Banking royal commission: Insurers could face criminal charges

Australian Financial Review Sep 21 2018 6:59 PM

James Frost


The royal commission has heard a host of insurers have systematically broken laws, many of them carrying criminal penalties, in an explosive final day of hearings on the insurance industry.

The open findings were delivered to the Hayne royal commission on Friday afternoon and were made even more embarrassing when Financial Services Council chief executive Sally Loane was unable to answer general questions about the industry and developments in relevant markets.

In response to a question about the code of conduct Ms Loane said she didn't know. "As I said, I'm CEO. I have a lot of people on my staff."

Counsel assisting the commission Rowena Orr, QC, presented the damaging findings, saying it was open to commissioner Kenneth Hayne to find evidence of insurance companies acting unconscionably, making false and misleading statements and breaching professional standards with alarming regularity.

Treasurer John Frydenberg commended the royal commission for identifying the behaviour and said the government was prepared for the release of the interim report, due on Friday.

"We cannot see a repeat of some of the conduct that we've seen to date – fees for no service, fees for dead people," he said.

Included in a catalogue of breathtaking behaviour revealed were CommInsure's refusal to payout breast cancer claims unless there was a mastectomy, TAL's hiring of a private eye to spy on an ex-nurse's swimming pool visits and AMP's practice of charging life insurance premiums to dead customers.

Other improper behaviour to emerge from insurers were Allianz's sale of two million travel policies using misleading statements, REST's decision to hand back a paraplegic's insurance payout to a global insurer and Suncorp's charging homeless bushfire victims for house and contents policies.

Ms Orr singled out Clearview Direct's "substantial and insurmountable culture problems" and its "seriously inadequate" risk systems as contributing to breaches, including as many as 303,000 breaches of the anti-hawking provisions of the Corporations Act under section 992A for cold calling.

She said it was open for the Commissioner to find evidence of unconscionable conduct, misleading and deceptive conduct, breaches of good faith duty and the failure to do all things necessary to provide financial service efficiently, honestly and fairly under 912A of the Corporations Act.

Freedom Insurance, which used boiler rooms to sell worthless insurance to vulnerable customers, was also berated for its "extremely heavy handed" methods and the "belittling tone of internal communications" in relation to a customer who had Down syndrome and was bulldozed into buying a policy by a British backpacker incentivised by company booze cruises and trips to Bali.

'A particularly affecting record'

Commissioner Hayne interrupted proceedings at this point to highlight the conduct involved, citing the audio call of the man having difficulty repeating a phrase in order to cancel the policy as "a particularly affecting record".

Ms Orr said it was open to find evidence of unconscionable conduct in five cases where sales to vulnerable people took place in contravention of 12CA and 12CB of the ASIC Act.

She also highlighted multiple breaches of 912A and 936E of the Corporations Act for its use of high pressure tactics with vulnerable customers, its sales agents receiving conflicted remuneration and other junkets and gifts.

CBA's troubled CommInsure division – ­which has been sold to AIA – was also carved up for misconduct.

Ms Orr said it was open to find CBA breached 12DB of the ASIC Act in relation to false and misleading statements about its insurance policies, which included outdated heart attack definitions and required "radical breast surgery" before it would payout for breast cancer.

Ms Orr said the case studies of revealed "a troubling lack of respect" when it tried to mislead the regulator on several occasions which was in breach of the Financial Ombudsman's terms of reference.

TAL was also given the rounds of the kitchen by both Ms Orr and Commissioner Hayne. Ms Orr singled out TAL's decision to employ an "external investigator, the excessive use of surveillance, bullying tactics and offensive representations" in relation to one traumatised policy holder.

Commissioner Hayne said he was "struck" by the evidence in this case and asked whether more thought needed to be given to whether TAL should be held accountable for exacerbating her condition with the private investigator and the insistence she completes her daily diaries.

Allianz was not spared either. Ms Orr said Allianz may have engaged in misleading and deceptive conduct in relation to the 39 representations about travel insurance; 14 representations about home insurance; 4 representations about motor vehicle insurance; 3 representations about life insurance; and one representation about boat insurance.

She also said its repeated failures to report significant breaches to ASIC in 10 business days meant Allianz may have breached section 912D of the Corporations Act, which is a criminal offence. Allianz may have failed to comply with prudential requirements to have a designated compliance function.

Counsel assisting Mark Costello said AMP's conduct in relation to charging smoker rates as a default and charging dead people premiums for life insurance may have breached sections 29VC and 52 of the Superannuation Insurance Supervision Act, which respectively require the insurance fee to be on a cost recovery basis for MySuper products and require the trustee to exercise degree of care, skill and diligence.

It also may have breached its general obligations under 912A of the Corporations Act as well as 912D for breach reporting failures, which carries criminal penalties, Mr Costello said.

'Insurance on a life that's dead?'

Commissioner Hayne said the circumstances in which AMP deducted the premiums need not be a complicated question, asking "How do you deduct a premium for life insurance on a life that's dead?" he asked.

Earlier in the day Insurance Council of Australia CEO Robert Whelan made clear during his appearance that extending unfair contract terms legislation to include blanket coverage of general insurance contracts would immediately result in higher premiums for policy holders.

"The reinsurers would consider the contracts of Australian insurers to be more risky and more uncertain and prices would be struck on that which would no doubt be greater than the price it is today," Mr Whelan said.

Following Mr Whelan, Financial Services Council chief executive Sally Loane unravelled during an awkward display where she was unable to answer basic questions, with counsel assisting growing increasingly frustrated with the stonewalling during the short hearing.

"You are the CEO of the Financial Services Council and you have been put forward by the Financial Services Council to give evidence on these topics," Ms Orr said.

Under questioning Ms Loane said she did not know whether the FSC supported FOFA, was unaware of a change to UK laws that made it harder for insurers to deny claims and doesn't know why the FSC lobbied Treasury over similar laws here.

She was also unable to offer a defence of the commission structures used by life insurance companies.

"What is all the money for Ms Loane? What is the approximately $6 billion paid in commissions to financial advisers for?" Ms Orr asked.

"I really couldn't say with certainty, these are to do with commissions being paid to advisers for essentially selling their products, this was subject of the ASIC report that triggered the Trowbridge report," Ms Loane said.