Financial Services Reform Act 2001- The insurance industry impact
by Rachel Young
The long anticipated Financial Services Reform Act (“FSRA”) commenced on 11 March 2002. The FSRA extensively reforms and consolidates the regulatory requirements of providers of financial services and the financial services industry as a whole.
The FSRA repeals the Insurance (Agents and Brokers) Act 1984 (Cth) and amends the Insurance Act 1973(Cth), the Life Insurance Act 1995 (Cth) and the Insurance Contracts Act 1994 (Cth).
The FSRA will not affect health, marine, State and Territory insurance and workers’ compensation insurance.
The FSRA introduces a regime consisting of three key elements:
licensing of financial markets and clearing and settlement facilities, and
licensing and conduct of financial service providers.
It is the last element that is of particular interest to the insurance industry.
The single licensing regime is intended to provide investors with consistent consumer protection, irrespective of the source of the financial service, and to maintain the standards of conduct and disclosure requirements of financial service providers. The regime applies to all persons, especially financial intermediaries, who provide a “financial service”, whether as principals or as authorised representatives. Financial intermediaries include securities dealers, investment advisers, futures advisers and brokers, general and life insurance brokers and future exchange dealers.
“Financial service” is defined within the FSRA to encompass sales, advice, dealing in or making a market in “financial products”, operating a managed investment scheme or providing a custodial or depository service.
Critical to the FSRA is the definition of “financial product”, which generally incorporates insurance products.
An Australian Financial Services Licence (“AFSL”) will be required by those providing financial services to either wholesale or retail clients. Retail clients include those who seek or are offered one of the following types of insurance policies: motor vehicle; home/building; home contents; sickness and/or accident; consumer credit; travel insurance or personal and domestic property insurance.
Wholesale clients include those who seek or are offered any other type of general insurance policy not already included in the above list.
It is through the AFSL that ASIC will regulate licensees to ensure they are appropriately skilled, have adequate financial resources (including professional indemnity insurance) and compliance systems which incorporate dispute resolution facilities and procedures.
The administrative and compliance costs of market participants are
significantly reduced under the FSRA, as ASIC is required to maintain a register of licensees, authorised representatives and exempted professional bodies. Previously, licensees were required to keep and maintain this information.
Financial service providers have two years to apply and obtain an AFSL pursuant to the transitional arrangements. However, current licences/registrations will cease to have effect when the holder is granted an AFSL or at the end of the transition period. Accordingly, a Corporations Act licence or an IABA registration will no longer be valid and should not be displayed. Pursuant to Regulation 10.2.44, insurance agents and brokers will be required to maintain their professional indemnity insurance during the two year transition period.