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March 2006 - Refinements aim to improve communication

The Federal Government has announced proposed “refinements” to its Financial Services Reform Act.

The proposed changes aim to “promote effective communication with consumers, so they can make well-informed decisions about their financial future, and reduce the compliance burden”.

Both are worthy objectives. Simplification and reduction of red tape is always a positive move, reducing the cost of doing business and the complexity of compliance with the myriad laws governing the insurance industry. Over-regulation frequently has unintended byproducts. For example, it is doubtful whether, given the length and complexity of most product disclosure statements (PDSs), that the average “man in the street” can make a reasoned judgement when comparing one product with another. And does the consumer have time to wade through all the information provided? The answer is probably no. Which means the decision is being made on the same basis it has always been -- price, company reputation and image, brand awareness and similar factors. If consumers seek a broker’s advice, they’re more likely to get a product that suits their precise needs and budget. But brokers are infrequently used for domestic and motor policy purchases.

The refinements include amendments that:

  • allow service providers to tailor, reduce duplication in and reduce the length of financial services guides (FSGs);
  • reduce the frequency in which a Statement of Advice (SoA) is required to be given to a client;
  • allow product issuers the option of producing a short form PDS;
  • reduce the length of oral disclosures required for sales, for example, by telephone;
  • exempt basic deposit products (for example, savings accounts) from the PDS requirements;
  • tailor the disclosure requirements for general insurance products;
  • make changes to the retail/wholesale client definition - which specifies which clients require additional consumer protections;
  • exempt secondary service providers (financial service providers who have no direct relationship with a client but provide their services to the client through another service provider) from the need to provide an FSG in certain circumstances;
  • clarify that certain types of advice about financial products do not attract the licensing and disclosure requirements of the Act;
  • clarify the jurisdictional reach of financial services regulation;
  • make changes to sub-authorisation requirements - under the legislation, licensees are able to authorise representatives to act for them, who can, in certain circumstances, sub-authorise other representatives; and
  • make technical and other amendments to the Act.

The industry welcomes the refinements and the government consultation that occurred before their implementation. There are some areas in which the changes have probably not gone far enough, but they are a step in the right direction.

Both the life and general industries have received positive report cards from the ratings agency Standard & Poor’s (S&P), with both industries being rated stable.

S&P said the stability of life insurer financial strength ratings was driven by continued consumer demand for long-term savings and financial protection products, coupled with strong performance in key profit drivers. However, those were offset by increasing competition in the life industry and from other savings vehicles, leading to continued pressure on margins in the Australia life insurance market.

Ratings in the Australian life sector remained stable during the last six months of 2005, with no financial strength ratings for any insurer being upgraded or downgraded across the sector. However, changes in companies’ strategies had led to some companies being sold or placed under strategic review by their parents.

In the general industry, S&P maintained its stable rating outlook for Australia, despite ongoing domestic pricing pressure, and domestic and global catastrophes of “almost biblical proportions”. S&P said the record-breaking Atlantic hurricane season dominated the global insurance industry late last year, as the rising insured cost of the three category-5 storms (Katrina, Rita and Wilma) unfolded. However, the Australian sector was largely immune from the cost of the hurricanes. Domestic fundamentals remained strong, with continued underwriting profitability, an industry consisting of generally cost-efficient operators, a focus on shareholder returns, and diversification of business line exposures.

ANZIIF is again hosting its annual insurance industry awards, with the presentation dinner scheduled for Sydney in July. As AILA president, I have been invited to participate on the judging panel. I have agreed to take part as I believe this is an important way for AILA to be showcased to the industry and it should assist in increasing AILA’s profile.

I would like to pay tribute to past president Kelli Stallard, who left the board after the November 2005 AGM, for her many years of dedicated service to AILA. I’d also like to thank my predecessor, Peter Backe-Hansen, for his hard work on AILA’s behalf.

Steve Knight
AILA President



PO Box 2011 FOREST HILL VIC 3131
1300 699 140 office@aila.com.au



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