Financial Sector Reform (Hayne Royal Commission Response-Protecting Consumers (2019 Measures)) Bill 2019

05 February 2020

I'll briefly summarise the effects of the bill and then review each of the schedules before addressing our amendment. Schedule 1 of the bill extends the unfair-contract terms laws to cover insurance contracts. Schedule 2 of the bill brings funeral insurance into the general financial consumer protections regime. And schedule 3 of the bill introduces a best interest duty for mortgage brokers and provides for regulations to reform mortgage broker remuneration.


I will address schedule 1. Can I say, as a preface, it's deeply disappointing that this wasn't introduced into the House before Christmas. Labor have long communicated to the government that they will have our every cooperation in ensuring that the Hayne royal commission recommendations on the banking and financial sector are implemented posthaste, and we'll do whatever we can, from a parliamentary sense, to ensure that those bills can be debated, debated early, improved where necessary and moved from this place to the other place and enacted. We do this because we take the view that the consumers of Australia rely upon it. We also make the observation that many of the recommendations—in fact, most of the recommendations—of the royal commission were not new to government. I'll go to that point when addressing the unfair-contract terms which are subject to one of the schedules before the House.


Given that they're not new to government, the government should have already implemented most of these recommendations. Work should have been well underway. So it's regrettable that here we are in the first session of this year and we are only now debating this legislation. It's regrettable for a second reason. Any Australian government can predict that, between October, November and December in this country, we approach, with great sadness, the period of natural disasters. Whether it be floods, whether it be cyclones in the north, whether it be bushfires, as we've tragically seen through the summer of 2019-20, or, as we've seen in our nation's capital, devastating hailstorms—all too frequent throughout the summer months—it is a very predictable phenomena. So, against that backdrop, you have to ask yourself: why would any government delay the implementation of legislation which improves the handling of insurance claims—insurance claims that we can predict with calendar certainty are going to increase after the summer period? We can predict with calendar certainty that that is going to occur. As you move through the flood season, the bushfire season, the hail season, you know that those insurance claims are going to increase. And this schedule deals with applying unfair terms to the insurance contracts, providing consumers with additional protections as and when they need to make their claims.


Any responsible government would know that insurance customers are going to need those protections as we move into the natural disaster season. They are not there, they haven't been there; that's bad enough. The government, in the last week of parliament last year, indicated that they were going to introduce this legislation into the parliament. But they chose not to. What was more important to the government than implementing these recommendations that were going to protect insurance consumers? Introducing the already failed union-busting Ensuring Integrity bills. It was a very costly stunt which is going to cost insurance consumers dearly. So if you're struggling with the terms of your unfair insurance contract, if you're struggling with the insurance claims management process and you're wondering who to blame, you need look no further than this mob over here. They were too interested in playing political parlour games and not interested enough in implementing the recommendations of the Hayne royal commission into the banking and financial services sector, most of which have been sitting in the government's lap since 2016.


Let's deal with schedule 1 of the bill. Schedule 1 of the bill brings insurance contracts from the Insurance Contracts Act 1984 into the unfair contracts regime established under the ASIC Act. Many businesses use standard form contracts which are set out on a 'take it or leave it' basis; whether it is a tenant taking out a new tenancy or the purchase of a motor vehicle, it is all too common in the insurance contracts area. These are standard contracts. It's not as if the average consumer sits down with their insurer and negotiates line by line the terms of the contract. They are a standard form contract: 'Here it is. Sign on the dotted line, pay your premium and you have cover.'


This is a reasonable and appropriate business practice when you are dealing with high-volume contracts. But it leaves customers with no power to negotiate with businesses if elements of a standard form contract are unfair. This is why Labor introduced the unfair contract terms regime in 2010—to protect consumers from exploitation and unfairness. Under the regime, terms in standard contracts are nullified if they are found to be unfair by a competent judicial authority. This provides powerful protections to consumers from exploitative business practices. But, until now, insurance contracts have been exempt, for the most part, from this regime.


These reforms have been a long time coming. It was highlighted as an issue by Commissioner Hayne in his final report back in February last year, which recommended that unfair contract terms be extended to cover insurance contracts. But that wasn't the first time that this recommendation has been made to government after thoroughgoing research and consultation with industry. Indeed, it was recommendation 6 of the Australian Competition and Consumer Commission's interim report into the Northern Australia insurance in 2018. It was recommendation 3.1 of the bipartisan report of the 2018 Parliamentary Joint Committee on Corporations and Financial Services inquiry into the life insurance industry. Indeed, in 2017, a year earlier, the Senate Economics Committee conducted an inquiry into the general insurance industry and at recommendation 11 they made a clear recommendation to government on exactly the same thing. We can go back to the 2017 Australian Consumer Law review. At proposal 10 it was exactly the same recommendation. I simply ask this: given that the coalition had report after report after report and recommendation after recommendation after recommendation, why is it that it has taken until today for these amendments to be introduced into the parliament and debated?


A 2012 government report estimated, from the available data on insurance, that the cost to consumers was somewhere in excess of $10 million a year. The failure of the government to act on report after report and recommendation after recommendation costs consumers $10 million a year. That may be pocket change to those opposite, but to consumers who are struggling with the devastation of a bushfire, their properties devastated by flood or their cars or premises wiped out by hailstones, that is real money that they need in their time of need. We also know that this $10 million is probably at the bottom end of estimations, because most detriment is likely to be underreported. Consumers often fail to claim and often fail to report issues. Since 2012, we have only seen the intensity of floods and bushfires increase.


To take these numbers as given, Australian insurance customers have suffered at least $20 million in detriments from unfair contract terms while the coalition government has sat on report after report after report recommending that they take action, with no action being taken. This means that, while this government has been busy wasting parliamentary time on bills aimed at tearing down workers' protections and workers' rights, Australian families have been left helpless in the face of unfair contract terms. We need a better approach. We need the government to take a serious, concerted, workmanlike approach to the implementation of not only the Hayne commission recommendations but also the series of reports that have recommended the same thing.


These new laws are welcome. They will bring insurance contracts into the unfair contract terms regime. But there are some sensible further refinements that are needed to redress the unique issues relating to insurance contracts. The terms that define the main subject matter of the insurance contract will be excluded from the regime. Terms determining the up-front prices, excesses and deductibles will be excluded where they are disclosed in a transparent manner. The utmost duty of good faith will be unaffected. The utmost duty of good faith, which applies via both statute law and common law to insurance contracts, will persist. These refinements however will ensure that insurers can offer insurance contracts with the knowledge necessary to set prices and assess risks while consumers are protected by the new features of the regime.

I want to go to schedule 2, which deals with funeral insurance. Schedule 2 is the subject of my second reading amendment, which I formally move:

That all words after "That" be omitted with a view to substituting the following words:

"whilst not declining to give the bill a second reading, the House:

(1) notes that:

(a) it has been over 12 months since the Hayne Royal Commission exposed the fact that Aboriginal families have been taken advantage of by the deceptive conduct and the misleading selling of funeral insurance products in Aboriginal communities;

(b) the selling of these products has continued while the Government has delayed the introduction of remedial legislation;

(c) when passed, this bill will present a fundamental challenge to the questionable business model of the marketers of these products; and

(d) if the companies which have promoted those schemes fail, as many as 19,000 policy holders could lose the meagre benefit payments from those policies; and

(2) therefore calls on the Government to work with the Opposition, and representatives of affected communities, to ensure that the policy holders and their families will be protected".


Schedule 2 of the bill ensures that the consumer protection provisions of the Australian Securities and Investments Commission Act 2001 will apply to funeral expenses policies. We are deeply concerned. We congratulate the government on introducing laws to address this matter.


Everything that I have said about the delays in introducing schedule 1 of this bill applies to schedule 2 in double force, because between the time when Commissioner Hayne exposed the rorts and dishonesty in the marketing of funeral insurance, particularly in vulnerable Aboriginal communities, and now the practices have continued.


We still see these little-value or junk insurance products being marketed to vulnerable people in vulnerable communities. We are deeply concerned that that has persisted for more than 12 months—in fact, closer to two years—since the behaviours were originally exposed by the Hayne royal commission. Labour welcome the fact that laws have been introduced but we have some concerns. On 7 December, the shadow minister for Indigenous affairs and myself wrote to the Treasurer outlining our concerns about the consequences of this foreshadowed legislation and I seek leave to table a copy of that letter now.


Leave granted.


Mr STEPHEN JONES: I thank the minister. We welcome the fact that legislation is being moved. The amendments do not—I want to stress this—impact on the treatment of prepaid funerals, which have operated for well in excess of a century by reputable organisations including friendly societies, unions and others. They will continue to operate as funeral benefit funds. But I want to distinguish a product which is marketed as funeral insurance from those funeral benefit funds which will be interrupted by the passage of this legislation. We welcome the change. It is a capstone on a particularly sorry story in our nation's financial history.


Commissioner Hayne was withering in his condemnation of so-called financial expenses policies. They're policies of little value and may be particularly likely to be sold to Aboriginal and Torres Strait Islander people living in remote and regional Australia. The so-called Aboriginal Community Benefit Fund was one such company, one such fund marketing these insurance products. It's a particularly extraordinary story, exposed by the Hayne royal commission, of a for-profit funeral insurance company marketed as an Aboriginal community benefit fund that was run neither by Indigenous Australians for their benefit nor for the benefit of their communities.


This company is still trading, remarkably, as Youpla Group Pty Ltd. It sells insurance funeral products to Indigenous Australians, which leads to them paying more in premiums than their families could ever hope to claim from the policy itself. Extraordinarily, this company has until recently had a direct relationship with Centrelink's Centrepay system, allowing the company to arrange, perhaps with formal consent but—I wager—rarely with the consent of an Aboriginal and Torres Strait Islander person who had available to them the financial advice necessary to ensure that they made a proper decision in respect of that policy. So in a sense, Centrelink's Centrepay system has been incorporated into this great scam. The company has built a business model on exploiting the genuine desires of Indigenous Australians to ensure that their families were not left penniless when they passed away.


Labor welcomes the amendments in this schedule which will see an end to a particularly sorry business model by bringing these products within the regulation of the Australian Securities and Investment Commission and by ensuring that they will be dealt with as if they were any other financial product. It will end the business model which has allowed this exploitation to persist. Labor wants to ensure that approximately 19,000 policy holders who bought funeral insurance on the basis of these dodgy marketing practices will not be left in limbo. We do not want to see these Aboriginal and Torres Strait Islander Australians being ripped off twice.


This was the subject of the letter, which I have tabled, that the shadow minister for Indigenous Australians and I have written to the Treasurer. We think a proactive approach is needed to ensure that these vulnerable Australians do not get ripped off twice. We are very keen to work with the government to ensure that such arrangements can be put in place when and if they are necessary.


I will address schedule 3 of the bill, which introduces a best-interest duty for mortgage brokers that will ensure the consumers' interests are prioritised when a mortgage broker provides credit assistance. This will mean a duty will apply in relation to the provision of consumer credit assistance. The policy also provides a regulation-making power to regulate mortgage broker remuneration. The draft regulations set out by the government require that the value of the up-front commissions be linked to the amount drawn down by borrowers instead of the loan amount. It is often the practice that somebody purchasing a house—let's just say, for argument's sake, a $500,000 house with a $400,000 mortgage—may increase that mortgage by another $20,000, $30,000 or $40,000 to pay for other expenses associated with the moving into, the renovation of or the furnishing of that property. They may not spend all of that money at once. Under previous arrangements, a commission available to a mortgage broker may be available up-front on the full value of that mortgage, whether or not it was drawn down on, ever, or within a certain period of time. The amendments set out in the schedule make sense, and we support them.


The draft regulations also ban campaign and volume based commissions and payments, together with a capping of soft-dollar benefits. I've spoken about the drawdown phenomena and how commissions have been paid. The draft regulations also amend the period over which commissions can be clawed back from aggregators and mortgage brokers, limiting it to two years, and passing on this cost to consumers will be prohibited.


We support the reforms. We do note that the Productivity Commission has found the competitiveness of the Australian home loan market is now dependent on mortgage brokers. This is an important point—not a point fully ventilated through the Hayne royal commission but relevant to another observation I will make. A few years back, fewer than half of all mortgages written in this country went through a mortgage broker. At the beginning of the Hayne royal commission process it was probably around 50 to 55 per cent. Today it's in excess of 60 per cent. That's six out of every 10 mortgage loans that are written in this country for a home loan going through a mortgage broker. They are now well integrated into the financing of the home loan market and the housing market.


The Productivity Commission has acknowledged this. We'd like to see more competition in that area. We've said time and time again that we do not think there is enough competition driving down prices in the home mortgage market. We believe that mortgage brokers, where properly regulated, are a key to driving more competition, particularly within the home mortgage market.


But it's important that we ensure the reforms that are the subject of this bill work as intended. I note that the government has committed to a review of the mortgage broker reforms in three years time. This commitment doesn't appear as a part of the legislation. Labor won't block the passage of this bill, but we will ensure that this review takes place as promised.


I do want to say something about Commissioner Hayne's recommendation on the business model around mortgage brokers. Commissioner Hayne recommended that the commission based business model for the mortgage broker market be ended. The government has taken a different approach to that. This bill does not contemplate at this stage the implementation of the recommendation. I think there are sound reasons for hastening slowly in this area. As I've already said, 60 per cent of the mortgage market is now written through the mortgage broker system. Labor agrees with the government to the passage of this bill and not implementing the recommendation, which would ban commission based payments at this stage, but mortgage brokers are on notice. Mortgage brokers are on notice that the system has to work and it has to work in the interests of the customers that they represent, not the financiers whose products they are facilitating. If it emanates over the period of the next few years and evidence comes forward that that is not the case then we will be ensuring that those remuneration arrangements are subject to the review as recommended by Commissioner Hayne and contemplated by the government—in fact, guaranteed by the government.


So we commend both my amendment, which deals with the subject matter of general insurance, and the bill to all members of this place. It is important that the government get a giddy-up on implementing the royal commission recommendations. When this bill passes the House, as I hope it does swiftly, and goes to the other place—hopefully it will be passed before the end of this sitting fortnight—we will still have only met a grand total of 10 of the 76 recommendations of the Hayne royal commission. I think the community expects that we would have done much, much more than that after the more than 12 months since those recommendations were handed down, particularly when you consider that the vast majority of those recommendations have been presented to government not once, not twice, not three times, not four times but in some cases close to 10 times. With those observations I commend the motion and the amendment to the House.

Mr STEPHEN JONES (Whitlam) (11:00): I'm pleased to be speaking to the motion. I wish to move an amendment to the second reading stage, which I provide to the clerks.

The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 finally implements four of the government's long list of unmet commitments from its response to the banking royal commission. This will, when it finally passes the parliament, bring the government to a grand total of 10 of the 76 recommendations that were made by the Hayne commission into the banking and financial services sector.