The Story So Far

The Life Insurance Code of Practice (LICOP) was introduced from 1 July 2017 following input from a broad range of industry stakeholders and is one of a handful of regulatory measures introduced following a period of negative publicity for the industry which culminated in the Hayne Royal Commission into misconduct in the banking, superannuation and financial services industry.

Among other things, the LICOP was developed to ‘protect consumer interests by promoting high standards of service, providing a benchmark of consistency within the industry, and establishing a framework for professional behaviour and responsibilities.’¹ This included setting minimum standards around policy definitions, product disclosure requirements, sales practices and claims handling. In short, the LICOP was designed to improve the customer experience by ensuring industry wide compliance. Whilst it is compulsory for companies who are members of the FSC, non-members can also opt into the LICOP.² 

We also saw the establishment of the Life Code Compliance Committee (LCCC) 'to make determinations in relation to reports of alleged Code breaches which the LCCC has investigated' and 'impose, at its discretion, sanctions for a breach of the Code where a breach is not corrected'³ among other things. Compliance with the LICOP is monitored and enforced by the LCCC⁴ which also investigates self-reported breaches and referrals from consumers of alleged breaches.

Initially, there was cause for optimism. ASIC’s Report 587 of August 2018 noted a general improvement within the industry, stating that 'many firms, conduct had improved, and the introduction of the Code by the FSC appears to have played a role in improving sales standards, particularly where it sets clear and specific expectations.'⁵ Nevertheless, there were calls for the LICOP to be more comprehensive and cover those areas missed by the initial iteration of the LICOP such as ‘clearer questions on application forms’ and ‘plain language explanations for non-standard terms such as exclusions.’⁶ In November 2018, the FSC released the new draft of the LICOP 2.0 for public consultation.⁷ However to date, the LICOP 2.0 has not been implemented in any capacity.

By the time the final report of the Hayne Royal Commission was tabled in early 2019, life insurers had been grappling with the LICOP’s compliance regime for over two years. However, the Royal Commission's final report made several key recommendations as to how the LICOP could be improved and enforcement capabilities enhanced. Firstly that ASIC, in approving industry codes of conduct, may take into consideration whether particular provisions of an industry code of conduct have been designated as ‘enforceable code provisions’.⁸ 

To this end, the provisions of the LICOP that govern the terms of the contract made between the life insurer and the policy holder should be designated as enforceable provisions⁹, meaning that a breach of certain provisions of the LICOP would constitute a breach of law. Furthermore, the LCCC should have the power to impose sanctions on insurers in breach of the LICOP.¹⁰ Notwithstanding, it was envisaged that any further iteration of the LICOP containing enforceable provisions, although subject to ASIC approval, will be largely left in the hands of the industry itself.

Proposed Legislation

Accordingly, in February 2020, Treasury commenced a consultation process with regards to proposed legislation to implement the enforceability of industry codes such as the LICOP. The legislation was to be introduced to Parliament by 30 June 2020 but has been delayed and is now set to be introduced to Parliament by December 2020.¹¹ 

The draft legislation released by Treasury, being the ‘Financial Sector Reform (Hayne Royal Commission Response - Protecting Consumers (2020 Measures) Bill 2020: Fsrc Rec 1.15 (Enforceable Code Provisions)’ enables ASIC to make certain provisions of industry codes enforceable. Relevantly, it is proposed that s1101A of the Corporations Act 2001 be amended to provide that ASIC, in the approval process, may identify a provision of any code of conduct submitted for approval, as an enforceable code provision. Furthermore, to broaden the key criteria for code approval.

For example, under the proposed change, among other things ASIC must not approve a code of conduct unless it is satisfied that each enforceable code provision is legally effective and that subscribers to the code have effective administrative systems for monitoring compliance with the code and making information obtained as a result of monitoring publicly available.

The proposed legislation also requires an independent review, every five years, of any approved industry code of conduct. The intention here is to ensure that any approved code is kept up to date with changes and fresh concerns within the industry. In the absence of an approved code of conduct, the proposed legislation provides that ASIC may prescribe its own code of conduct and declare it to be a ‘mandatory code of conduct’ to which subscribers must comply or face a pecuniary penalty not exceeding 1000 penalty units. Similarly, if a subscriber holds itself out as compliant with its own code (approved by ASIC) but then breaches an enforceable code provision, the subscriber would be liable to a civil penalty of 300 penalty units.

The Way Forward 

Whilst the LICOP is here to stay, it seems the life insurance industry will have a degree of control over any further iteration of the LICOP to be approved by ASIC. Indeed, the Hayne Royal Commission considered it 'important for the life insurance industry to continue to identify opportunities for improvement' and that industry 'commit in its codes, to making those improvements.'¹² As a result, the life insurance industry will have the opportunity to implement more practical and achievable standards within the LICOP and have some degree of input with respect to what might be identified as ‘enforceable code provisions’. Indeed, meeting the LICOP’s current compliance standards has been the principal challenge for life insurers since its inception in 2017.

However, if ASIC were not to approve of any further version of the LICOP proposed by the life insurance industry, this would leave open the possibility of a mandatory code being imposed by the ASIC regulations. As indicated in the explanatory memorandum, a mandatory code may be imposed when ‘efforts between ASIC and industry to develop an approved code of conduct have not been successful or because industry has not put forward a proposed code in a timely manner.’

Whilst the proposed legislation does not directly alter the LICOP, it is likely that many of the provisions will be legally enforceable. Further, there is pressure on the life insurance industry to update the LICOP to promote higher standards. As a result, the LICOP will need to be continually reviewed, at least once every five years in accordance with the proposed legislation, which means that the enforceable provisions are unlikely to remain static and the industry can expect continual change and development in the future. We will be keeping a keen eye on the developments of LICOP 2.0 and ASIC’s approval process once these legislative changes come into effect.

¹ Life Insurance Code of Practice pg2
² https://www.fsc.org.au/policy/life-insurance/code-of-practice/
³ Life CCC Charter – FSC 2019
⁴ https://lifeccc.org.au/insurers/
⁵ https://download.asic.gov.au/media/4853336/rep587-published-30-august-2…
⁶ https://www.fsc.org.au/resources/1342-life-code-consultation-launch-12-…
⁷ https://www.fsc.org.au/policy/life-insurance/code-of-practice/code-2-0
⁸ Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, final report, Recommendation 1.15
⁹ Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, final report, Recommendation 4.9
¹⁰ Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, final report, pg 33
¹¹ https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-…
¹² Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, final report, pg 314