Explanatory Memorandum
(Circulated by the authority of the Minister for Revenue and Assistant Treasurer, the Hon Peter Dutton MP)Chapter 3 Direct Offshore Foreign Insurers - Corporations Act
Outline of chapter
3.1 Items 1 and 2 in Schedule 2 of this Bill amend the Corporations Act to prohibit AFSL holders and authorised representatives from dealing in a general insurance product that is not from an authorised insurer, Lloyd's underwriter or where an exemption applies.
3.2 The Corporations Act amendments are intended to complement the changes made to the Insurance Act outlined in Chapter 2 of this explanatory memorandum.
Context of amendments
3.3 AFSL holders and authorised representatives, especially insurance agents and brokers, provide a conduit for Australian consumers and businesses to access the insurance market, including DOFIs.
3.4 These financial intermediaries provide a valuable financial service to Australian consumers and business in assist them to obtain competitive insurance to meet their needs or place a hard to place insurance risk.
3.5 The HIH Royal Commissioner noted a possible gap in APRA's regulatory reach of offshore insurers and that it may be possible for an offshore insurer, for example, an insurer who has been refused authorisation by the APRA to move offshore and issue insurance policies through an agent or broker in Australia in an attempt to avoid the operation of the Insurance Act.
3.6 The changes outlined in Chapter 2 of this explanatory memorandum enhance the integrity of general insurance prudential regulation in Australia. The Corporations Act prohibition introduced by this Bill complements and reinforces the integrity of this general insurance regulation by limiting the extent to which AFSL holders and authorised representatives can deal in a product that is not regulated under the Insurance Act. This maximises the likelihood that Australian individuals and businesses will benefit from the protection provided by Australia's general insurance regulatory regime.
Summary of new law
3.7 Schedule 2 of this Bill amends the Corporations Act to prohibit Australian financial service licence holders or authorised representatives from dealing in a general insurance product unless the product is from a general insurer authorised under the Insurance Act, a Lloyd's underwriter or relates to an exemption under the proposed section 3A, specified in Chapter 2 of this explanatory memorandum.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| AFSL holders and authorised representatives will be prohibited from dealing in a general insurance product that is not from an authorised insurer, Lloyd's underwriter or where the new exemption provisions apply. | Currently, the only limit on the financial service products a AFSL holders may deal in is outlined in the licence.
AFSL holders and their authorised representatives are also required to comply with the general obligations under section 912A of the Act. |
Detailed explanation of new law
3.8 This measure prohibits AFSL holders and authorised representatives from dealing in a general insurance product unless the general insurance product is issued by an authorised insurer under the Insurance Act, a Lloyd's underwriter or an exemption in the Insurance Act applies (that is, a section 7 or a section 3A exemption).[ Schedule 2, item 1 ]
3.9 For example, an insurance broker, who is an AFSL holder or authorised representative, will not be able to arrange, acquire, vary or dispose of a general insurance product for their client unless that product is from an authorised insurer, Lloyd's underwriter or they are satisfied that the general insurance product required by the client is exempt.
3.10 Where an exemption applies, the AFSL holder or authorised representative can seek to obtain insurance for the client from any insurer, but must continue to comply with existing conduct and disclosure obligations in the Corporations Act (e.g. the requirement that any retail personal advice is appropriate).
3.11 It is intended that the prohibition will rely on definitions already in the Corporations and Insurance Acts. The definition of Australian financial service licensee, contained in section 761A of the Corporations Act, and the definitions of APRA-authorised general insurer and Lloyd's underwriter, defined in section 12 and Part 7 of the Insurance Act, respectively, apply to the prohibition.
3.12 This provision would apply to all AFSL holders and authorised representatives on its face, but in practice would impact most on AFSL holders and authorised representatives that regularly deal in general insurance products.
3.13 No amendments to the exemptions in 911A(2) are proposed. This requirement is not to apply to a person exempted under section 911A(2) from the requirement to hold an AFSL for a financial service they provide.
3.14 Dealing is defined in section 766C of the Corporations Act. The prohibition does not apply to providing financial product advice, as defined in section 766B of the Corporations Act.
3.15 The prohibition only applies to general insurance products as defined in section 764A(1)(d) of the Corporations Act.
3.16 Consistent with other offences in Chapter 7 of the Corporations Act, the prohibition is an offence of strict liability. The maximum penalty is a fine of 50 penalty units. [ Schedule 2, Item 1 ]
3.17 The penalty units that will attach to this offence are of a similar order to others in Chapter 7 of the Corporations Act, for example, the strict liability offence where a person (fails to give a disclosure document or statement to a retail client, that is 50 penalty units (this means 50 x 110 for a natural person and 50 x 110 x 5 for a body corporate i.e. $27,500).
3.18 A strict liability offence is considered necessary to maximise the defensive value of the new offence, thus maximising its role in complementing and reinforcing the regulation of general insurance.
3.19 This offence will enforced by ASIC under its existing powers in the Corporations Act. The three main consequences that will flow from a breach of this measure are:
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- People affected will be able to apply to the court to seek an injunction under section 1324 of the Corporations Act to stop the prohibited conduct.
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- The general penalty provisions in section 1311 and 1312 will apply to this provision. In addition, the defence of mistake of fact in section 9.2 of the Criminal code applies to this prohibition. This measure will not attract a term of imprisonment.
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- A breach of this prohibition will be a breach of obligations of financial services licensees (that is, specifically section 912A(1)(c)), and may be grounds for ASIC to vary, suspend or cancel a person's AFSL or apply for a banning order against that person.
Application and transitional provisions
3.20 This offence will commence at the same time as the Insurance Act measures, on 1 July 2008.
Consequential amendments
3.21 A new penalty provision will be inserted into Schedule 3 of the Corporations Act for a breach of this prohibition. It will carry a maximum penalty of 50 penalty units.[ Schedule 2, item 2 ]