or their brokers to lodge margin which is charged in favour of the relevant exchange or clearing house to secure performance of the client's obligations under derivatives and futures contracts.

SISR rr13.15A(1A), (1B) and (1C), referred to in (b) above, identify the types of situations where charges are typically imposed under the law or the rules of the relevant exchanges or clearing houses.

SISR r13.15A(2) and schedule 4 define "approved body" to include various stock and futures exchanges including the ASX, ASX 24 and their associated clearing houses. SISR r13.15A(2) also defines "derivative" as meaning a derivative (within the meaning of CA Chapter 7), a foreign exchange contract (within the meaning of that Chapter) and an arrangement that is a forward, swap or option, or any combination of those things, in relation to one or more commodities, but not to include any arrangement that is of a kind mentioned in r6(2) of the Payment Systems and Netting Regulations 2001 (r6(2) identifies obligations that are not eligible obligations in relation to a close‑out netting contract and includes credit facilities, reciprocal purchase agreements (otherwise known as repurchase agreements), sell‑buyback arrangements, securities loan arrangements, contracts of insurance and managed investment schemes).

CR r7.9.37(1) Disclosure in Periodic Statements
The "fund information" to be disclosed in the periodic reports under s1017DA by superannuation entities includes: ...
(h)   a statement regarding the funds policy toward the use of derivative securities;
(i)   if the derivatives charge ratio of the fund (as defined in the SIS Regulations) exceeded 5% at any time during the reporting period:
  (i)   the derivatives charge ratio as at the end of the reporting period;
  (ii)   the highest derivatives charge ratio attained during the reporting period;
  (iii)   an explanation of why the derivatives charge ratio exceeded 5%; and
  (iv)   an explanation of the meaning of derivatives charge ratio in, or to the effect of the following:
    "The derivatives charge ratio is the percentage of the total market value of the assets of the fund (other than cash) that the trustee has charged as security for derivatives investments made by the trustee.".

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Overview of Retirement Savings Account Act 1997

RSAA s8 - Definition of RSA
An RSA, or retirement savings account, is an account or a policy:
(a)   that is described as an RSA;
(b)   that is provided by an entity that is an RSA institution at the time the account is opened or the policy is issued;
(c)   that is capital guaranteed (see s14);
(d)   that is held by a person who is an eligible person at the time the account is opened or the policy is issued (ie they satisfy any prescribed criteria - see s13);
(e)   that, at the time that it is opened or issued, satisfies the requirements in s15 and any prescribed criteria.

Click here for a copy of the Retirement Savings Account Act 1997.

RSAs are intended to be simple, low cost capital-guaranteed alternatives to superannuation. RSAs are subject to concessional rules under income tax and social security law.

An RSA can only be provided by a life insurance company as a policy (s8(2)).

RSAA s11 - Who is an RSA Institution?
(1)   A person is an RSA institution at a particular time if there is an approval under s26 in force in relation to the person at that time which has not been suspended or revoked under s33.
(2)   Only an ADI or a life insurance company or a prescribed financial institution can be approved as an RSA institution.

No financial institutions have been prescribed for the purposes of s11(2).

RSAA s15 - RSA Benefits
An RSA must be maintained to provide one or more of the benefits below:
(1)   benefits for the holder of the RSA on or after one of, or the earlier of, the following:
  (a)   the holder's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the holder was engaged (whether the holder's retirement occurred before, or occurred after, the holder's account was opened);
  (b)   the holder's attainment of an age not less than the age specified in the regulations;
(2)   benefits in respect of the holder of the RSA on or after the holder's death, if:
  (a)   the death occurred before (1)(a) or (b) above: and
  (b)   the benefits are provided to the holder's legal personal representative, to any or all of the holder's dependants, or to both.

The specified age is 65 years (Retirement Savings Account Regulations r6.11).

As long as the RSA is maintained to provide one or more of the benefits above, it may also be maintained to provide one or more of the following:

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benefits for the holder on or after the termination of the holder's employment with an employer who had, or any of whose associates had, at any time, contributed amounts in the account;

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benefits for the holder on or after the holder's cessation of work, if the work was for gain or reward in any business, trade, profession, vocation, calling, occupation or employment in which the holder was engaged and the cessation is on account of ill-health (whether physical or mental);

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benefits in respect of the holder on or after the holder's death, if the benefits are provided to the holder's legal personal representative, to any or all of the holder's dependants, or to both and the death occurred after (1)(a) or (b) above;

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such other benefits as APRA approves in writing (RSAA s15(4)).

 

RSAA ss38 and 39 - Operating Standards for RSAs
     The regulations may prescribe standards applicable to the operation of RSAs and RSA providers must comply with applicable standards at all times.
     A person who intentionally or recklessly fails to comply with applicable operating standards is guilty of an offence punishable on conviction by a fine not exceeding 100 penalty units.

 

RSAA ss40 and 41 Certain Arrangements etc. Not Permitted
     An RSA provider must not enter into any interest off-set arrangements or combination account arrangements where one of the accounts involved is an RSA (s40(1)).
     Any term or condition in a contract or other agreement providing for a charge, mortgage, lien or other encumbrance over, or in relation to, an RSA is of no effect (s41(1)).
     Benefits provided under an RSA in relation to an RSA cannot be assigned (s41(2)).
     An RSA provider must not recognise, or in any way encourage or sanction, a charge, mortgage, lien or other encumbrance over an RSA or an assignment of benefits provided under an RSA (s41(3)).

 

RSAA s78(1) - Improper Conduct in the Provision of RSAs
An RSA provider, or an associate of an RSA provider, must not:
(a)   supply, or offer to supply, goods or services to a person;
(b)   supply, or offer to supply, goods or services to a person at a particular price; or
(c)   give or allow, or offer to give or allow, a discount, allowance, rebate or credit in relation to the supply, or the proposed supply, of goods or services to a person;
on the condition that one or more of the employees of the person will hold, or has applied or agreed to hold, an RSA provided by the RSA provider. An RSA provider, or an associate of an RSA provider, also must not refuse to do (a), (b) or (c) above, for the reason that one or more of the employees of the person does not hold, or has not applied or agreed to hold, an RSA provided by the RSA provider.

 

CR r7.9.28 - Information for RSA Holders Where Amount Reaches $10,000
If the amount of an RSA at the end of a reporting period is at least $10,000, the periodic statement under s1017DA for that reporting period must include the following:
(a)   a statement of that fact;
(b)   a statement that the information contained in the periodic statement is important and that the notice must be read carefully;
(c)   a statement that outlines the effect of the lower-risk/lower-return nature of the RSA on possible benefits in the long term;
(d)   a suggestion that the RSA holder may wish to consider:
  (i)   other superannuation arrangements that may provide a greater return over the long term; and
  (ii)   seeking advice on alternative investment strategies that may be more suitable.

CR r7.9.19 sets out the general requirements that must be met for periodic statements for RSAs. CR r7.9.22(2) provides that a periodic statement for an RSA holder must also include: (a) a statement that outlines the effect of the lower‑risk/lower‑return nature of the product on possible benefits in the long term; and (b) a suggestion that the RSA holder may wish to consider other superannuation arrangements that may provide a greater return over the long term and seeking advice on alternative investment strategies that may be more suitable.

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Marketing Insurance and Superannuation Products

CA s761G(5) - General Insurance Products
A general insurance product or service that relates to a general insurance product is provided to a person as a retail client if:
(a)   either:
  (i)   the person is an individual; or
  (ii)   the insurance product is or would be for use in connection with a small business (see s761G(12)); and
(b)   the product is motor vehicle, home building, home contents, sickness and accident, consumer credit, travel or personal and domestic property insurance or a kind of general insurance product prescribed by regulations made these purposes.
Otherwise, a general insurance product or a service related to such a product that is provided to a person is not provided to them as a retail client.

This basically means that the $500K+ and wealthy and sophisticated investor exclusions in ss761G(7) and 761GA do not apply to most general insurance products.

Note that you don't need a financial services licence just to handle or settle an insurance claim on behalf of a client (CR r7.1.33).

CA s761G(6) Superannuation and RSA Products
(a)   An interest in a pooled superannuation trust that is provided by the trustee of that trust to a person covered by (b)(i) below is not provided to them as a retail client.
(b)   A financial service related to a superannuation product or an RSA product that is provided to:
  (i)   the trustee of a superannuation fund, an approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme (within the meaning of SISA) that has net assets of at least $10 million; or
  (ii)  an RSA provider (within the meaning of the RSAA),
  is not provided to them as a retail client.
Otherwise, a superannuation product or RSA product or a service related to such a product that is provided to a person is provided to them as a retail client.

Again, this basically means that the $500K+ and wealthy and sophisticated investor exclusions in ss761G(7) and 761GA do not apply to superannuation or RSA products.

Note that ASIC has said in Media Release 14-191 that it will apply the wholesale investor test to SMSFs in a somewhat more relaxed manner. ASIC says that where the trustee of an existing SMSF receives advice about how to invest the fund's assets, ASIC will not take action provided the person providing the advice confirms that the trustee is a wholesale client based on the general test in s761G(7) (eg if the trustee has a certificate from a qualified accountant stating they have net assets of $2.5 million or if the value of the investment is at least $500,000), rather than applying the higher $10 million net asset test in s761G(6)(b)(i). ASIC will also adopt a similar approach to a trustee who subscribes for financial products on behalf of an existing fund. However, ASIC has warned that although it may not take action where financial services are provided on a wholesale basis to trustees of existing superannuation funds with less than $10 million in these circumstances, this will not affect private rights of action that may be available to third parties. ASIC has therefore cautioned that persons providing financial services to trustees of SMSFs need to make their own commercial decision on this issue, after considering the legal risks.

Licensing and Disclosure Requirements
     Persons who carry on a business of advising on, or dealing in, insurance, superannuation or RSA products need a financial services licence authorising them to provide that service or to be an authorised representative of such a licensee.
     As most clients will be acquiring products as retail investors, advisers generally need:
      Financial Services Guide
      Statement of Advice for any advice given
      Product Disclosure Statement for any products recommended
      To act in the best interests of the client when giving personal advice
      To avoid conflicted remuneration and comply with ongoing fee requirements
      To warn if giving personal advice based on incomplete or inaccurate information or if giving general advice
      Dispute resolution systems
      Compensation arrangements.

CA s1010B(2)(b) provides that the issue of any superannuation product is taken to occur in the course of a business of issuing financial products, ensuring that a PDS is always required for the issue of a superannuation product.

In ASIC v PFS Business Development Group Pty Ltd [2006] VSC 192, the Supreme Court of Victoria held that companies engaged in establishing and marketing self-managed superannuation funds were carrying on a "financial services business" that required the holding of an Australian financial services licence.

It should be noted that there are substantial modifications of, or embellishments to, these requirements in the Corporations Regulations.

By way of example, under CR r7.7.10, it is no longer necessary for an SOA to be given in relation to most general insurance products other than sickness and accident insurance or consumer credit insurance.

CR r7.7.08A also permits a combined FSG and PDS to be issued as a single document for general insurance and life risk insurance products if the providing entity is the product issuer or a representative or a related body corporate of the product issuer. Note that CR r7.7.08A does not apply to a superannuation product to which Subdivision 4.2B of Division 4 of Part 7.9 applies (r7.7.08A(1C)). The reason is that the Government wants to ensure that the consumer is provided with a short and simple PDS for superannuation products (see below), and combining the PDS with other documents is not consistent with this objective.

By way of further example, there are modifications to the PDS and application form requirements for employer sponsored and successor funds in CR rr7.9.12, 7.9.13 and schedule 10A. CR r7.9.14 also modifies the right to return a superannuation or RSA interest that has been issued or sold in contravention of s1016E where it is subject to preservation rules or cashing restrictions.

Note also that the obligation in s961B for an adviser to act in the client's best interests is scaled down for general insurance products (see CA s961B(4)). Similarly, the obligation to give priority to a client's interests in s961J does not apply if the subject matter of the advice sought by the client is solely a general insurance product (s961J(3)), nor does the restriction on conflicted remuneration (ss963B(1)(a) and 963C(a) and r7.7A.12G).

Some of the tensions between the requirement for an adviser to act in the client's best interests and the common practice of remunerating life insurance salespersons by commission are highlighted in ASIC's 2005/06 investigation into insurance advice provided by GE Money. Following a review of over 150 customers files, ASIC became concerned about a number of GE Money insurance sales practices, including: (1) GE Money had a practice of advising customers to take out consumer credit insurance life cover (which would pay out the GE Money loan on their death) as well as a term life policy (which would pay a lump sum on death to the customer's estate) when it would have been cheaper for the customer to take out one term life policy to achieve the same result; (2) GE Money routinely advised customers, who were single and had no dependants, to take out life insurance to pay out the loan to GE Money when it was not clear that it was in the customer's interests to do so; (3) GE Money might have recommended that customers take out more life insurance than they needed because GE Money: (a) routinely did not take into account the level of customers' superannuation savings; (b) sometimes did not take into account life insurance cover that was part of customers' superannuation; and (c) sometimes recommended a higher level of insurance cover than the customer records suggested they needed; and (4) where an existing customer sought further credit, GE Money's practice was to provide a new loan package (incorporating the existing loan balance) and replace the existing CCI life policy with a new one. These customers were not told about the potential problems with this approach, including that if a health condition arose before the issue of the replacement policy, they might not be able to make a claim. GE Money ultimately gave enforceable undertakings to ASIC that it would: (1) stop recommending that customers take both CCI life and term life policies; (2) stop advising single customers with no dependants to take out life insurance to pay the GE Money loan unless there is a clear benefit to the customer; (3) undertake a review, both internally and by an independent compliance expert, of its sales practices; and (4) offer compensation to affected consumers. See ASIC Media Release 06-080.

CR r7.9.11O Modified PDS Requirements for Superannuation Products
A PDS for a superannuation product to which Subdivision 4.2B of Division 4 of Part 7.9 applies must:
(a)   include the information and statements mentioned in CR schedule 10D; and
(b)   be in the form mentioned in CR schedule 10D.

Subdivision 4.2B of Division 4 of Part 7.9 applies to all superannuation products, other than those that consist solely of an interest in a defined benefits fund, a pension product or a superannuation product that has no investment component (also known as a risk‑only superannuation product) (CR r7.9.11K). Combined accumulation/pension products and combined accumulation/defined benefits products are still included in the regime. However, a person is able to apply to ASIC, on a case-by-case basis or on a product-wide basis, for relevant relief from these requirements, where appropriate.

The modified PDS requirements for superannuation products in CR schedule 10D are quite prescriptive. For example, the length of a PDS (not including any matter in writing that is applied, adopted or incorporated by the PDS) for must not exceed: (a) 8 pages if it is printed on A4; (b) 16 pages if it is printed on A5; or (c) 24 pages if it is printed on DL. The minimum font size for text in the PDS is 8 points for the name, address, ABN, ACN and AFSL of the person giving the PDS and 9 points for all other text.

The PDS must include sections which must be numbered and titled as follows:

1. About [name of superannuation product]

2. How super works

3. Benefits of investing with [name of superannuation product]

4. Risks of super

5. How we invest your money

6. Fees and costs

7. How super is taxed

8. Insurance in your super

9. How to open an account.

The PDS may include additional sections after sections 1 to 9 and may include other information, provided it does not contravene the limitations on length mentioned above. The regulations contain further requirements as to what can and can't be included in each section mentioned above.

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Insurance Agents and Brokers

The Difference Between an Agent and a Broker
Agent = an agent of the insurer whose function is to procure persons to insure with his or her principal.
Broker = an independent consultant who is engaged by, and acts as the agent for, an intended insured to locate and secure suitable insurance cover. Insurance brokers are, however, unlike other agents in that:
     their commission is usually paid by the insurer and not their principal; and
     they often act under "binders" from insurers, which are authorities given to them by an insurer permitting them to enter into insurance contacts on behalf of the insurer and to deal with and settle claims against and on behalf of the insurer (see s761A).

Note that the Insurance (Agents and Brokers) Act 1974 was repealed as part of the FSR reforms, although many of the provisions in the Act were simply carried across to the Corporations Act or Corporations Regulations.

Binders and the fact that a broker's commission is usually paid by the insurer can create divided loyalties and raise conflict issues to which brokers need to be particularly sensitive.

A particularly egregious example of this emerged in October 2004, when NY Attorney General Eliot Spitzer announced that he was suing the leading US insurance brokerage firm, Marsh & McLennan, alleging that it steered unsuspecting clients to insurers with whom it had lucrative payoff agreements and that the firm solicited rigged bids for insurance contracts. The accompanying civil complaint alleged that for years Marsh received special payments from insurance companies that were above and beyond normal sales commissions. These payments, known as "contingent commissions", were characterized as compensation for "market services" but were, in fact, rewards for the business that Marsh and its independent brokers steered and allocated to the insurance companies. The complaint also alleged that Marsh occasionally solicited fake bids to deceive its customers into thinking that true competition had taken place for their insurance business. The complaint culminated in a settlement agreement under which Marsh & McLennan agreed to pay US$850 million in restitution to its policyholders, to adopt a new business model designed to avoid conflicts of interest and to issue a public statement apologising for "unlawful" and "shameful" conduct.

Subsequently, ASIC conducted a review of the remuneration practices of general insurance brokers in Australia (Report REP42 Insurance Broker Remuneration Arrangements). The review did not find any evidence of the kind of systemic abuses uncovered in the US. ASIC did, however, identify some deficiencies in relation to Australian brokers' management of conflicts of interest and disclosure of remuneration. The review also highlighted the inherent conflict in the practice of paying volume bonuses or other types of contingent remuneration to brokers. In particular, ASIC found that more than half the brokers reviewed had contingent remuneration arrangements in place and most of those brokers placed a significant proportion of their business with insurers that paid extra commissions based on the volume of business placed with them.

CA s916E - Licensees Acting Under a Binder
(1)   Despite s916D, a financial services licensee (the authorised licensee) may be the authorised representative of another financial services licensee who is an insurer, if the authorised licensee acts under a binder given by the insurer.
(2)   For all purposes connected with contracts that are risk insurance products, or with claims against the insurer, in respect of which the authorised licensee acts under the binder:
  (a)   the authorised licensee is taken to act on behalf of the insurer and not the insured; and
  (b)   if the insured in fact relied in good faith on the conduct of the authorised licensee, the authorised licensee is taken to act on behalf of the insurer regardless of the fact that the authorised licensee did not act within the scope of the binder.

CA s916D generally prohibits an AFSL holder from acting as an authorised representative for another licensee. S916E(1) provides an exception to that rule for a licensee acting under a binder given by an insurer.

S916E(2) makes it clear that when the broker is purporting to act under a binder, the broker is acting as agent for the insurer (reversing the common law position that a broker is the agent of the insured). This is so even if the broker actually exceeds their authority under the binder.

The FSG used by a broker which acts under a binder must identify the services provided under the binder, state that they are provided under a binder and explain the significance of the services being provided under a binder (see ss942B(2)(i) and 942C(2)(j)).

The Common Law Duties of Brokers
Per Kirby P in Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1995) 25 NSWLR 541, at 555-6:
"1. The duty in law of a broker who is engaged to secure insurance on behalf of a client is [to] exercise proper care and skill in carrying out the assured' s instructions
2. The foregoing duty does not extend to expounding the law to the insured. But it does extend to pointing out legal pitfalls which might arise in the course of effecting a valid insurance cover and in securing cover for the risk necessary to the insured's disclosed or ascertained needs ...
5. It is especially important that an insurance broker should go through with the insured the list of exceptions in the policy secured. This should be done in order to afford the insured, who may fall within an exception, the opportunity to request deletion of the exception upon payment of a higher premium or cover with another insurer."

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Insurance Premiums

CR r7.8.01(4) Insurance Money may be Paid into Trust Account
Money paid to a financial services licensee from or on behalf of:
     an insured or intending insured for or on account of an insurer in connection with a contract of insurance or proposed contract of insurance; or
     an insurer for or on account of an insured or intending insured,
is money which may be paid into [a client trust] account to which s981B applies.

 

CR r7.8.02(6) Minimum Trust Account Balance Requirements for Insurance Products
In relation to moneys received in relation to insurance products, the financial services licensee must ensure that:
(a)   the balance of moneys in an account maintained by the financial services licensee under s981B; and
(b)   the total amount previously withdrawn from the account and currently invested under r7.8.02(2);
is at least the sum of:
(c)   any amounts that an insurer is entitled to receive from the account; and
(d)   any amounts that an insured or intending insured is entitled to receive from the account.

The effect of this regulation is to require the licensee to make good any shortfall in its trust account. The insurer and insured are still entitled to amounts even if they have been withdrawn from the trust account and invested (r7.8.02(6A) and (6B)). ASIC has power to waive this minimum balance requirement (r7.8.02(6C)).

CA s985B - Status of Amounts Paid in Respect of Contracts of Insurance
(1)   If:
  (a)   a contract of insurance is arranged or effected by a financial services licensee; and
  (b)   the licensee is not the insurer;
  payment to the licensee of money payable (whether in respect of a premium or otherwise) by the insured under or in relation to the contract is a discharge, as between the insured and the insurer, of the liability of the insured to the insurer in respect of that money.
(2)   Payment to a financial services licensee by or on behalf of an intending insured of money (whether in respect of a premium or otherwise) in respect of a contract of insurance to be arranged or effected by the licensee with an insurer (not being the licensee) is a discharge, as between the insured and the insurer, of any liability of the insured under or in respect of the contract, to the extent of the amount of the payment.
(3)   Payment by an insurer to a financial services licensee of money payable to an insured, whether in respect of a claim, return of premiums or otherwise, under or in relation to a contract of insurance, does not discharge any liability of the insurer to the insured in respect of that money.
(4)   An agreement, so far as it purports to alter or restrict the operation of s985B(1), (2) or (3), is void.
(5)   S985B(4) does not make void an agreement between a financial services licensee and an insured in so far as the agreement allows the licensee to set off against money payable to the insured money payable by the insured to the licensee in respect of premiums.

This repeats provisions that used to be found in s14 of the Insurance (Agents and Brokers) Act and reverses the position that would otherwise apply at common law because the broker acts as agent for the insured and not the insurer. The common law position was that payment of an insurance premium by the insured to the broker did not discharge the liability of the insured to the insurer for the premium so that if the broker became insolvent without accounting for the money to the insurer, the insurer could still recover the premium from the insured (Con-Stan Industries (Aust) Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226). Now payment to the broker is a good discharge to the insured.

Note that this section applies whether or not there is a binder in place between the insurer and the licensee.

CR r7.8.05 Money Held on Trust for Insurer Once Risk Accepted
If, in relation to an insurance product:
(a)   a financial services licensee is holding client money; and
(b)   the risk in relation to the insurance product has been accepted by an insurer,
the financial services licensee holds the money on trust for the insurer in accordance with Division 2 of Part 7.8 of the Act, subject to the agreement of the insurer. However, to the extent the money is held in a s981B account, the financial services licensee is entitled to the interest on the account and that interest need not be paid into the account.

 

CR r7.8.08(1) and (2) Payment of Premiums to Insurers
Where:
(a)   money is received by a financial services licensee: (i) from or on behalf of an insured or intending insured, or from another financial services licensee on behalf of an insured or intending insured; and (ii) as a premium or an instalment of a premium in connection with a contract of insurance or a proposed contract of insurance;
(b)   the risk, or a part of the risk, to which the contract or proposed contract relates is accepted by or on behalf of an insurer; and
(c)   the financial services licensee who so received the money is informed of, or otherwise ascertains, the amount of the premium or instalment to be paid,
the money must be paid to the insurer:
(d)   within 90 days after: (i) the day on which the cover provided by the insurer under the contract starts to have effect; or (ii) the first day of the period to which the instalment relates; or
(e)   if it is not practicable for the financial services licensee to pay the amount in that period - as soon as practicable after the end of that period.

CR rr7.8.05 and 7.8.08 are based on s27 of the Insurance (Agents and Brokers) Act. Together, they recognise a practice in the insurance broking industry where brokers retain premiums paid by clients for some time before paying them over to the insurer and keep the interest they earn on the retained funds. CR7.8.08 fixes the maximum period that this can occur generally as 90 days from when risk coverage starts.

CR r7.8.08(3) provides that if the licensee has not received the amount of the premium, or of an instalment of the premium, payable in respect of a contract of insurance at the end of the period referred to in (d) above, the licensee must notify the insurer in writing, not later than 7 days after the end of that period, that the licensee has not received the amount. There are provisions in CR rr7.8.08(5)-(9) to deal with the situation where the licensee has not been informed of, and has not otherwise ascertained, the amount of the premium or instalment to be paid.

CR r7.8.08(10) provides that nothing in CR7.8.08 prevents:

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an insurer from making a contract or arrangement for the licensee to pay an amount to the insurer before the 90 day period has expired;

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an insurer from authorising a licensee in writing to pay on behalf of the insurer from out of the money received by the licensee any charges required by law to be paid by the insurer in respect of the contract of insurance (eg stamp duty); or

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a licensee from exercising any legal right to deduct from any moneys payable by the licensee to the insurer any remuneration payable by the insurer to the licensee in relation to a contract of insurance.

 

CR r7.8.08(13)-(15) Refund of Premiums to Clients
If:
(i)   a financial services licensee receives money from, or on behalf of, an insured or intending insured in connection with a contract of insurance or proposed contract of insurance; and
(ii)   at the end of 30 days after the day on which the money was received, the risk, or a part of the risk, to which the contract or proposed contract relates has not been accepted,
the financial services licensee must, within 7 days after the end of the 30 day period:
(a)   give notice in the approved form to the insured or intending insured of the extent to which the risk has not been accepted; and
(b)   return that part of the money that relates to the part of the risk that has not been accepted to the insured or intending insured.

 

CR r7.8.08(16) Payment of Other Amounts to Clients
If a financial services licensee receives money from, or on behalf of, an insurer for payment to, or on behalf of, an insured, the financial services licensee must pay an amount equal to the money to, or on behalf of, the insured:
(a)   within 7 days after the day on which the financial services licensee received the money; or
(b)   if it is not practicable for the financial services licensee to pay the amount in that period - as soon as practicable after the end of the period.

CR r7.8.08(17) provides that nothing in r7.8.08(16) prevents:

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an insured from making a contract or arrangement with a insurance financial services licensee providing for the financial services licensee to pay an amount mentioned in that subregulation to or on behalf of the insured before the time by which the financial services licensee is required by that subregulation to pay that amount to or on behalf of the insured; or

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a financial services licensee from exercising any legal right available to the financial services licensee to deduct from an amount payable by the financial services licensee to the insured any money payable by the insured to the financial services licensee in connection with a contract of insurance.

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Industry Codes of Practice

General Insurance Code of Practice
     General Insurance Code of Practice - intended to promote better, more informed relations between insurers and their customers; to improve consumer confidence in the general insurance industry; to provide better mechanisms for the resolution of complaints and disputes between insurers and their customers; and to commit insurers and the professionals they rely upon to higher standards of customer service.
     General Insurance Brokers' Code of Practice - intended to promote informed and effective relationships between insureds, insurers and insurance brokers.

The General Insurance Code covers all general insurance products except workers compensation, marine insurance, medical indemnity insurance, and compulsory third party insurance including where there is linked driver protection cover. It does not cover reinsurance. It does not apply to life and health insurance products issued by: a) life insurers; or b) registered health insurers.

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The Superannuation Complaints Tribunal

Superannuation (Resolution of Complaints) Act 1993 s11 - Tribunal Objectives
The SCT must, in carrying out its functions or exercising its powers under this Act, pursue the objectives of providing mechanisms for:
(a)   the conciliation of complaints;
(b)   if a complaint cannot be resolved by conciliation - the review of the decision or conduct to which the complaint relates;
that are fair, economical, informal and quick.

Click here for a copy of the Superannuation (Resolution of Complaints) Act 1993.

The Superannuation (Resolution of Complaints) Act establishes the Superannuation Complaints Tribunal. It is funded by a levy on trustees of regulated superannuation funds.

Jurisdiction of SCT
The SCT has jurisdiction to deal with complaints about:
     decisions of trustees of regulated super funds or ADFs (s14);
     decisions of trustees to admit persons to life policy funds (s14A);
     conduct of insurers concerning the sale of annuity policies (s15A);
     decisions of insurers under annuity policies (s15B);
     statements given to the Commissioner of Taxation by superannuation providers (s15CA);
     conduct of RSA providers concerning the opening of RSAs (s15E);
     decisions of RSA providers (s15F);
     conduct of insurers concerning the sale of insurance benefits where the premiums are paid from an RSA (s15H); and
     decisions of insurers under contract of insurance where the premiums are paid from an RSA (s15J).

 

Other Matters Concerning the SCT
     SCT may not deal with a complaint unless the complainant has first attempted to have the matter resolved directly with the trustee, insurer or RSA provider (s19).
     SCT may not deal with a complaint if the subject matter of complaint is the subject of court proceedings (s20).
     SCT first attempts to conciliate the complaint and, if that fails, conducts a formal hearing.
     A party is not entitled to be legally represented unless they are under a disability or the SCT otherwise consents (s23).

Section 23(1) allows a body corporate or unincorporate to be represented by a responsible officer of the body.

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