ASIC RG 275 — ASIC Regulatory Guide – RG 275 The deferred sales model for add-on insurance

Page 1 REGULATORY GUIDE 275 The deferred sales model for add-on insurance July 2021 About this guide This guide is for issuers and distributors of add-on insurance. It provides guidance on the requirements that apply to providers of add-on insurance when complying with the deferred sales model, and how ASIC will approach applications for exemption from the deferred sales model. Page 2 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This guide was issued in July 2021 and is based on legislation and regulations as at the date of issue. In October 2021 we amended RG 275.29 (and its note), RG 275.31, Table 2 and RG 275.117 following the making of intended regulations under reg 3B and Pt 2A of the ASIC Regulations. In March 2022 we updated the note at RG 275.130 and RG 275.204 to reflect the breach reporting reforms that commenced on 1 October 2021. Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act, Australian Securities and Investments Commission Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 3 Contents A Overview ........................................................................................... 4 Purpose of the deferred sales model for add-on insurance .............. 4 What this guide is about .................................................................... 5 B Scope of the deferred sales model ................................................ 6 Definition of ‘add-on insurance product’ ............................................ 6 Who is a customer? ........................................................................... 7 What is a principal product or service? .............................................. 7 Products offered or sold in connection with a principal product or service................................................................................................ 8 Products that manage financial risk ................................................. 11 Types of contracts that can be add-on insurance products............. 11 Persons who must comply with the deferred sales model .............. 12 Products that are not subject to the deferred sales model .............. 13 C Complying with the deferred sales model .................................. 15 Outline of the deferred sales model ................................................. 15 Pre-deferral period ........................................................................... 17 Deferral period ................................................................................. 19 Post-deferral period ......................................................................... 23 Customer opt-out ............................................................................. 24 Customer right of return and refund ................................................ 25 Record keeping ................................................................................ 26 D Exemptions from the deferred sales model ................................ 27 ASIC’s powers to grant an exemption ............................................. 27 Our general approach to applications for exemption ....................... 28 How to apply for an exemption ........................................................ 29 Appendix 1: Customer Information ..................................................... 33 Appendix 2: Exemption factors ........................................................... 34 Historically good value for money: s12DY(2)(a) .............................. 34 High risk of underinsurance or non-insurance: s12DY(2)(b) ........... 36 Whether the product is well understood by consumers: s12DY(2)(c) .. 38 Differences between the add-on insurance product and similar products: s12DY(2)(d) ..................................................................... 40 Other matters ASIC considers relevant: s12DY(2)(e) ..................... 41 Key terms ............................................................................................... 45 Related information ............................................................................... 47 Page 4 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 4 A Overview Key points The Australian Government introduced the deferred sales model after the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended an industry-wide deferred sales model for add-on insurance. This guide explains: • the scope of the deferred sales model—that is, which products and persons are subject to the deferred sales model; and • the requirements that apply to providers of add-on insurance before, during and after the add-on insurance deferral period (deferral period). This guide also explains ASIC’s powers to grant an individual exemption and how we will approach applications for individual exemptions. Purpose of the deferred sales model for add-on insurance RG 275.1 In 2018, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) considered problems in the add-on insurance market. It found poor-value products, risks of unfair sales practices and outcomes, and worse claims outcomes than in other insurance markets. RG 275.2 To address these issues, the Royal Commission recommended the introduction of an industry-wide deferred sales model for add-on insurance: Recommendation 4.3. The Productivity Commission had earlier recommended a deferred sales model as part of its inquiry into competition in the Australian financial system. Note: See Productivity Commission, Competition in the Australian financial system, inquiry report, June 2018; Royal Commission, Final report, 4 February 2019. RG 275.3 The Government responded to the Royal Commission’s findings and recommendation by introducing a deferred sales model for add-on insurance. The deferred sales model is set out in Pt 2, Div 2, Subdiv DA (s12DO– 12DZA) of the Australian Securities and Investments Commission Act 2001 (ASIC Act). Note: See the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Financial Sector Reform Act). Page 5 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 5 RG 275.4 The deferred sales model requires a clear four-day pause between when a customer enters a commitment to acquire a principal product or service, and when they are offered or sold an add-on insurance product (‘deferral period’). In this guide, we refer to ‘offers’ as also including requests or invitations to the customer to ask for, apply for, or purchase an add-on insurance product). RG 275.5 When developing the deferred sales model, the Government stated: The objective of the proposed deferred sales model is to promote informed purchasing decisions by consumers in add-on insurance markets. The model achieves this by introducing an enforced pause in the sales process between the purchase of a primary product and their decision to purchase add-on insurance. The deferral period will enable and encourage consumers to consider the merits of the insurance offered and to consult alternative providers. Note: See Treasury, Proposal paper: Reforms to the sale of add-on insurance products, 9 September 2019. What this guide is about RG 275.6 This guide explains our interpretation of the requirements that apply to issuers and distributors of add-on insurance products under the deferred sales model for add-on insurance and provides guidance on how to comply with those requirements. It also describes ASIC’s approach to applications for exemption from the deferred sales model. RG 275.7 In this guide: (a) Section B Scope of the deferred sales model explains which products are subject to the deferred sales model and who must comply with the requirements under the deferred sales model; (b) Section C Complying with the deferred sales model outlines the requirements that apply before, during and after the deferral period and describes how to comply with the deferred sales model; (c) Section D Exemptions from the deferred sales model outlines our powers to grant an exemption from the deferred sales model; (d) Appendix 1 Customer Information relates to the ASIC-prescribed information that must be provided to a customer to start the deferral period; (e) Appendix 2 Exemption factors explains: (i) the factors we will have regard to when assessing an application for exemption, including the types of data and information that will assist our assessment; and (ii) the data template we have provided on the ASIC website that applicants may use to collate and submit product data to support an application for an exemption. Page 6 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 6 B Scope of the deferred sales model Key points The deferred sales model applies to an ‘add-on insurance product’ as defined in s12DO of the ASIC Act. This section explains the following key elements of the s12DO definition: • who is a consumer; • what is a principal product or service; • products offered or sold in connection with a principal product or service; • products that manage financial risk; and • types of contracts that can be add-on insurance products. This section also outlines the exceptions that apply to certain add-on insurance products. Definition of ‘add-on insurance product’ RG 275.8 The deferred sales model applies to an ‘add-on insurance product’ which is defined in s12DO of the ASIC Act as a financial product that: (a) is offered or sold to a consumer in connection with that person acquiring another product or service (referred to as the ‘principal product or service’ in this guide); Note: The consumer is then referred to as the ‘customer’ in the deferred sales model provisions. (b) is offered or sold by: (i) the provider of the principal product or service (referred to as the ‘principal provider’ in this guide); or (ii) another person, under an arrangement with the principal provider (referred to as the ‘third-party provider’ in this guide); (c) manages financial risk relating to the principal product or service; and (d) either: (i) is a ‘contract of insurance’; or (ii) provides for the customer to benefit from a contract of insurance to which the provider of the financial product is a party. Page 7 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 7 Who is a customer? RG 275.9 A product is only an ‘add-on insurance product’ if the customer who is offered or sold the product is a ‘consumer’ as defined in the law. RG 275.10 For example, lenders mortgage insurance is not sold to a customer as an add- on insurance product because it is not offered or sold to a ‘consumer’. Instead, the insurance is taken out by the lender to manage the risk of not recovering the full loan balance from the borrower, should the borrower be unable to meet the loan payments. Lenders may require borrowers who are considered higher risk to pay for lenders mortgage insurance to obtain a home loan. While it may be paid for by the borrower, it covers the risk to the lender. RG 275.11 Section 12BC provides that a person acquires a financial service or a financial product as a ‘consumer’ if: (a) the price of the service or product does not exceed $100,000; (b) where the price of the service or product exceeds $100,000—the service or product is of a kind ordinarily acquired for personal, domestic or household use or consumption; or (c) where the service or product was acquired for use or consumption in connection with a small business and the price of the service or product exceeds $100,000—the service or product of a kind ordinarily acquired for business use or consumption. Note: Section 12BC defines consumers by reference to the ‘financial services’ they acquire. A ‘financial product’ is a ‘financial service’ for the purposes of s12BC: see s12BAB(1AA). RG 275.12 A ‘small business’ is defined in s12BC(2) to mean a business employing less than: (a) if the business is or includes the manufacture of goods—100 people; or (b) otherwise—20 people. What is a principal product or service? RG 275.13 A principal product or service is the product or service that a customer acquires or agrees to acquire during the transaction in connection with which the customer is offered or sold an add-on insurance product: s12DO. RG 275.14 Examples of principal products and services include: (a) credit facilities such as home loans, with which consumer credit insurance may be offered; (b) motor vehicles, with which consumer credit insurance, tyre and rim insurance and other insurances may be offered; Page 8 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 8 (c) furniture removals, with which removalist insurance may be offered; and (d) mobile phones, with which screen protection insurance may be offered. RG 275.15 The provider of the principal product or service is the person the customer pays for the principal product or service: s12DO(1)(b). They are referred to as the ‘principal provider’ in this guide. Products offered or sold in connection with a principal product or service RG 275.16 ASIC considers the concepts of ‘offer’, ‘sale’ and ‘sold’ are relatively broad and take their ordinary meaning. The terms are intended to capture the actions of principal providers, third-party providers and other issuers of add- on insurance. RG 275.17 An insurance product that is provided on a complimentary basis with a principal product or service is generally not ‘offered’ or ‘sold’ to a customer. An example is complimentary travel insurance provided with a credit card. Note: See the Explanatory Memorandum to the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Explanatory Memorandum), paragraph 3.29 and Example 3.3. RG 275.18 Such insurance is unlikely to be caught by the deferred sales model as it is generally not offered or sold to a customer. Whether the product is subject to the deferred sales model is determined on a case-by case basis. There may be circumstances where a product marketed as ‘complimentary’ is actually offered or sold to a customer, and hence is subject to the deferred sales model. In connection with a principal product or service RG 275.19 ASIC considers that ‘in connection with’ takes its ordinary meaning and an add-on insurance product is likely to be offered or sold ‘in connection with’ a principal product or service if: (a) the add-on insurance product is offered or sold around the same time as the principal product or service (recognising that the sale can only occur after the deferral period); (b) the sale of the principal product or service provides an advantage to the provider of the add-on insurance product to leverage the sale of the add- on insurance product; or (c) arising from the transaction for the principal product or service, the principal provider refers the customer to a third-party provider and the customer is offered or sold insurance by that third-party provider. Page 9 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 9 RG 275.20 For example, a lender may provide a home loan product to a customer and, under an arrangement, give the customer’s contact details to an issuer of consumer credit insurance. If the issuer of the insurance contacts the customer three weeks later, the offer will still be ‘in connection with’ the customer acquiring the principal product. RG 275.21 This is because the opportunity to sell the insurance arose because the customer acquired the home loan and the lender passed the customer’s details on to the issuer of consumer credit insurance. The issuer of the insurance will commit an offence if they have not complied with the deferred sales model before selling the add-on insurance product. RG 275.22 An insurance product is not sold ‘in connection with’ a principal product or service if the customer buys the insurance product on the standalone market, even if the seller of the insurance also sells insurance as an add-on insurance product. Note: See Explanatory Memorandum, paragraph 3.30. RG 275.23 If a customer is given complimentary insurance cover for a principal product or service at the time of the principal purchase, and later has to opt in at a cost to secure ongoing insurance cover, the offer or sale of that paid insurance product is likely to be ‘in connection with’ the principal purchase as the offer or sale of the paid product at that time leverages the sale of the principal product. RG 275.24 However, the hawking prohibition rather than the deferred sales model will always apply to offers of, or requests or invitations relating to, an add-on insurance product made after six weeks from the day the deferral period begins or, where there is no deferral period, the day on which the customer indicates an intention to acquire the principal product or service: s992A(3) of the Corporations Act 2001 (Corporations Act). RG 275.25 If a customer is given complimentary insurance cover from the time of the principal purchase but has to provide their credit card details upfront and billing starts later automatically upon expiry of the complimentary period, this constitutes the sale of the add-on product at the earlier time and will be in breach of the deferred sales model provisions. Note: For further discussion of s12DQ(5), see RG 275.49–RG 275.52. Acquiring, or entering into a commitment to acquire RG 275.26 The product must be offered or sold in connection with the customer ‘acquiring, or entering into a commitment to acquire’ the principal product or service: s12DO(1)(a). Page 10 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 10 RG 275.27 The terms ‘acquiring’ and ‘commitment to acquire’ in relation to a principal product or service take their ordinary meaning. If the principal product is a financial product or service, the term ‘acquire’ is modified by s12BA and 12BD. RG 275.28 Under s12DO(3) of the ASIC Act, the Australian Securities and Investments Commission Regulations 2001 (ASIC Regulations) may provide that a customer is, for the purposes of the deferred sales model, taken to have entered into a commitment to acquire a principal product or service of a specified class at a specified time. RG 275.29 The time at which a consumer has entered into a commitment for certain classes of principal products and services is defined in reg 3B of the ASIC Regulations: see Table 1. Table 1: When a consumer enters into a commitment Class of product or service Time of entering into a commitment Credit card When the consumer is informed in writing of the approval of the credit facility Loan secured by a mortgage, charge or other security interest over residential property in Australia When the consumer is informed in writing of the approval of the credit facility Loan for the purchase of a motor vehicle When the consumer is informed in writing of the approval of the credit facility Loan for personal, domestic or household purposes When the consumer is informed in writing of the approval of the credit facility Hire of a motor vehicle Either:  if the consumer makes a reservation for the hire of the vehicle before taking possession of the vehicle—when the consumer makes the reservation; or  when the consumer takes possession of the vehicle Source: Regulation 3B of the ASIC Regulations. RG 275.30 Where the purchase of a product is subject to finance, there may be two separate principal products: the product which is subject to the finance, and the finance itself (e.g. the loan or credit facility). The time at which the customer commits to acquire each principal product may be different. RG 275.31 For example, if a customer buys a car with a loan, there will be two separate times when a customer enters into a commitment to acquire a principal product: (a) for the car—when the customer places the order for the car, subject to finance; and (b) for the loan—when the customer is informed in writing that the loan has been approved: reg 3B of the ASIC Regulations. Page 11 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 11 Products that manage financial risk RG 275.32 To meet the definition of add-on insurance product, the product must manage financial risk relating to the principal product or service within the meaning of s12BAA. RG 275.33 Section 12BAA(5) provides that a person manages financial risk if they: (a) manage the financial consequences to them of particular circumstances happening; or (b) avoid or limit the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices and interest rates). RG 275.34 An example of a financial product which is likely to be an add-on insurance product is consumer credit insurance. This product covers the risk of default on a loan, with benefits aimed at mitigating that risk for the customer. We consider that this product would still be add-on insurance if the benefits were paid to the customer, rather than directly to the lender to be paid towards the loan balance, because the product is designed to meet the consequence of a default under the loan for the customer. RG 275.35 Generally a life insurance product will not be an add-on insurance product, as it does not manage a financial risk relating to the principal product or service, but instead insures the life of the customer. However, whether or not a particular life insurance product is an add-on insurance product will depend on the design of that product. If a life insurance product was designed in a similar way to consumer credit insurance so that, for example, it managed a financial risk relating to the purchase of a loan, then it could be seen to be managing a financial risk relating to a principal product or service. RG 275.36 The default inclusion of liability and personal accident insurance in a local sporting club membership would generally not be subject to the deferred sales model. This is because we do not consider that the insurance manages a financial risk relating to the principal purchase, which is the membership. RG 275.37 If the product is not an add-on insurance product (and therefore not subject to the deferred sales model), the hawking prohibition in s992A of the Corporations Act (hawking prohibition) applies. Note: See Explanatory Memorandum, paragraphs 3.119–3.122 and Regulatory Guide 38 The hawking prohibitions (RG 38). Types of contracts that can be add-on insurance products RG 275.38 To meet the definition of add-on insurance product, the financial product must either: (a) be a ‘contract of insurance’ (s12DO(2)); or Page 12 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 12 (b) provide for the customer to benefit from a contract of insurance to which the provider of the add-on insurance product is a party (s12DO(1)(d)(ii)). RG 275.39 A ‘contract of insurance’ includes: (a) a contract that would ordinarily be regarded as a contract of insurance, even if some of its provisions are not by way of insurance; and (b) a contract that includes provisions of insurance, even if the contract would not ordinarily be regarded as a contract of insurance (the deferred sales model will only apply to the provisions of insurance). Note: See Explanatory Memorandum, paragraph 3.31. RG 275.40 For example, a mobile phone protection plan which includes insurance components, as well as extended warranty components which are not insurance, will be a contract of insurance for the purposes of s12DO. Note: For guidance on when a ‘warranty’ is more likely to include insurance elements, see Information Sheet 198 Extended warranties (INFO 198). RG 275.41 A contract of insurance under s12DO(1)(d)(ii) may include an arrangement where a group purchasing body provides eligible customers with cover under a risk management product that the group purchasing body has entered into with a third-party provider. Note: For more information on group purchasing arrangements, see Regulatory Guide 195 Group purchasing bodies for insurance and risk products (RG 195). Persons who must comply with the deferred sales model RG 275.42 Principal providers and third-party providers of add-on insurance products are subject to the deferred sales model. RG 275.43 A principal provider is a person who provides principal products or services and who also engages in any of the following conduct in connection with the principal product or service: (a) selling an add-on insurance product; (b) permitting another person to offer or sell an add-on insurance under an arrangement to which it is a party; or (c) offering an add-on insurance product for issue or sale to a customer, or requesting or inviting a customer to ask or apply for or purchase an add- on insurance product: see s12DO(1) and 12DR(1). RG 275.44 A third-party provider is a person who has an arrangement with a principal provider and who also engages in any of the following conduct in connection with the principal product or service: (a) selling an add-on insurance product; or Page 13 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 13 (b) offering an add-on insurance product for issue or sale to a customer, or requesting or inviting a customer to ask or apply for or purchase an add- on insurance product: see s12DO(1), 12DQ(4) and 12DR(3). RG 275.45 Whether offers or sales of insurance by insurance brokers are covered by the deferred sales model will depend on: (a) the circumstances, including whether the insurance broker offers or sells the insurance in accordance with an arrangement with the principal provider; and (b) whether the insurance product offered or sold satisfies the definition of an add-on insurance product in s12DO. Products that are not subject to the deferred sales model RG 275.46 The add-on insurance products covered by an exception from the deferred sales model are outlined in Table 2. Table 2: Products not subject to the deferred sales model under the ASIC Act Exceptions Add-on insurance products covered Financial advisers: s12DU The add-on insurance product is offered (including requests and invitations) or sold in the course of a person (the financial adviser) providing personal advice in circumstances where the best interests duty (under Pt 7.7A, Div 2 of the Corporations Act) applies and the add-on insurance product relates to a principal product or service provided by the financial adviser that the financial adviser recommends in the course of providing the advice. Note: This exception will only apply to insurance brokers if they satisfy all the requirements of 12DU, including that the insurance relates to a principal product or service that is provided by the broker. Product intervention order: s12DV The add-on insurance product is the subject of a product intervention order under Pt 7.9A of the Corporations Act that imposes a deferral period during which the add-on insurance product must not be sold. However, if a product intervention order does not specify a deferral period—instead, for example, specifying design standards for an add-on insurance product—the deferred sales model will continue to apply to that add-on insurance product. Note: A product intervention order that applies to a class of products is made as a legislative instrument. ASIC publishes a list of legislative instruments on our website. For product intervention orders that are not legislative instruments and that apply to a specified person or conduct, ASIC will serve a copy of the order on any person to whom we consider the order applies. Comprehensive motor vehicle insurance: s12DW This exemption applies to a contract sold to an individual who:  wholly or partly owns a motor vehicle; or  has the use of a motor vehicle under a lease of at least four months’ duration where cover is for:  loss of, or damage to, the motor vehicle or property of another person resulting from an accident; or  loss or damage caused by fire, theft or malicious acts. Page 14 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 14 Exceptions Add-on insurance products covered Exemption by regulations: s12DX Part 2A of the ASIC Regulations specifies the classes of add-on insurance products that are exempt from s12DQ, 12DR and 12DS of the ASIC Act. Exemption by ASIC: s12DY An add-on insurance product or class of add-on insurance products sold by a specified person is exempted from compliance with s12DQ, 12DR and/or 12DS by a notifiable instrument made by ASIC: see Section D of this guide. Note: See Explanatory Memorandum, paragraphs 3.88–3.105. Page 15 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 15 C Complying with the deferred sales model Key points There are three distinct periods in the deferred sales model: • pre-deferral period; • deferral period; and • post-deferral period. This section sets out: • when each period starts and ends; and • the requirements that apply to a provider of add-on insurance products during each of the periods. Outline of the deferred sales model RG 275.47 The conduct that is permitted and prohibited for providers of add-on insurance products changes over the distinct periods in the deferred sales model: (a) Pre-deferral period—This period starts when the customer indicates an intention to acquire a principal product or service and ends when the deferral period starts: see the conduct requirements set out in RG 275.59–RG 275.69. (b) Deferral period—This period starts when the customer commits to acquire a principal product or service and receives the information in the manner and form prescribed by ASIC (Customer Information). It ends at the end of four days after the day on which the deferral period began: see the conduct requirements set out in RG 275.70–RG 275.90. A person only needs to give the customer the Customer Information to initiate the deferral period if they wish to offer or sell the customer add-on insurance. (c) Post-deferral period—This period starts at the end of the deferral period and ends six weeks after the day the deferral period began: see the conduct requirements set out in RG 275.91–RG 275.99. RG 275.48 The start and length of each period and the key requirements for each period are set out in Figure 1. Page 16 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 16 Figure 1: Outline of the deferred sales model Note: For a summary of the content of this figure, see RG 275.47 (accessible version). When has an add-on insurance product been sold? RG 275.49 It is an offence to sell an add-on insurance product during the pre-deferral period or deferral period: s12DQ. RG 275.50 An add-on insurance product is taken to be sold to a customer when no further action from the customer is required for the sale to occur, even if the sale does not occur until a later time: s12DQ(5). RG 275.51 This means a provider cannot: (a) sell an add-on insurance product through an ‘opt-out’ process, where the sale will automatically occur once the deferral period ends; or (b) structure the application and sale phases so that the customer does not need to engage further before the add-on insurance product is issued. RG 275.52 For example, it would be an offence for a provider to offer a customer an add-on insurance product, obtain the customer’s credit card details, wait until the end of the four-day deferral period, then process the sale of the add-on insurance product. Note: See Explanatory Memorandum, Example 3.7. Page 17 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 17 Interaction with the hawking prohibition RG 275.53 Outside the periods in the deferred sales model, the hawking prohibition in s992A of the Corporations Act will apply and unsolicited offers, requests or invitations relating to add-on insurance are prohibited. RG 275.54 Before the start of the pre-deferral period, the hawking prohibition generally prevent a person from making an unsolicited offer of add-on insurance. This is the default regime applying to the sale of all insurance products. RG 275.55 Generally, the hawking prohibition will not apply to the offer to sell or issue the add-on insurance product if the customer has specifically consented to being contacted for the purpose of making the offer or the offer ‘was reasonably within the scope of the consumer’s consent’: see s992A(5) of the Corporations Act for all requirements. RG 275.56 The hawking prohibition will apply to offers, requests or invitations to apply for add-on insurance products if they are made six weeks after: (a) the day the deferral period starts; or (b) if there is no deferral period (because the Customer Information is not given to the customer)—the day the customer indicates an intention to acquire a principal product to which an add-on insurance product relates: s992A(3) of the Corporations Act. RG 275.57 For example, if the customer indicated an intention to acquire the principal product on 1 September: (a) if the deferral period began at 9 am on 3 September, the hawking prohibition will resume after 11.59 pm on 16 October; or (b) where there is no deferral period, the hawking prohibition will resume after 11.59 pm on 14 October. RG 275.58 After this time, any contact made by the principal provider or a third-party provider with the customer will be subject to the hawking prohibition. Note: For more information on the hawking prohibition, see RG 38. Pre-deferral period RG 275.59 The purpose of the pre-deferral period is to enable salespersons to discuss the add-on insurance products with customers before a principal product or service is sold, without triggering the hawking prohibition. The discussions should not be used as an opportunity to pressure customers to agree to purchase an add-on insurance product after the deferral period. Conduct of this nature would undermine the deferred sales model. Note: See Explanatory Memorandum, paragraph 3.33. Page 18 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 18 When the period starts and ends RG 275.60 The pre-deferral period starts when a customer indicates an intention to acquire a principal product or service. Indicates an intention to acquire RG 275.61 Whether and when a customer indicates an intention to acquire a principal product or service will depend on the circumstances. For example, a customer may indicate this intention by: (a) stating that they are considering purchasing a specific type of product or service; or (b) asking questions specific to that type of product or service of a representative of a business that sells that product or service. RG 275.62 A customer asking a retailer questions about their white goods and furniture is unlikely to indicate an intention to acquire a specific product. The customer needs to indicate they are considering purchasing a specific type of product. Note: See Explanatory Memorandum, paragraph 3.36. End of the period RG 275.63 The pre-deferral period ends if a deferral period starts: see RG 275.71 for when the deferral period starts. RG 275.64 If there is no deferral period, the pre-deferral period does not end: s12DP(3)(c). The add-on insurance product cannot be sold unless the customer was provided with the Customer Information required by s12DP(4) to trigger a deferral period and the deferral period has since ended. RG 275.65 If a deferral period does not start within six weeks of the customer indicating an intention to acquire a principal product or service—that is, the pre- deferral period does not end—then the hawking prohibition applies to offers, requests or invites in relation to an add-on insurance product or service from the end of the six weeks: s992A(3)(b) of the Corporations Act. Note: For more information on the hawking prohibition, see RG 38. In July 2021, ASIC commenced public consultation on updates to RG 38 in line with changes introduced by the Financial Sector Reform Act. Prohibition on sale RG 275.66 A principal provider or a third-party provider commits an offence if they sell an add-on insurance product to a customer during the pre-deferral period, unless an exception applies. This prohibition continues until both the pre- deferral and deferral periods have ended: s12DQ. Page 19 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 19 RG 275.67 A principal provider may commit an offence in relation to the prohibited sale of add-on insurance by a third party: s12DQ(2). The principal provider will commit an offence if: (a) there is an arrangement between the principal provider and a third-party provider that relates to the provision of add-on insurance for products or services offered by the principal provider to a customer; and (b) the third-party provider sells add-on insurance to the customer, except after the end of the deferral period. Permitted conduct RG 275.68 During the pre-deferral period, and before the hawking prohibition applies, a principal provider or a third-party provider can: (a) offer an add-on insurance product for issue or sale to the customer; or (b) request or invite the customer to: (i) ask or apply for an add-on insurance product; or (ii) purchase an add-on insurance product: s12DR(2)(a). RG 275.69 This allows the provider to advertise and discuss the add-on insurance product in the pre-deferral period. There are no restrictions on what can be discussed during this period. The provider may answer any questions from customers and provide any information they wish, including in document form. However, the provider cannot sell the add-on insurance product. Example 1: Communication during the pre-deferral period Anh buys a mobile phone in-store. Zayn, the salesperson, offers Anh mobile phone insurance. Zayn has not given Anh the Customer Information and so the deferral period has not started. Anh asks a question about exclusions under the insurance policy. Zayn answers verbally and outlines the exclusions under the policy. Zayn also explains the cover under the policy and gives Anh some marketing materials. Zayn has not committed an offence because the deferral period has not started and he has not sold the product. Deferral period RG 275.70 The purpose of the four-day deferral period is to provide the customer with an opportunity to consider the suitability of the add-on insurance product being offered and alternative products, while reducing the likelihood of the customer disengaging entirely from the decision about whether to purchase the add-on insurance product. Note: See Explanatory Memorandum, paragraph 3.39. Page 20 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 20 When the period starts and ends RG 275.71 The deferral period starts at the later of: (a) the time the customer enters into a commitment to acquire a product or service or, if the customer does not enter into such a commitment before acquiring a product or service, the time at which the customer acquires the principal product or service; and (b) the time the customer is given the Customer Information. RG 275.72 The deferral period ends four days after the day it begins. For example, if a customer buys a new mobile phone on Sunday 1 January and is given the Customer Information for add-on screen protection insurance, the deferral period ends at 11.59 pm on Thursday 5 January. Note: See Explanatory Memorandum, paragraph 3.38 and Example 3.4. Customer enters into a commitment RG 275.73 For some classes of principal products or services, the time when a customer enters into a commitment will be defined by reg 3B of the ASIC Regulations: see Table 1. RG 275.74 A commitment is generally a firm decision by the customer to acquire the principal product or service, such as: (a) making a payment for the product or service; or (b) entering into an agreement for the product or service which might allow payment over a period of time or at a later date. Note: See Explanatory Memorandum, paragraph 3.41 RG 275.75 A customer would generally know what they have purchased and would therefore have a risk to manage in relation to the purchase. A customer expressing a preference for a product or service does not amount to a commitment. The time at which a commitment has been entered into would depend on the circumstances of each case. Note: See Explanatory Memorandum, paragraphs 3.41–3.42. RG 275.76 An example of a customer making a ‘commitment’ to acquire a principal product is the customer paying a 50% deposit for a theatre season ticket online. Conversely, a customer has not made a commitment to acquire a product where the customer talks about a particular mobile phone with a salesperson in a store, then says they will return later to buy that phone. Note: See Explanatory Memorandum, Examples 3.5 and 3.6. Page 21 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 21 Prohibition on sale RG 275.77 A principal provider or a third-party provider commits an offence if they sell an add-on insurance product to a customer during the deferral period: s12DQ. RG 275.78 The principal provider will also commit an offence if: (a) there is an arrangement between the principal provider and a third-party provider that relates to the provision of add-on insurance products for products or services offered by the principal provider to a customer; and (b) the third-party provider sells an add-on insurance product to the customer, except after the end of the deferral period: s12DQ(2). RG 275.79 For example, a car hire company may lend a car to a customer, then email the customer’s details to a third-party insurer who sells excess-reduction insurance. If that insurer offers and sells the insurance to the customer during the deferral period, the insurer has committed an offence and the car hire company has also committed an offence in relation to the insurer’s conduct. Note: See Explanatory Memorandum, Example 3.8. Prohibition on offers, request and invites other than in writing RG 275.80 During the deferral period, a principal provider or a third-party provider cannot offer, request or invite the customer to ask for, apply for, or purchase an add-on insurance product for issue or sale other than in writing: s12DR. RG 275.81 This means that a provider cannot discuss add-on insurance during any phone calls or in-person meetings with a customer during the deferral period, subject to the rules for customer-initiated contact: see RG 275.82–RG 275.90. Responding to customer-initiated contact RG 275.82 The prohibition on making offers, requests or invitations to a customer during the deferral period does not apply where, during the deferral period: (a) the customer initiates contact; (b) the offer, request or invitation is made in response to the contact initiated by the customer; and (c) the offer, request or invitation relates only to the purpose for which the customer initiated the contact: s12DR(4). Note: See Explanatory Memorandum, paragraph 3.76. RG 275.83 If a customer could be deemed to have ‘initiated contact’ by an action taken in the pre-deferral period, it could enable providers to influence customers to give such consent before the principal product or service has been offered, including in high-pressure sales scenarios. This could circumvent the s12DR prohibition on contact other than in writing. We understand this to be contrary to the policy intent and design of the deferred sales model. Page 22 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 22 RG 275.84 If the customer contacts the provider about the principal product or service, the provider can respond using any method of communication, but cannot initiate a discussion about the add-on insurance. On the other hand, if the customer initiates a discussion about the add-on insurance product during a telephone call with the provider, ASIC considers that the discussion of the insurance was part of the customer’s purpose for initiating the contact. RG 275.85 If a customer initiates contact for the sole purpose of discussing an add-on insurance product, the provider can respond using any method of communication. For example, if the customer emails the provider questions about an add-on insurance product, the provider can respond by telephone. RG 275.86 At all times, a provider must limit the communication to the purpose for which the customer initiated the contact. For example, if a customer initiates contact and seeks information about the waiting period for mortgage protection insurance offered with a home loan, the provider cannot offer to sell the mortgage protection insurance, unless the customer raises the purchase of that insurance. RG 275.87 The prohibition on selling insurance during the deferral period remains and cannot be waived. Even if the customer says they wish to buy the add-on insurance product, the provider cannot sell the add-on insurance product until the deferral period ends. RG 275.88 For example, if a customer calls a provider during the deferral period and asks for information about an add-on insurance product’s claims ratio, the provider can give the customer that information over the telephone, because the customer initiated the contact. However, it would be an offence for the provider to then offer to sell the customer the add-on insurance product during the customer-initiated telephone call. Note: See Explanatory Memorandum, Examples 3.9 and 3.10. RG 275.89 Providers of add-on insurance products need to be able to demonstrate that the offer, request or invitation to a customer relates only to the purpose for which the customer has initiated the contact. Note: See Explanatory Memorandum, paragraph 3.79. RG 275.90 Offers, requests and invitations in relation to an add-on insurance product are prohibited if a customer has indicated that they do not wish to receive those offers, requests or invitations: s12DS. Note: For more information on the prohibition in s12DS, see RG 275.100–RG 275.102. Page 23 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 23 Post-deferral period RG 275.91 The period after the end of the four-day deferral period is called the post- deferral period. RG 275.92 When the post-deferral period ends, the deferred sales model ceases to apply and the hawking prohibition applies to sales of add-on insurance as defined in s12DO. When the period starts and ends RG 275.93 The post-deferral period starts at the end of the deferral period and ends on the date six weeks after the start of the deferral period. The duration of the post-deferral period is, therefore, five weeks and three days (six weeks with a four-day deferral period subtracted). Add-on insurance products can be sold RG 275.94 The prohibition in s12DQ on selling an add-on insurance product ceases at the end of the four-day deferral period. For example, if the deferral period began on 1 July then it would end at 11.59 pm on 5 July and a provider would then be able to sell an add-on insurance product. Note: For more information on when the deferral period starts and ends, see RG 275.71– RG 275.72. Modified prohibition on offers, requests and invitations other than in writing RG 275.95 While a provider can conclude the sale of an add-on insurance product in the post-deferral period, offers, requests and invitations to buy the product can only be made in writing during the post-deferral period, subject to the rules for customer-initiated contact: s12DR(1) and (3). Note: For a discussion of the meaning of ‘offers’, see RG 275.16–RG 275.18. Responding to customer-initiated contact RG 275.96 A provider is able to make offers, requests and invitations other than in writing where they are in response to customer-initiated contact: s12DR(4). This exception is broader during the post-deferral period than during the deferral period because any offers, requests and invitations made during the post-deferral period do not need to relate only to the purpose for which the customer initiated the contact. However, they must still only be in response to customer-initiated contact. Page 24 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 24 RG 275.97 During the post-deferral period, if either the principal provider or a third- party provider is contacted by the customer, either party may respond to the customer’s inquiry using any method of communication and may make an offer, request or invitation in relation to add-on insurance in the course of the communication. The provider can also conclude the sale. Note: See Explanatory Memorandum, paragraph 3.80. RG 275.98 For example, after the deferral period has ended in relation to an add-on insurance product: (a) if a customer writes to a provider to ask for more information about the insurance, the provider can call the customer and sell the insurance over the telephone, because the customer initiated the contact; (b) a provider can offer the insurance by emailing the customer advertising material about the insurance and a link to purchase it; and (c) a provider cannot offer the customer the insurance by contacting the customer by telephone—this would be an offence. RG 275.99 Offers, requests and invitations in relation to an add-on insurance product are prohibited if a customer has indicated that they do not wish to receive those offers, requests or invitations: s12DS. Note: For more information on the prohibition in s12DS, see RG 275.100–RG 275.102. Customer opt-out RG 275.100 At any time after a customer has acquired, or entered into a commitment to acquire, a principal product or service, they can indicate to the principal provider or a third-party product provider that they do not wish to receive offers, requests or invitations relating to an add-on insurance product. RG 275.101 A provider of add-on insurance will commit an offence if they offer, request or invite the customer to ask for, apply for, or purchase an add-on insurance product after the customer has informed either the principal provider or a third-party provider that they no longer wish to receive such offers, requests or invitations: s12DS. If the provider was not the person to whom the customer communicated their opt-out, the offence is committed if the provider was reckless as to the customer having opted out: s12GBCN(3A)(c). Note: See Explanatory Memorandum, paragraphs 3.61 and 3.74. RG 275.102 For example, a lender may offer a customer consumer credit insurance with a loan, then during the deferral period, the customer may contact the lender by telephone and say they do not want to be contacted about the insurance again. If the lender emails the customer three weeks later offering the insurance again, the lender will have committed an offence. Note: See Explanatory Memorandum, Example 3.11. Page 25 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 25 Customer right of return and refund RG 275.103 A customer is entitled to a full refund of the amount paid for the add-on insurance product, less the value of any claim paid, if the provider sells them the product in breach of the prohibition on selling in s12DQ: s12DT. RG 275.104 This refund for the sale of the add-on insurance product is not at the discretion of the seller. The legislation operates to terminate automatically, from the time of return, an add-on insurance contract the customer has with a principal provider, third-party provider or other person. Period of return RG 275.105 A customer can exercise the right to a refund at any time during the period starting when the product was sold and ending: (a) if s1019B of the Corporations Act gives the customer a right to return the product within a particular period (the cooling-off period)—one month after the end of that period; or (b) otherwise—one month and 14 days after the product was sold. RG 275.106 The purpose of this right is to allow all customers approximately six weeks to exercise the right of return under the deferred sales model if they have been sold an add-on insurance product in breach of the deferred sales model provisions. Where applicable, the right to return during the cooling-off period can be exercised, even where an add-on insurance product has been sold in compliance with the deferred sales model. RG 275.107 This means that if an add-on insurance product is subject to a 14-day cooling-off period under s1019B of the Corporations Act, the right of return under the deferred sales model will run concurrently with the s1019B right of return and will last for an additional month after the end of the s1019B cooling-off period. Product can be returned after a claim RG 275.108 Importantly, unlike the right of return under s1019B of the Corporations Act, the deferred sales model right of return and refund allows a customer to return an add-on insurance product even where they have made a claim. RG 275.109 Where an add-on insurance product has been sold in breach of s12DQ, a provider must not suggest to a customer that they cannot or should not return the add-on insurance if they have made a claim. Page 26 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 26 No penalty RG 275.110 The customer cannot be required to pay any penalty for terminating the contract due to a contravention of s12DQ. This includes any fees linked to the cancellation of a product. RG 275.111 The provider cannot require the customer to make any other payments, even those that are not linked to the cancellation of the add-on insurance product, after the date the customer returns the product. This is because the contract is terminated by s12DT from the time of return. Record keeping RG 275.112 As a matter of good business practice, and to comply with general business record-keeping obligations, a provider of add-on insurance should keep records relating to: (a) the add-on insurance product that was sold and when it was sold; (b) the circumstances in which it was sold, such as whether it was sold in connection with the acquisition of a principal product or service, and whether a deferral period applies; and (c) when the deferral period ended. Note: See Explanatory Memorandum, paragraph 3.54. Specific record-keeping requirements applying to issuers and distributors in relation to the design and distribution obligations under Pt 7.8A are set out in s994F of the Corporations Act. See also s1101C of the Corporations Act for obligations relating to records required to be maintained under Ch 7 such as financial records, personal advice and training of representatives. RG 275.113 The time at which a principal provider makes an offer, request or invitation should be recorded by the provider as a matter of good business practice. Note: See Explanatory Memorandum, paragraph 3.59. RG 275.114 ASIC also considers that it is important for principal providers and third- party providers to collect and retain information in relation to an add-on insurance product on: (a) when the pre-deferral period began for each customer, so the provider can demonstrate they are able to make offers not limited by the hawking prohibition; (b) the nature of the customer interactions including the purpose, communication method and how contact was initiated; and (c) whether and when the customer opted out of receiving offers, requests or invites. RG 275.115 Adequate record-keeping is also important because the evidentiary burden is on a provider who seeks to rely on an exception to an offence. For example, recordings of telephone calls may demonstrate that contact was initiated by the customer and the offer, request or invitation related only to the purpose for which the customer initiated that contact. Page 27 REGULATORY GUIDE 275: The deferred sales model for add-on insurance © Australian Securities and Investments Commission July 2021 Page 27 D Exemptions from the deferred sales model Key points ASIC has discretionary powers to exempt an add-on insurance product or class of products sold by a specified person. ASIC must have regard to the factors specified in s12DY when considering an application for exemption. We provide guidance on each factor and the type of information that will help us assess an application. ASIC has discretion to impose conditions on an exemption, and exemptions may be granted for a limited period. Regulatory Guide 51 Applications for relief (RG 51) remains our primary guidance on our approach to assessing individual relief applications. ASIC’s powers to grant an exemption RG 275.116 ASIC has discretionary powers to make a notifiable instrument exempting from s12DQ, 12DR and/or 12DS of the ASIC Act: (a) an add-on insurance product sold by a specified person (s12DY(1)(a)); and (b) a class of add-on insurance products sold by a specified person (s12DY(1)(b)). RG 275.117 ASIC cannot make a legislative instrument to exempt a class of add-on insurance products from the deferred sales model. Under s12DX, the Government has made regulations to exempt certain classes of add-on insurance products. Note: Part 2A of the ASIC Regulations exempts certain classes of a