House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 4 - Caps on commissions (recommendation 4.4)

Outline of chapter

4.1 Schedule 4 to the Bill amends the ASIC Act to place a cap on the amount of commission that may be paid in relation to add-on risk products such as tyre and rim insurance, mechanical breakdown insurance and consumer credit insurance (for the credit facility) supplied in connection with the sale or long-term lease of a motor vehicle.

Context of amendments

4.2 The Financial Services Royal Commission considered add-on insurance sold in car yards and found that the levels of commissions paid to motor vehicle dealers in connection with the sale of such products contributed to the mis-selling of those products. The Financial Services Royal Commission noted that:

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amounts paid out in commissions on add-on insurance products regularly exceed claims payouts;

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insurers view car dealers as distribution networks and pay higher commissions to compete with one another to gain market share of those networks; and

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industry has taken limited steps to reduce commissions, but there are few legal requirements to do so.

4.3 Recommendation 4.4 of the Financial Services Royal Commission recommended was that ASIC impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products.

4.4 Currently, commissions paid by insurers in connection with consumer credit insurance taken out by a debtor is capped at 20 per cent of the premium (where the related credit contract is regulated by the Credit Act).

Summary of new law

4.5 Schedule 4 amends the ASIC Act to:

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provide ASIC with the power, by legislative instrument, to set caps on the amount of commission that may be paid in relation to certain add-on risk products sold in connection with the sale or long-term lease of a motor vehicle;

•

make it a criminal offence, civil penalty and offence of strict liability for a person to pay or receive a commission in relation to an add-on risk product that exceeds the cap determined by ASIC for that product; and

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give consumers the right to recover commissions paid in excess of the cap.

4.6 The amendments improve outcomes for consumers by discouraging the mis-selling of add-on risk products in car yards, particularly those products where the amounts paid in commissions are greater than those paid out in claims.

Comparison of key features of new law and current law

Detailed explanation of new law

Commissions for add-on risk products must not exceed the cap

4.7 Schedule 4 inserts a new offence into Subdivision D of Division 2 of Part 2 of the ASIC Act. The offence relates to providing or receiving commissions in connection with the supply of add-on risk products that are provided in connection with the sale or long-term lease of a motor vehicle, or the provision of credit connected with the sale or long-term lease of a motor vehicle. An offence is committed if the commission exceeds the cap determined by ASIC for that add-on risk product. [Schedule 4, item 3, section 12DMC(1) of the ASIC Act]

4.8 An add-on risk product is defined as a facility through which, or through the acquisition of which, a person manages financial risk. The concept of managing financial risk is defined in section 12BAA(5) of the ASIC Act. Add-on risk products include insurance products and certain insurance-like products. [Schedule 4, items 2 and 3, the definition of 'add-on risk product' in section 12BA(1) and section 12DMC(2) of the ASIC Act]

4.9 The offence applies to commissions provided or received in connection with the supply of a financial service that consists of providing an add-on risk product to the product recipient in connection with the sale or long-term lease of a motor vehicle, or in connection with the provision of credit connected with the sale or long-term lease of a motor vehicle. The product recipient may be the consumer, or the person who sells or leases the motor vehicle and provides a warranty in connection with the motor vehicle to the consumer. [Schedule 4, item 3, section 12DMC(1) of the ASIC Act]

4.10 The financial service may be supplied by any person to any other person. It is not limited to transactions in which a financial service is supplied to a consumer. [Schedule 4, item 3, section 12DMC(1) of the ASIC Act]

4.11 Commission includes any form of monetary consideration, or non-monetary consideration to which a monetary value can be assigned. Whether a payment or benefit is a commission is determined by the substance of the arrangement, regardless of how it is characterised by the parties to the arrangement. Examples of commissions intended to be captured by this definition include, but are not limited to, the following, or a combination of the following:

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financial or other benefits in the nature of a commission;

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the profit on the sale of an extended warranty which is underwritten by an add-on risk product;

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payments or other incentives (such as holidays, hospitality or training) that are not necessarily linked to an individual transaction but are based on a cumulative amount of sales (by number or dollar value) of add-on insurance or insurance like products.

[Schedule 4, item 2, the definition of 'commission' in section 12BA(1) of the ASIC Act]

4.12 Long-term lease of a motor vehicle means a contract for the hire of a motor vehicle for a fixed period of more than four months, or for an indefinite period. [Schedule 4, item 2, the definition of 'long-term lease' in section 12BA(1) of the ASIC Act]

4.13 Motor vehicle has also been defined for the purposes of the caps on commissions. [Schedule 4, item 2, the definition of 'motor vehicle' in section 12BA(1) of the ASIC Act]

4.14 Motor vehicle means any motor-powered vehicle of a kind intended for use as land transport (other than rail transport), whether or not it is for use on a road. Motor vehicles that are not intended for use on a road and that are of a kind intended primarily for use by persons with restricted mobility are carved-out from the definition. This excludes electric wheelchairs, mobility scooters and similar vehicles from the definition of motor vehicle.

4.15 Motor vehicle also means any other vehicle of a kind intended to be towed by a motor-powered road vehicle intended for use as land transport (such as a caravan).

4.16 For the offence to apply, the person acquiring the motor vehicle must acquire it as a consumer within the meaning of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 as applied under Subdivision A of Division 2 of Part XI of that Act). [Schedule 4, items 2 and 3, the definition of 'Australian Consumer Law' in section 12BA(1) and section 12DMC(1) of the ASIC Act]

4.17 The offence applies where:

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the supply of the add-on risk product is covered by an ASIC determination setting a cap on the commission; and

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the value of the commission is greater than the cap set out in the determination in relation to that add-on risk product.

[Schedule 4, item 3, section 12DMC(1) of the ASIC Act]

4.18 Where there is no determination covering the product, there is no cap on the commission, subject to the interaction between the new law and section 145 of the National Credit Code (which regulates commissions for consumer credit insurance).

ASIC's power to determine the caps on the value of commissions

4.19 The new law gives ASIC the power to make a legislative instrument setting out the cap on commissions provided in connection with add-on risk products of a kind specified in the instrument. [Schedule 4, item 3, section 12DMC(3) of the ASIC Act]

4.20 The determination may limit the circumstances in which the cap applies to a particular add-on risk product. [Schedule 4, item 3, section 12DMC(4) of the ASIC Act]

Example 4.1

ASIC makes a determination capping the commission payable on guaranteed asset protection insurance policies at 10 per cent of the premium. The determination provides that guaranteed asset protection insurance products with a claims ratio of 65 per cent or more are not covered by the determination and can continue to attract uncapped commissions.

4.21 The determination may also set out how the value of commissions is to be calculated when determining if the cap on commissions applies. [Schedule 4, item 3, section 12DMC(4) of the ASIC Act]

How commissions should be valued

4.22 The value of the commission provided in connection with an add-on risk product must be calculated in accordance with the applicable ASIC determination that covers the product. This is to enable ASIC to apply a formula or method that is flexible and tailored to particular payment arrangements. [Schedule 4, item 3, section 12DMC(5) of the ASIC Act]

4.23 If the ASIC determination does not include a way to calculate the value of the commission, the value of the commission is the sum of:

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the amount of money of the commission (to the extent that the commission is expressed as an amount of money); and

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if some or all of the commission is not expressed as an amount of money, the market value of that portion of the commission.

[Schedule 4, item 3, section 12DMC(5) of the ASIC Act]

4.24 Money has the same meaning as in the A New Tax System (Goods and Services Tax) Act 1999 and includes:

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currency;

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promissory notes and bills of exchange;

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any negotiable instrument used or circulated, or intended for use or circulation, as currency;

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postal notes and money orders; and

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payment by way of a credit card or debit card, crediting or debiting an account, or the creation or transfer of a debt.

[Schedule 4, item 2, the definition of 'money' in section 12BA(1) of the ASIC Act]

4.25 In working out the market value, anything that would prevent or restrict conversion to money should be disregarded. [Schedule 4, item 3, section 12DMC(6) of the ASIC Act]

4.26 Where a commission is provided in connection with two or more add-on risk products, the value of the commission is to be apportioned between the add-on risk products in accordance with the ASIC determination. However, if the ASIC determination does not provide for apportionment, the commission is to be apportioned between the products on a reasonable basis. [Schedule 4, item 3, section 12DMC(7) of the ASIC Act]

Example 4.2

ASIC makes a determination imposing a cap on commissions for certain insurance products. The determination covers arrangements between licensees and intermediaries where employees who meet sales targets may attend an overseas conference paid for by the licensee. The determination made by ASIC can:

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prescribe how the value of the overseas conference is to be calculated; and

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provide that the value of the benefit must be apportioned equally between the products sold by each employee in the period during which sales are used to ascertain eligibility to attend the conference.

4.27 The offence also applies where more than one commission is provided in connection with a single add-on risk product.

4.28 In these circumstances, the offence applies as if one single commission is provided that comprises all of those commissions. If those commissions are provided by more than one person, the commission is then taken to be jointly provided by all of those persons. The value of that single commission is the sum of the values of all of those commissions. [Schedule 4, item 3, section 12DMC(8) of the ASIC Act]

4.29 The effect of this provision is to stop providers and recipients of commissions from dividing a commission that would otherwise exceed the cap between multiple providers or recipients.

Example 4.3

An Australian Financial Services licensee issues mechanical breakdown insurance through an authorised representative (broker) who works on the same site as a car dealership. ASIC caps commissions on mechanical breakdown insurance at 15 per cent of the premium. If the premium is $600 and the licensee provides a commission of $70 to the broker and $30 to the dealer on the sale of each product, the combined value of both commissions ($100) will be 16 per cent, which exceeds the 15 per cent cap.

Interaction with the National Credit Code

4.30 Section 145 of the National Credit Code provides for a 20 per cent cap on commissions provided in connection with consumer credit insurance.

4.31 The offence of exceeding the cap on commissions that is inserted by this Schedule will only affect commissions paid in connection with consumer credit insurance that are subject to section 145 of the National Credit Code:

•

the insurance is an add-on product of a kind covered by a ASIC determination; and

•

the add-on product is provided in connection with the sale or long-term lease of a motor vehicle, or the provision of credit connected with the sale or long-term lease of a motor vehicle.

[Schedule 4, item 3, section 12DMC(9) of the ASIC Act]

4.32 If no determination has been made by ASIC in relation to the add-on product, section 145 of the National Credit Code will continue to apply a 20 per cent cap on commissions provided in connection with consumer credit insurance. [Schedule 4, items 2 and 3, the definition of 'National Credit Code' in section 12BA(1) and the note to section 12DMC(9) of the ASIC Act]

4.33 Consequential amendments have been made to section 145 of the National Credit Code to provide for this interaction. [Schedule 4, item 13, section 145(6) of the National Credit Code]

4.34 New definitions of add-on risk product, long-term lease, and motor vehicle are inserted into section 204(1) of the National Credit Code to ensure the consequential amendments operate as intended. [Schedule 4, item 14, section 204(1) of the National Credit Code]

Criminal consequences for breaching the caps on commissions

The ordinary offence

4.35 Breaching the cap on commissions is an ordinary criminal offence under section 12GB of the ASIC Act. Under section 12GB of the ASIC Act, a person who contravenes provisions of Subdivision D of Division 2 of Part 2 of the ASIC Act (which contains consumer protection provisions, and will include those relating to the cap on commissions) is subject to a maximum penalty of 2,000 penalty units. A person also commits an offence if they attempt to contravene or are involved in a contravention of the cap on commissions. This is consistent with the existing penalties for contravening consumer protection provisions in the ASIC Act.

4.36 Section 93E of the ASIC Act outlines the penalty applicable to an offence where the offence is committed by a body corporate. In accordance with that section, the maximum penalty for a body corporate is 10 times the fine specified for the offence in section 12GB (that is, 20,000 penalty units).

The civil penalty provision

4.37 Breaching the cap on commissions is a civil penalty provision under section 12GBA(6) of the ASIC Act.

4.38 The maximum penalty for contravening the civil penalty provision is to be determined in accordance with section 12GBCA of the ASIC Act (section 12GBCA provides the penalty that is applicable to a contravention of a civil penalty provision by an individual and a body corporate).

The strict liability offence

4.39 Breaching the cap on commissions is an offence of strict liability. The maximum penalty for the strict liability offence is 60 penalty units for an individual. In accordance with section 93E of the ASIC Act, the penalty for a body corporate is 600 penalty units. [Schedule 4, item 4, sections 12GB(1AA) and (1AB) of the ASIC Act]

4.40 The Guide to Framing Commonwealth Offences was considered in determining the penalty amounts for the strict liability offence. The offence specifies a maximum penalty of 60 penalty units for an individual. This complies with the Guide to Framing Commonwealth Offences, which provides that an appropriate maximum penalty for a strict liability offence is 60 penalty units for an individual. The offence specifies a maximum penalty amount of 600 penalty units for bodies corporate. This exceeds the amount considered appropriate in the Guide to Framing Commonwealth Offences, which is 300 penalty units for bodies corporate.

4.41 The departure from the Guide to Framing Commonwealth Offences for the maximum penalty amount for bodies corporate is appropriate in this situation. Consistent with the uplift factor for body corporate penalties in the ASIC Act, having the body corporate penalty at a maximum of 600 penalty units reflects the need for bodies corporate to be genuinely deterred from engaging in criminal behaviour, even where fault elements do not need to be proven.

4.42 Corporate participants in the financial sector often have significant resources, which may encourage some operators to view lower penalties as a cost of doing business when compared to the chances of getting caught, and the overall gains to be made from engaging in the criminal behaviour. An increased penalty of 600 penalty units effectively neutralises any profit-based incentive to break the law, and is appropriate to direct toward bodies corporate because it is commensurate with a body corporate's potential size, resources and capacity.

4.43 The Guide to Framing Commonwealth Offences notes that strict liability offences are also appropriate where they are likely to enhance the effectiveness of the enforcement regime, and where there are legitimate grounds for penalising persons lacking fault.

4.44 A concurrent strict liability offence for breaching the cap on commissions is important to ensure the regime is enforceable in the absence of evidence of fault elements. The strict liability offence creates a lower penalty for engaging in the prohibited conduct (compared to the ordinary offence). For lower levels of offending, the strict liability offence is appropriate to deter future criminal behaviour. In complex cases where it is particularly difficult to find adequate evidence of fault elements, the strict liability offence allows the regulator to still take appropriate enforcement action ensuring contraventions can still be brought to account.

4.45 As found by the Financial Services Royal Commission, excessive commissions create a disproportionate incentive for car yard intermediaries to sell add-on insurance to customers who cannot afford or have no use for the product, or who will be unable to claim on the product.

4.46 The community expects consumers to be adequately protected from sales practices that do not align with their best interests, especially in financial services. Giving and receiving excessive commissions to sell add-on insurance in car yards contributes to that misalignment.

4.47 A strict liability offence will significantly improve the regulatory regime by making the standards of behaviour enforceable in a broader range of circumstances than for an ordinary criminal offence alone. This will discourage disreputable practices that cause consumer detriment more broadly across the industry and ensure lower level contraventions that can still cause harm to consumers, can be brought to account.

4.48 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact which the accused must prove on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences.

4.49 Where a person is convicted of two or more offences constituted by breaching the cap on commissions that are of the same nature and occurred around the same time, the penalty imposed will not be more than the maximum fine that would ordinarily be imposed for a single offence. If a person is convicted of multiple strict liability offences, where those offences were of the same nature or committed around the same time, the cumulative penalty must not exceed the maximum fine that may be imposed for one strict liability offence. This is consistent with the existing rules that apply in relation to offences against Subdivision D of Division 2 of Part 2 of the ASIC Act, which deals with consumer protections. [Schedule 4, items 5, 6 and 7, sections 12GB(2), (2A) and (2B) of the ASIC Act]

4.50 The penalty limit for multiple contraventions of the same offence provision applies whether or not the person was also convicted of another offence or offences in contravention of the cap on commissions that were of a different nature or occurred at a different time. [Schedule 4, item 7, section 12GB(2B) of the ASIC Act]

4.51 Consequential amendments are made to sections 12GB(3), (5) and (6) of the ASIC Act to ensure the strict liability offence operates consistently with the existing ordinary criminal offence. [Schedule 4, item 8, sections 12GB(3), (5) and (6) of the ASIC Act]

Recovering commissions that exceed the cap

4.52 The amendments in Schedule 4 allow consumers to recover commissions that exceed a cap. The consumer may recover the commission from the person who provided the commission or the motor vehicle dealer who received the commission, depending on the nature of the financial service and the attached commission that has been provided.

4.53 Where a commission is subject to a cap and that cap is exceeded, the consumer is entitled to recover the entire value of the commission from the person who provided the commission. [Schedule 4, item 9, section 12GFA(1) of the ASIC Act]

4.54 Similarly, where a person who is a motor vehicle dealer receives a commission that exceeds the cap in relation to a warranty they gave to a consumer, the consumer is entitled to recover the entire value of the commission from the motor vehicle dealer. [Schedule 4, item 9, section 12GFA(2) of the ASIC Act]

4.55 These provisions do not affect the consumer's right to recover loss or damage under section 12GF of the ASIC Act (section 12GF entitles a person to recover loss or damage caused as a result of conduct that contravenes certain provisions in the ASIC Act). [Schedule 4, item 9, section 12GFA(3) of the ASIC Act]

4.56 If a court finds that a person has committed an offence or contravened a civil penalty provision by breaching the cap on commissions, that finding may be used as evidence in a separate action to recover commissions that exceed the cap. [Schedule 4, item 10, section 12GG of the ASIC Act]

4.57 In an action to recover commissions that exceed the cap, the court may make other orders (other than to repay the excess commission) if the consumer has suffered loss or damage as a result of a contravention of a provision in Division 2 of Part 2 of the ASIC Act. [Schedule 4, item 11, section 12GM(1) of the ASIC Act]

4.58 In an action to recover commissions that exceed the cap, the court may, on application of the Minister or ASIC, make an order prohibiting the payment or transfer of money or other property. [Schedule 4, item 12, section 12GN(1) of the ASIC Act]

4.59 If a consumer makes a claim to recover a commission that exceeds the cap and wishes to rely on conduct engaged in outside Australia in the proceeding to prove their claim, they may do so only if the Minister consents in writing. [Schedule 4, item 1, section 12AC(2) of the ASIC Act]

Application and transitional provisions

4.60 The amendments in Schedule 4 apply to commissions provided in connection with supplies of add-on risk products under contracts, arrangements or understandings entered into on or after the day after the amendments commence. The amendments commence on the later of 1 January 2021 and the day after Royal Assent. [Clause 2, Schedule 4, item 15]