Codes of practice
4.1 One of the key issues considered in this report is appropriate industry
regulation. The notion of a code of practice for the life insurance industry is
a recent phenomenon with the Financial Services Council (FSC) instigating a
self-regulatory code for its members and the Insurance in Superannuation
Working Group (ISWG) developing a draft code of practice for superannuation
trustees and insurers.
4.2 However, serious questions arose during this inquiry as to whether industry
codes based on self-regulation are in fact sufficient to prevent poor
practices. Consequently, several submitters and witnesses favoured a
co-regulatory model which, they argued, had far greater potential to not only facilitate
best-practice in the life insurance industry, but also to restore consumer
confidence in the sector.
4.3 This chapter covers codes of practice in the life insurance industry
- summarises codes of practice across the financial services
- examines the use of codes of practice in the life insurance sector
- considers evidence received during the inquiry on codes of
- considers the co-regulatory model proposed by the ASIC
Enforcement Review Taskforce.
4.4 During the inquiry submitters and witnesses used the terms 'code of
practice' and 'code of conduct' interchangeably. This report uses the term code
of practice, except where evidence referring to a code of conduct is quoted.
Financial services codes of practice
4.5 Codes of practice have existed in the financial services sector since
the late 1980s. Most of these industry-based codes were voluntary for industry
participants. The codes aimed, on the one hand, to provide flexibility to
industry participants, and on the other hand, to protect consumers of financial
products and services through the setting of best practice standards of conduct
and providing a system of informal dispute resolution.
4.6 Regulatory Guide 183 Approval of financial service sector codes of
conduct (RG183) sets out requirements for a code to be approved by ASIC
under the Corporations Act. RG183 includes requirements for the code to be
written in plain language, to address stakeholder issues, to provide for
consistent monitoring and compliance, and for mandatory three-year code reviews.
4.7 Currently, there are 11 codes for financial services including banking,
insurance, financial planning, brokering, and ePayments.
4.8 The only self-regulatory code to be approved by ASIC is the Financial
Planning Association's Professional Ongoing Fees Code.
Life insurance codes of practice
4.9 The committee received evidence that a self-regulatory voluntary life
insurance industry code of practice was established in 1995 and an HIV/AIDS
life insurance code of practice was established in 1998. Apparently, neither
code was embraced by the life insurance industry and, consequently, both codes
fell into disuse.
4.10 In 2015, the Trowbridge Review of Retail Life Insurance Advice
recommended that a life insurance code be developed and modelled on the General
Insurance Code of Practice and aimed at settings standards of best practice for
life insurers, licensees and advisers (Policy Recommendation 6).
4.11 The FSC led the development of the Life Insurance Code of Practice
(Code). The Code came into effect from 11 October 2016 and all FSC life
insurer members (which does not include all industry participants) were bound
by the Code from 1 July 2017.
4.12 The FSC has over 100 members from Australia's retail and wholesale funds
management businesses, superannuation funds, life insurers, financial advisory
networks and licensed trustee companies. The FSC website indicates that 22 life insurance companies are members and are
bound by the Life Insurance Code of Practice from 30 June 2017. There are currently 29 life insurers registered in Australia under section 21
of the Life Insurance Act 1995.
4.13 The Code will be subject to an independent governance framework through
the Life Code Compliance Committee (LCCC). The LCCC includes three independent
experts including a consumer advocate. The LCCC is able to require life
insurers who do not comply with the Code to take corrective action and be
subject to sanctions. Sanctions may include:
- a requirement that particular rectification steps be taken within
a specified timeframe, taking into account any rectification related to the
breach imposed by any regulatory body;
a formal warning;
- a requirement that a code compliance audit be undertaken;
- a requirement to undertake corrective advertising or write
directly to the customers impacted by the breach; and/or
- publication of non-compliance on the company's own website and on
the FSC website.
4.14 The Code covers customer service, plain language disclosure, updating
medical definitions, conduct and monitoring of sales, remedies for mis-selling,
claims handling, claims investigations, interviews and surveillance. The Code
- prescribed timeframes for deciding claims;
- insurers to keep customers informed about the process and progress
of a claim;
- insurers to provide reasons for information requests;
- alternative methods of verifying information prior to arranging
surveillance and that surveillance be discontinued where there is evidence from
an independent medical examiner that it negatively impacts the claimant's
- monitoring of sales practices and the offer of remedies, such as
refund or replacement policy, where the insurer discovers that an inappropriate
sale has occurred; and
- reviews of key medical definitions every three years.
4.15 The above Code did not extend to superannuation trustees involved with
group life insurance. In response to that concern, the Insurance in
Superannuation Working Group (ISWG) was established to develop a code of
practice for superannuation trustees and insurers.
4.16 In September 2017, the ISWG released a draft Insurance in Superannuation
Code of Practice (Super Code) to apply to superannuation funds that offer
insurance. The draft Super Code includes:
- Benefit design: to ensure automatic insurance benefits are
appropriate and affordable for all segments of members, notably younger
members, those making low or infrequent contributions, as well as those nearing
- Premium limits: trustees to design benefits to ensure the level
and cost of cover does not exceed 1 per cent of estimated earnings and 0.5 per cent
for members under 25.
- Cessation arrangements: to come into effect only after
communicating with members; insurance premiums will stop being deducted 13
months after a member's contributions cease.
- Duplicate insurance cover: trustees required to ask new members
for permission to help them identify any other insurance cover held within
- Member communication initiatives: to assist members to understand
what insurance products they hold and the impact insurance premiums can have on
their retirement savings.
- Better claims handling initiatives: to include response times and
better information provided to members.
4.17 Mr David Haynes, Executive Manager for Policy and Research at the Australian
Institute of Superannuation Trustees, informed the committee that the Super
Code should lead to substantive improvements in the provision of life insurance
within superannuation. For example, in areas such as claims handling, there
will be an enforceable code to which the whole of the industry signs up and which
is then endorsed and effectively overseen by ASIC.
4.18 During the course of the inquiry, the draft Super Code was proceeding
through a consultation and review process. The Super Code is intended to bind
superannuation fund trustees that offer insurance within an APRA-regulated
superannuation fund. The ISWG is currently contemplating options (including
regulatory options) for ensuring the Super Code is mandatory for all
superannuation trustees, in order to achieve broad industry change. The ISWG is
also considering whether the two life insurance codes of practice—that is the
FSC-coordinated Code and the ISWG-coordinated Super Code—could be combined.
4.19 The final ISWG Super Code was released in December 2017 and takes effect
from 1 July 2018. As the final version of the code was released well after the committee had
received submissions and taken evidence during hearings, the committee's report
has made reference to evidence it received on the draft ISWG Super Code.
4.20 The FOS acknowledged that while there may be technical difficulties in
establishing a single life insurance code that would be far preferable to
multiple codes which may add to complexity for consumers and difficulties in
ensuring consistent standards across the industry for subscribers.
Evidence received on life insurance codes of practice
4.21 The FSC submitted that the Code sets standards above existing laws in
many areas. As such, the FSC argued that the Code is intended to strengthen
industry standards for the benefit of all Australians.
4.22 Under the current self-regulatory model, the codes are voluntary and are
not approved by ASIC. While a code could be approved by ASIC, ASIC would not
have the power to enforce the code, which can be monitored by the LCCC. In this
regard, Mr Peter Kell, Deputy Chairman of ASIC, observed:
The industry has also indicated to us that their intention is
to submit the code for our approval. That doesn't necessarily mean that ASIC
would enforce all the provisions, but we would only approve it if we were
confident that the enforceability was robust.
4.23 BT Financial supported the Code, informing the committee that in its
view, the measures will foster trust, transparency and accountability across
all aspects of the life insurance industry.
4.24 FOS supported recent industry initiatives to develop the Code. FOS
noted, however, that a code is only as good as its implementation. FOS
therefore emphasised the importance of clear communication to policy holders
and consumers about the content of the Code, and in particular, the processes
relating to claims assessment.
4.25 The FOS also suggested improvements in the next version of the Code
- covering all services provided by life insurers;
- holding subscribers accountable for the actions and conduct of
- timeframes for handling complaints;
- standardising medical definitions where appropriate;
- a single uniform approach to the cancellation of policies for
non-payment of premiums; and
- making the code easier for consumers to understand.
4.26 FOS also argued that the Code should become part of the contract with
the consumer, and also that the code should be approved by ASIC:
What we would say about the code, for example, is that it
currently does not form part of the contract between the applicant or the
insured and the insurer and that perhaps, going forward in the second
iteration, that is something that could indeed occur. We feel that that would
allow the individuals who have rights under the code to enforce them more
sufficiently. We also understand that the FSC is looking to have that code
approved. Again, we feel that that is a good step because it will send a
message to consumers that the code can be trusted and that it will be enforced
and monitored, and that life insurers will be held accountable, as they should
be, under the code.
4.27 Consumer groups and lawyers were critical of shortcomings in the Code.
In particular, there was a broad recognition from consumer groups, lawyers, and
FOS that the Code must be registered with ASIC in order to increase its
4.28 Maurice Blackburn Lawyers argued that a self-regulated code is
insufficient, and represents a wasted opportunity to effect genuine change in
the industry. In addition, Maurice Blackburn Lawyers suggested that the
- regulate the conduct of insurance companies in assessing claims;
- provide for the fair and reasonable exchange of documentation
relied upon in assessing claims; and
- include hard time frames so that claims are assessed in a timely manner.
4.29 The FRLC stated that the Code does not meet best practice standards and
does little, if anything, to restore confidence in the industry. The FRLC
argued for greater oversight by ASIC to bring the industry into line with
4.30 The FRLC also had concerns about the process in the Code for updating
Central to our concerns is that the 'relevant' medical
specialist does not have to be independent of the insurers. Who is a 'relevant'
medical specialist is entirely at the discretion of insurers and the FSC. This
fundamentally undermines the appearance of impartiality and raises questions as
to the validity of the draft and any review into medical definitions, in the
eyes of consumers.
4.31 The Consumer Action Law Centre acknowledged that the Code may lead to
improved claims handling timeframes and greater protections for policyholders
during investigations and surveillance processes.
4.32 However, Consumer Action Law Centre also pointed to significant
weaknesses in the Code, including that:
- the Code is not enforceable by courts or tribunals, or registered
- the claims timeframes do not apply to people who have life
insurance in their superannuation, which is the majority of life insurance; and
- the three-yearly reviews by a 'relevant' medical specialist do
not have to be undertaken independently of the insurers. The Code also only
guarantees some updates to medical definitions for 'on sale' policies only,
excluding the many people whose policies are no longer 'on sale'.
4.33 Likewise, the Australian Lawyers Alliance (ALA) identified significant
shortcomings in the Code, including that it:
- does not do enough to protect the rights and interests of
- provides no real remedy for its breach and therefore no incentive
- has limited scope and coverage; and
- does not cover all participants in the industry.
4.34 The ALA was also critical of the role of the LCCC because the LCCC cannot
take any direct action to assist a consumer who may the victim of a breach of
the Code. While, the LCCC can impose rectification steps, they are not defined.
Indeed, the ALA argued that the strongest identified sanction that can be
imposed by the LCCC is that the insurer will have to write to the consumer
about the issue.
4.35 While the vast bulk of the evidence to the committee argued that the
Code was weak, limited in scope, and should be approved by ASIC, at the other
end of the spectrum, one submitter did not support the Code because, in their
view, the Code was unnecessary and went too far. That submitter argued that the
Code would drive up premiums, reduce the adviser network, and cause even
greater levels of under‑insurance in Australia.
ASIC Enforcement Review Taskforce—Co-regulation
4.36 In October 2016, the government announced an ASIC Enforcement Review Taskforce
(Taskforce) to review the adequacy of ASIC's enforcement regime, including in
relation to codes of practice.
4.37 In June 2017 the Taskforce released a consultation paper on industry
codes in the financial sector. The consultation paper considered the merits of
self-regulatory and co-regulatory approaches:
The impact on the lives of those affected by poor practices,
as brought to light in media reports and in Parliamentary and other inquiries,
has resulted in the Australian financial sector coming under intense public and
regulatory scrutiny in recent times and in the impairment of consumer
confidence in the sector. In this context it is apt to consider whether
self-regulatory initiatives such as industry codes are achieving their
potential, and whether that potential could better be achieved by the
introduction of a co-regulatory model – at least for codes in relation to key
services provided to retail and small business customers.
4.38 The Taskforce observed that where self-regulation is non-existent or has
proved ineffective, and a legislative solution is not appropriate,
co-regulation could significantly improve the content, consistency and
enforceability of codes.
4.39 While the content of the code and the rules regulating industry
behaviour are still determined by the industry participants, a co-regulatory
model is a stronger form of regulation than self-regulation because a
co-regulatory code requires approval by ASIC, participation is mandatory, and
the code is enforceable.
The introduction of an enforceable co-regulatory code in
appropriate parts of the financial sector could boost consumer confidence in
4.41 The Taskforce consultation paper proposed a co-regulatory model for the
financial services sector with the following components:
- The content and governance arrangements for relevant codes should
be subject to approval by ASIC.
- Entities engaging in activities covered by an approved code
should be required to subscribe to that code.
- Approved codes should be binding and enforceable against
subscribers by contractual arrangements with a code monitoring body.
- An individual customer should be able to seek appropriate redress
through the subscriber's internal and external dispute resolution arrangements
for non-compliance with an approved code.
- The code monitoring body, comprising a mix of industry, consumer
and expert members, should monitor the adequacy of the code and industry
compliance with it over time, and periodically report to ASIC on these matters.
4.42 The Taskforce considered that the proposed co-regulatory approach should
apply to sectors of the industry that would be covered by an external dispute
resolution body such as the proposed Australian Financial Complaints Authority
4.43 If a consumer lodged a complaint about an insurer's compliance with the
code, the external dispute resolution body would apply the code of practice to
any dispute between the insurer and the insured.
4.44 As noted above, codes may also give rise to enforceable rights in court
actions as codes may form part of the contract between the parties. In
addition, the ASIC Act provides that a court may have regard to an industry
code in determining whether the conduct of a financial services supplier is
4.45 The Electronic Funds Transfer Code of Practice (now known as the
ePayments code) is the only co-regulatory code currently operating in the
retail financial services system.
4.46 The committee notes that while the Financial Services Council argued
that the Life Insurance Code of Practice set standards above current
legislative requirements, consumer groups argued that the Code falls well short
of best practice and some community expectations.
4.47 Furthermore, the Insurance in Superannuation Working Group has only just
released a code of practice for superannuation trustees and insurers. Given
that most life insurance is held in superannuation, the committee considers
this to be a somewhat tardy response to a pressing issue. In addition, there is
no mechanism for ASIC or a consumer to enforce the present industry Code, or to
4.48 The committee has considered the current self-regulatory approach
adopted by the Financial Services Council and the Insurance in Superannuation
Working Group. The committee is not persuaded that the current voluntary
approaches to industry self-regulation put forward by the Financial Services
Council and Insurance in Superannuation Working Group are sufficient to deter
misconduct and address the poor practices that have become all too prevalent in
the life insurance industry.
4.49 The committee also notes that previous self-regulatory codes in the life
insurance industry fell into disuse. The committee considers that it would be
unacceptable for such a situation to recur.
4.50 In light of the above, the committee welcomes the co-regulatory approach
proposed by the ASIC Enforcement Review Taskforce. The committee is persuaded
that co-regulation would have greater potential to foster best-practice in the
life insurance industry and, as a consequence, help restore much-needed
consumer confidence in the sector.
4.51 In particular, the committee considers that, with respect to the life
insurance industry, a co-regulatory approach must, at a minimum, deliver a code
- is written in plain English that regulates the conduct of life
insurance companies in assessing claims;
- is mandatory for all industry participants;
- is registered with ASIC;
- is enforceable in order to create accountability; and
- provides genuine remedies for its breach, including financial
remedies, thereby creating an incentive for compliance.
4.52 The committee recommends that the government implement the co‑regulatory
approach put forward in the ASIC Enforcement Review Taskforce Position Paper across
the whole financial services sector, while ensuring, where possible, that there
are no exemptions for any part of the life insurance industry and that codes
are written in plain English.
4.53 The co-regulatory approach would give the code compliance committees the
power to determine whether breaches had occurred and the Australian Financial
Complaints Authority the power to enforce compliance through determinations.
However, both those processes only generally relate to individual breaches of
codes, as they are unlikely to be effective in addressing systemic or
systematic breaches of codes.
4.54 As a matter of practice, ASIC focusses its activities on systemic and
systematic misconduct. However, under the proposed arrangements, ASIC may not
have the power to undertake enforcement action for systemic and systematic code
breaches. This would result in a very significant gap in consumer protections.
4.55 In its recent inquiry into Whistleblower Protections, the committee's
recommendation 5.2 would include breaches of industry codes within the
definition of disclosable conduct.
4.56 In other words, if that particular recommendation was implemented,
whistleblowers would receive protection for blowing the whistle about serious
misconduct such as systemic or systematic breaches of codes of practice. This
may allow a company to receive and take action in relation to such a
disclosure. However, under the proposed co-regulatory model a regulator, such
as ASIC, would not have the power to take effective enforcement action in
relation to the disclosure.
4.57 The committee therefore considers that it is essential for regulators to
have appropriate enforcement powers in relation to systemic or systematic
breaches of industry codes of practice in addition to the proposed
4.58 The committee recommends that ASIC be given the power to undertake
enforcement action (halting misconduct, remedies and sanctions) in relation to
systemic or systematic breaches of codes of practice in the financial services
sector, including in the life insurance sector.
4.59 The committee also notes that the Life Insurance Code of Practice does
not place obligations on financial advisers or planners selling or advising on
life insurance. This is another in a very long list of exemptions from adequate
consumer protections that the life insurance industry currently exploits. The
committee considers the exemption to be a serious flaw, particularly given the
poor conduct of some advisers identified in several recent inquiries and
4.60 The committee therefore considers that, in order for codes of practice
in the financial services sector (including life insurance) to be approved by
ASIC, they must apply to all relevant industry participants, without exceptions.
4.61 The committee recommends that, in order for ASIC to approve any code of
practice in the financial services sector, including life insurance, the code
must apply to all relevant industry participants, without exemptions.
4.62 Finally, the committee supports the view, put forward by the Financial
Ombudsman Service amongst others, that it would be much easier for consumers
for there to be a single life insurance code of practice. The committee
therefore recommends that, prior to seeking ASIC approval, the Life Insurance
Code of Practice and the Insurance in Superannuation Code of Practice be
combined into a single code for the life insurance industry if possible.
4.63 The committee recommends that, prior to seeking ASIC approval, the two
codes of practice for the life insurance industry be combined into a single
code of practice if possible.