ASIC eyes banks for ‘predatory’ policy sales

The Australian 12:00am March 7, 2018

Michael Roddan

The corporate watchdog has revealed it is investigating the banking sector over its sale of predatory insurance for personal loans, after the sector failed to expand its add-on insurance reforms beyond credit card products.

Appearing before a Productivity Commission hearing in Melbourne yesterday for its review of competition in the financial system, Australian Securities & Investments Commission head of insurance and credit Michael Saadat said the banking sector had more work to do to shore up its controversial consumer credit insurance businesses.

In its revamped code of practice, the Australian Bankers’ Association has pledged to introduce a cooling-off period before tellers and salespeople could sell add-on insurance products with credit cards, which covers consumers if they get sick or lose their jobs.

An investigation by ASIC found many consumers were not aware they had been sold the insurance, and often customers were ineligible to claim on the policy they had been sold. Under the changes to the code of practice, banks are still allowed to sell insurance with credit cards online, and with other products such as home loans and personal loans.

Commonwealth Bank recently refunded more than 65,000 customers about $10 million, after selling them unsuitable consumer credit insurance, which was sold with credit cards, personal loans, home loans and car loans.

Action by the corporate regulator has so far clawed back more than $120m in refunds for ripped-off consumers who were sold dodgy add-on insurance in car dealer yards.

The royal commission into the banking sector will examine case studies later this month related to “car finance practices” at Westpac, including its subsidiary St George, and ANZ, including its subsidiary Esanda.

“The concerns around the sale of add-on insurance are not confined to the car dealership model,” Mr Saadat told Productivity Commission chairman Peter Harris.

Mr Saadat said the four-day period before banks were allowed to offer add-on insurance for credit cards was “a good step”.

“But that doesn’t cover the field in terms of the add-on products that banks sell,” he said. “There’s a good case for a deferred sales model in consumer credit insurance for personal loans. So far the banking industry hasn’t proposed that. We will be monitoring that. We think there could be more work to do there.”

Mr Harris said it was questionable as to why the banks were “so willing to offer a product that has such a poor rate of claims history” and one that was “offered in circumstances where it is difficult to access sufficient information to consider if it is a good deal”.

Mr Harris said the markets department in Treasury may be able to formulate a policy to foist a deferred sales model across all add-on insurance products.

The commission recently issued a draft report on its financial system review, in which it found banks and insurers were uncompetitive and boosted profits at the expense of loyal customers. Competition levels were “less than desirable” for home loans, credit cards, home insurance, wealth management and financial advice, the commission said.

ASIC senior executive Greg Kirk said there needed to be a greater focus on whether mortgage brokers were meeting responsible lending laws. The legislation requires lenders to only sell loans to customers who are able to repay the loan without undue hardship, and also only sell products that meet their needs and objectives.

“Needs and objectives are only explored in very broad terms,” Mr Kirk said.

According to research from analyst Jonathan Mott, of investment bank UBS, mortgage brokers are earning $4600 for every home loan they write and are adding 16 basis points of costs to every borrower.