Wednesday, 5 February 2020
Financial Sector Reform (Hayne Royal Commission Response — Protecting Consumers (2019 Measures)) Bill 2019; Second Reading
I'm pleased to be speaking to the motion. I wish to move an amendment to the second reading stage, which I provide to the clerks.
The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 finally implements four of the government's long list of unmet commitments from its response to the banking royal commission. This will, when it finally passes the parliament, bring the government to a grand total of 10 of the 76 recommendations that were made by the Hayne commission into the banking and financial services sector.
I'll briefly summarise the effects of the bill and then review each of the schedules before addressing our amendment. Schedule 1 of the bill extends the unfair-contract terms laws to cover insurance contracts. Schedule 2 of the bill brings funeral insurance into the general financial consumer protections regime. And schedule 3 of the bill introduces a best interest duty for mortgage brokers and provides for regulations to reform mortgage broker remuneration.
I will address schedule 1. Can I say, as a preface, it's deeply disappointing that this wasn't introduced into the House before Christmas. Labor have long communicated to the government that they will have our every cooperation in ensuring that the Hayne royal commission recommendations on the banking and financial sector are implemented posthaste, and we'll do whatever we can, from a parliamentary sense, to ensure that those bills can be debated, debated early, improved where necessary and moved from this place to the other place and enacted. We do this because we take the view that the consumers of Australia rely upon it. We also make the observation that many of the recommendations—in fact, most of the recommendations—of the royal commission were not new to government. I'll go to that point when addressing the unfair-contract terms which are subject to one of the schedules before the House.
Given that they're not new to government, the government should have already implemented most of these recommendations. Work should have been well underway. So it's regrettable that here we are in the first session of this year and we are only now debating this legislation. It's regrettable for a second reason. Any Australian government can predict that, between October, November and December in this country, we approach, with great sadness, the period of natural disasters. Whether it be floods, whether it be cyclones in the north, whether it be bushfires, as we've tragically seen through the summer of 2019-20, or, as we've seen in our nation's capital, devastating hailstorms—all too frequent throughout the summer months—it is a very predictable phenomena. So, against that backdrop, you have to ask yourself: why would any government delay the implementation of legislation which improves the handling of insurance claims—insurance claims that we can predict with calendar certainty are going to increase after the summer period? We can predict with calendar certainty that that is going to occur. As you move through the flood season, the bushfire season, the hail season, you know that those insurance claims are going to increase. And this schedule deals with applying unfair terms to the insurance contracts, providing consumers with additional protections as and when they need to make their claims.
Any responsible government would know that insurance customers are going to need those protections as we move into the natural disaster season. They are not there, they haven't been there; that's bad enough. The government, in the last week of parliament last year, indicated that they were going to introduce this legislation into the parliament. But they chose not to. What was more important to the government than implementing these recommendations that were going to protect insurance consumers? Introducing the already failed union-busting Ensuring Integrity bills. It was a very costly stunt which is going to cost insurance consumers dearly. So if you're struggling with the terms of your unfair insurance contract, if you're struggling with the insurance claims management process and you're wondering who to blame, you need look no further than this mob over here. They were too interested in playing political parlour games and not interested enough in implementing the recommendations of the Hayne royal commission into the banking and financial services sector, most of which have been sitting in the government's lap since 2016.
Let's deal with schedule 1 of the bill. Schedule 1 of the bill brings insurance contracts from the Insurance Contracts Act 1984 into the unfair contracts regime established under the ASIC Act. Many businesses use standard form contracts which are set out on a 'take it or leave it' basis; whether it is a tenant taking out a new tenancy or the purchase of a motor vehicle, it is all too common in the insurance contracts area. These are standard contracts. It's not as if the average consumer sits down with their insurer and negotiates line by line the terms of the contract. They are a standard form contract: 'Here it is. Sign on the dotted line, pay your premium and you have cover.'
This is a reasonable and appropriate business practice when you are dealing with high-volume contracts. But it leaves customers with no power to negotiate with businesses if elements of a standard form contract are unfair. This is why Labor introduced the unfair contract terms regime in 2010—to protect consumers from exploitation and unfairness. Under the regime, terms in standard contracts are nullified if they are found to be unfair by a competent judicial authority. This provides powerful protections to consumers from exploitative business practices. But, until now, insurance contracts have been exempt, for the most part, from this regime.
These reforms have been a long time coming. It was highlighted as an issue by Commissioner Hayne in his final report back in February last year, which recommended that unfair contract terms be extended to cover insurance contracts. But that wasn't the first time that this recommendation has been made to government after thoroughgoing research and consultation with industry. Indeed, it was recommendation 6 of the Australian Competition and Consumer Commission's interim report into the Northern Australia insurance in 2018. It was recommendation 3.1 of the bipartisan report of the 2018 Parliamentary Joint Committee on Corporations and Financial Services inquiry into the life insurance industry. Indeed, in 2017, a year earlier, the Senate Economics Committee conducted an inquiry into the general insurance industry and at recommendation 11 they made a clear recommendation to government on exactly the same thing. We can go back to the 2017 Australian Consumer Law review. At proposal 10 it was exactly the same recommendation. I simply ask this: given that the coalition had report after report after report and recommendation after recommendation after recommendation, why is it that it has taken until today for these amendments to be introduced into the parliament and debated?
A 2012 government report estimated, from the available data on insurance, that the cost to consumers was somewhere in excess of $10 million a year. The failure of the government to act on report after report and recommendation after recommendation costs consumers $10 million a year. That may be pocket change to those opposite, but to consumers who are struggling with the devastation of a bushfire, their properties devastated by flood or their cars or premises wiped out by hailstones, that is real money that they need in their time of need. We also know that this $10 million is probably at the bottom end of estimations, because most detriment is likely to be underreported. Consumers often fail to claim and often fail to report issues. Since 2012, we have only seen the intensity of floods and bushfires increase.
To take these numbers as given, Australian insurance customers have suffered at least $20 million in detriments from unfair contract terms while the coalition government has sat on report after report after report recommending that they take action, with no action being taken. This means that, while this government has been busy wasting parliamentary time on bills aimed at tearing down workers' protections and workers' rights, Australian families have been left helpless in the face of unfair contract terms. We need a better approach. We need the government to take a serious, concerted, workmanlike approach to the implementation of not only the Hayne commission recommendations but also the series of reports that have recommended the same thing.
These new laws are welcome. They will bring insurance contracts into the unfair contract terms regime. But there are some sensible further refinements that are needed to redress the unique issues relating to insurance contracts. The terms that define the main subject matter of the insurance contract will be excluded from the regime. Terms determining the up-front prices, excesses and deductibles will be excluded where they are disclosed in a transparent manner. The utmost duty of good faith will be unaffected. The utmost duty of good faith, which applies via both statute law and common law to insurance contracts, will persist. These refinements however will ensure that insurers can offer insurance contracts with the knowledge necessary to set prices and assess risks while consumers are protected by the new features of the regime.
I want to go to schedule 2, which deals with funeral insurance. Schedule 2 is the subject of my second reading amendment, which I formally move:
That all words after "That" be omitted with a view to substituting the following words:
"whilst not declining to give the bill a second reading, the House:
(1) notes that:
(a) it has been over 12 months since the Hayne Royal Commission exposed the fact that Aboriginal families have been taken advantage of by the deceptive conduct and the misleading selling of funeral insurance products in Aboriginal communities;
(b) the selling of these products has continued while the Government has delayed the introduction of remedial legislation;
(c) when passed, this bill will present a fundamental challenge to the questionable business model of the marketers of these products; and
(d) if the companies which have promoted those schemes fail, as many as 19,000 policy holders could lose the meagre benefit payments from those policies; and
(2) therefore calls on the Government to work with the Opposition, and representatives of affected communities, to ensure that the policy holders and their families will be protected".
Schedule 2 of the bill ensures that the consumer protection provisions of the Australian Securities and Investments Commission Act 2001 will apply to funeral expenses policies. We are deeply concerned. We congratulate the government on introducing laws to address this matter.
Everything that I have said about the delays in introducing schedule 1 of this bill applies to schedule 2 in double force, because between the time when Commissioner Hayne exposed the rorts and dishonesty in the marketing of funeral insurance, particularly in vulnerable Aboriginal communities, and now the practices have continued.
We still see these little-value or junk insurance products being marketed to vulnerable people in vulnerable communities. We are deeply concerned that that has persisted for more than 12 months—in fact, closer to two years—since the behaviours were originally exposed by the Hayne royal commission. Labour welcome the fact that laws have been introduced but we have some concerns. On 7 December, the shadow minister for Indigenous affairs and myself wrote to the Treasurer outlining our concerns about the consequences of this foreshadowed legislation and I seek leave to table a copy of that letter now.
I thank the minister. We welcome the fact that legislation is being moved. The amendments do not—I want to stress this—impact on the treatment of prepaid funerals, which have operated for well in excess of a century by reputable organisations including friendly societies, unions and others. They will continue to operate as funeral benefit funds. But I want to distinguish a product which is marketed as funeral insurance from those funeral benefit funds which will be interrupted by the passage of this legislation. We welcome the change. It is a capstone on a particularly sorry story in our nation's financial history.
Commissioner Hayne was withering in his condemnation of so-called financial expenses policies. They're policies of little value and may be particularly likely to be sold to Aboriginal and Torres Strait Islander people living in remote and regional Australia. The so-called Aboriginal Community Benefit Fund was one such company, one such fund marketing these insurance products. It's a particularly extraordinary story, exposed by the Hayne royal commission, of a for-profit funeral insurance company marketed as an Aboriginal community benefit fund that was run neither by Indigenous Australians for their benefit nor for the benefit of their communities.
This company is still trading, remarkably, as Youpla Group Pty Ltd. It sells insurance funeral products to Indigenous Australians, which leads to them paying more in premiums than their families could ever hope to claim from the policy itself. Extraordinarily, this company has until recently had a direct relationship with Centrelink's Centrepay system, allowing the company to arrange, perhaps with formal consent but—I wager—rarely with the consent of an Aboriginal and Torres Strait Islander person who had available to them the financial advice necessary to ensure that they made a proper decision in respect of that policy. So in a sense, Centrelink's Centrepay system has been incorporated into this great scam. The company has built a business model on exploiting the genuine desires of Indigenous Australians to ensure that their families were not left penniless when they passed away.
Labor welcomes the amendments in this schedule which will see an end to a particularly sorry business model by bringing these products within the regulation of the Australian Securities and Investment Commission and by ensuring that they will be dealt with as if they were any other financial product. It will end the business model which has allowed this exploitation to persist. Labor wants to ensure that approximately 19,000 policy holders who bought funeral insurance on the basis of these dodgy marketing practices will not be left in limbo. We do not want to see these Aboriginal and Torres Strait Islander Australians being ripped off twice.
This was the subject of the letter, which I have tabled, that the shadow minister for Indigenous Australians and I have written to the Treasurer. We think a proactive approach is needed to ensure that these vulnerable Australians do not get ripped off twice. We are very keen to work with the government to ensure that such arrangements can be put in place when and if they are necessary.
I will address schedule 3 of the bill, which introduces a best-interest duty for mortgage brokers that will ensure the consumers' interests are prioritised when a mortgage broker provides credit assistance. This will mean a duty will apply in relation to the provision of consumer credit assistance. The policy also provides a regulation-making power to regulate mortgage broker remuneration. The draft regulations set out by the government require that the value of the up-front commissions be linked to the amount drawn down by borrowers instead of the loan amount. It is often the practice that somebody purchasing a house—let's just say, for argument's sake, a $500,000 house with a $400,000 mortgage—may increase that mortgage by another $20,000, $30,000 or $40,000 to pay for other expenses associated with the moving into, the renovation of or the furnishing of that property. They may not spend all of that money at once. Under previous arrangements, a commission available to a mortgage broker may be available up-front on the full value of that mortgage, whether or not it was drawn down on, ever, or within a certain period of time. The amendments set out in the schedule make sense, and we support them.
The draft regulations also ban campaign and volume based commissions and payments, together with a capping of soft-dollar benefits. I've spoken about the drawdown phenomena and how commissions have been paid. The draft regulations also amend the period over which commissions can be clawed back from aggregators and mortgage brokers, limiting it to two years, and passing on this cost to consumers will be prohibited.
We support the reforms. We do note that the Productivity Commission has found the competitiveness of the Australian home loan market is now dependent on mortgage brokers. This is an important point—not a point fully ventilated through the Hayne royal commission but relevant to another observation I will make. A few years back, fewer than half of all mortgages written in this country went through a mortgage broker. At the beginning of the Hayne royal commission process it was probably around 50 to 55 per cent. Today it's in excess of 60 per cent. That's six out of every 10 mortgage loans that are written in this country for a home loan going through a mortgage broker. They are now well integrated into the financing of the home loan market and the housing market.
The Productivity Commission has acknowledged this. We'd like to see more competition in that area. We've said time and time again that we do not think there is enough competition driving down prices in the home mortgage market. We believe that mortgage brokers, where properly regulated, are a key to driving more competition, particularly within the home mortgage market.
But it's important that we ensure the reforms that are the subject of this bill work as intended. I note that the government has committed to a review of the mortgage broker reforms in three years time. This commitment doesn't appear as a part of the legislation. Labor won't block the passage of this bill, but we will ensure that this review takes place as promised.
I do want to say something about Commissioner Hayne's recommendation on the business model around mortgage brokers. Commissioner Hayne recommended that the commission based business model for the mortgage broker market be ended. The government has taken a different approach to that. This bill does not contemplate at this stage the implementation of the recommendation. I think there are sound reasons for hastening slowly in this area. As I've already said, 60 per cent of the mortgage market is now written through the mortgage broker system. Labor agrees with the government to the passage of this bill and not implementing the recommendation, which would ban commission based payments at this stage, but mortgage brokers are on notice. Mortgage brokers are on notice that the system has to work and it has to work in the interests of the customers that they represent, not the financiers whose products they are facilitating. If it emanates over the period of the next few years and evidence comes forward that that is not the case then we will be ensuring that those remuneration arrangements are subject to the review as recommended by Commissioner Hayne and contemplated by the government—in fact, guaranteed by the government.
So we commend both my amendment, which deals with the subject matter of general insurance, and the bill to all members of this place. It is important that the government get a giddy-up on implementing the royal commission recommendations. When this bill passes the House, as I hope it does swiftly, and goes to the other place—hopefully it will be passed before the end of this sitting fortnight—we will still have only met a grand total of 10 of the 76 recommendations of the Hayne royal commission. I think the community expects that we would have done much, much more than that after the more than 12 months since those recommendations were handed down, particularly when you consider that the vast majority of those recommendations have been presented to government not once, not twice, not three times, not four times but in some cases close to 10 times. With those observations I commend the motion and the amendment to the House.
I don't propose to speak for long today on this bill, the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019. Normally that gets me a round of applause, but apparently not today!
Mr Thistlethwaite interjecting—
Thank you! The member for Whitlam has spoken eloquently, eruditely and, of course, incorrectly on most of what is in this bill, and we thank him for his contribution today. We do share with him, however, his desire to see this legislation passed as quickly as possible, and perhaps the Labor Party could assist the government by not moving amendments that are both unnecessary and unlikely to assist in helping the consumers they so often mourn.
Unfair contract terms in insurance contracts is the subject of a recommendation of the Hayne royal commission. It is a recommendation that was proposed to that inquiry by ASIC. Just briefly, because the member for Whitlam has already eruditely already summarised what is proposed, the national unfair contract terms laws currently protect consumers and small businesses who purchase financial products and services through standard form contracts. Until now, insurance contracts, for very good reason, have been exempt from the regulation by these laws. The Insurance Contracts Act will be amended, however, to allow the ASIC Act's unfair-contracts laws to apply to all insurance contracts. This measure will offer protection to consumers who lack bargaining power and receive their contracts on a take-it-or-leave-it basis. These consumers are vulnerable to unfair terms, like exclusions or onerous conditions, which can be hidden in the contract. This will provide important protection in cases where an insurer has attempted to deny a claim or restrict the payout available to a consumer or a small business on the basis of an unfair term.
For insurance contracts, the regime will be tailored to increase clarity and certainty for industry and consumers. This includes defining the upfront price as premiums and excess or deductible payable and defining the main subject matter of the contract as what is being insured. This is in line with the royal commission's recommendation 4.7. Consumers and ASIC will be able to apply to a court for a declaration that a term of an insurance contract is unfair. If they succeed, the term will be void and therefore not enforceable.
Schedule 2 specifically deals with funeral expenses facilities and funeral insurance contracts. The financial services royal commission uncovered evidence of the significant harm caused to vulnerable consumers by the poor sales practices adopted by funeral expenses policy providers. The exemption in the Corporations Act that has allowed these providers to escape the scrutiny of the Australian Securities and Investments Commission will be removed once this bill is passed into law. They will be subject to the Australian financial services licensing regime. The bill will ensure that consumer protection provisions in the ASIC Act apply to funeral expenses policies, clarifying any ambiguity that may exist on this matter. The removal of this exemption will ensure consumers have appropriate protection when taking out policies to help fund the costs associated with a funeral. The provision of prepaid funerals will be unaffected by these reforms, on the ground that it will be able to rely on the funeral benefit exemption in the Corporations Act. The bill will come into effect after royal assent. Providers of funeral expenses policies that do not already hold an Australian financial services licence will be required to gain a licence by 1 April 2020.
Schedule 3 deals with mortgage brokers. Prior to the election, I found the recommendations of the royal commission on mortgage brokers to be somewhat contradictory. Labor, of course, backed these recommendations, but I'm glad to hear the member for Whitlam now saying that Labor agrees with our amended provisions here.
The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 fulfils the government's commitment to implement its response to two recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The bill will introduce a best-interest duty for mortgage brokers and reform mortgage broker remuneration. The regulations set out the details of the reform to remuneration. The best-interest duty will require mortgage brokers to act in the best interests of consumers when providing credit assistance in relation to credit contracts. The obligation will bring the law into line with what consumers currently expect of mortgage brokers. The bill and regulations make changes to mortgage broker remuneration by requiring the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount, banning campaign and volume based commission and payments, and capping soft-dollar benefits. The new rules will also limit the period over which commissions can be clawed back from aggregators and brokers to two years and prohibit the cost of clawbacks from being passed on to consumers. The royal commission identified evidence of mortgage brokers recommending loans based on the commission they would receive. Both the best-interest duty and the reforms to mortgage broker remuneration will mitigate the incentive for mortgage brokers to suggest loans that are not in the best interests of consumers.
It would be remiss of me not to make some comments about this piece of legislation. First, the evidence out of the royal commission, particularly in its interim report, is that banks have been using behavioural science to create a blizzard of products in the market, confusing consumers and giving the appearance of competition without there being actual competition. We're seeing this in the superannuation sector as well. Increasingly, mortgage brokers and financial planners are becoming critical to Australians' financial wellbeing, both now and into the future. As we are creating a more complex financial system, of which we should be rightly proud—whether it be in insurance, or superannuation and retirement incomes, or simply in mortgage products to buy a house or build an investment policy—it is important that we avail all Australians, regardless of their income, of the capacity to get the most and the best form of advice that they can get, and not simply reserve that advice for high-net-worth individuals and insiders who know where to go. My problem with the royal commission is that we may have the unintended consequence of creating yet more complexity while denying people the capacity and the ability to reach out for that advice that they so sorely need at the time when they need it.
The Hayne royal commission also pointed out a lot of anecdotal evidence about a lot of consumers being badly impacted by financial service companies and providers. What it failed to understand was that this parliament has already passed laws which those consumers and ASIC could have used both to shut down and to prosecute those providers who had done wrong by the consumers. It should have made the point and should have asked the question why those laws had not been invoked, rather than insisting that this parliament create yet more complexity to confuse yet more consumers and to deny yet more Australians capacity to understand and to seek the advice that they so need.
We have now given ASIC enormous powers. We have cloaked it in great and immense capacity to do great good and to do great harm. We have provided it with more resources than it has ever had before, and yet it comes back to this parliament and asks for more powers and more resources. We understand why, on this side of the House, but we expect ASIC to finally put an end to this. We expect fewer reports, less lobbying, less communication and less of ASIC trying to impact this parliament and wanting more regulation. We expect it to undertake its role in what it does in the manner and form which promotes competition and empowers consumers, rather than reducing the choices that they have.
The member for Watson is often heard saying that this side of the House wishes to impose on unions laws that company directors would never have. However, when we have retorted that we are very happy to apply the Corporations Law to unions and to union leaders, he often falls silent on the idea that unions should be subjected to the Corporations Law. The truth is that company directors in this country now are very much on the hook for virtually anything that goes wrong and for any consumer that is harmed. Litigation funders run rampant through our legal system with billions of dollars, driving fear into the hearts of people who are simply trying to provide products and services to consumers so that they can be better off.
These laws will ultimately protect consumers, but this parliament must be very careful that we do not introduce so many laws that we reduce the choice and the capacity for consumers to seek advice and to run their lives in a manner and form that they see fit, not in the manner and form that members of this House believe that they should.
I'm pleased to rise after the member for Mackellar's short contribution, as he prefaced, in the debate on the Financial Sector Reform (Hayne Royal Commission Response-Protecting Consumers (2019 Measures)) Bill 2019.
Labor supports this bill because Labor is always on the side of consumers and Australians. Unlike the coalition, which had to be dragged kicking and screaming to have a royal commission into banking and financial services, Labor led from the front to end the rorts and the rip-offs that were being identified as our residents and communities came to us with what they saw as an unfair system. We'll continue to push to implement the recommendations of that royal commission.
The Liberals and Nationals never wanted a royal commission into banking misconduct and now they continue to drag their feet in implementing the recommendations. We don't really need to remind those members in this House—but perhaps after the member for Mackellar's contribution it is worth noting that the Prime Minister himself voted 26 times against the Hayne royal commission. One year after receiving the final report—until this piece of legislation passes this House—only six of those recommendations have been implemented by this government. When this piece of legislation passes, that will take it to 10 of the 76 recommendations being implemented. On Saturday, it was the anniversary of those recommendations coming down. This government continues to drag its feet. There was a commitment that parts of the schedules of this legislation were going to be passed before the end of 2019, and, despite us sitting at the end of 2019, we had to wait until now for this bill to be before us. Not even the full horror of the banking royal commission, which revealed a culture of appalling rorts and rip-offs, was enough to spur this government into fast-enough action.
Schedule 1 of this bill goes to impact of unfair contract. It will bring insurance contracts from the Insurance Contracts Act into the unfair contracts regime under the ASIC Act. In 2010, Labor introduced the unfair contract terms regime to protect consumers from exploitation and unfairness. Under the regime, terms in standard contract terms are nullified if they are found to be unfair. A government report in 2012 told us that, from the data they had on insurance claims, there could be an up to $10 million a year hit for consumers in detriments in this space. And, because consumers were unlikely to report the issues, that detriment was unlikely to be reported and unlikely to be challenged. This is becoming increasingly important. With the effects of climate change worsening, the intensity and the number of natural disasters, like floods and bushfires, have increased since 2012 when this report was handed down and that creates more impetus for why this schedule is important and why Labor supports it today.
But the government has adopted this go-slow approach, despite being told by report after report that Australian insurance customers are suffering by now at least an estimated $20 million worth of detriments per annum in unfair contract terms. Perhaps the government should be more focused on fighting for a better deal for Australians rather than, as we've seen this week, fighting one another. This affects Australians affected by floods and fire—that's the bush! Instead, the National Party, members of the coalition, would rather fight over the deputy prime ministership.
The new law that we're talking about today will bring insurance contracts into that unfair contract terms regime, and this is welcomed. But there are some further sensible refinements needed to address the unique issues related to insurance contracts. These refinements will ensure that insurers can offer insurance contracts with the knowledge necessary to set prices and assess risks while consumers are protected by the new features of the regime.
Schedule 2 of the bill goes to funeral insurance—and it goes to the amendment that is before us now. Schedule 2 makes sure that funeral expenses policies are covered by the Australian Securities and Investments Commission Act, and the amendment does not change prepaid funeral arrangements which continue to operate as funeral benefits and, as most of us here across the chamber hear from our communities about, are seen to have benefit and are seen to deliver that benefit. We welcome that change. As the shadow minister told us, in the Hayne royal commission we heard the dreadful story of the Aboriginal Community Benefit Fund, which this schedule will change. This fund was neither Indigenous nor run for the benefit of communities. It is a for-profit company now rebranded as Youpla Group. This fund sold expensive funeral expenses policies to Indigenous Australians like Ms Tracey Walsh, an Indigenous woman from Mooroopna, in Victoria. These policies were marketed in a misleading way, leading to men and women like Tracey Walsh paying far more in premiums than their families could ever receive in funeral benefits. Until recently the fund even had an arrangement with Centrelink which let them deduct payments automatically from Centrelink recipients.
This amendment calls on the government to ensure that the 19,000 Australians who have these policies are protected and looked after beyond this legislation, that the government ensure that these Indigenous Australians and their families are protected and their interests seen to. Labor will be working closely with these communities to ensure that their voices are heard here in the parliament and around Australia if this amendment does not pass this parliament. So schedule 2 is welcome, but there are 19,000 Australians who already have policies in this space that need the government's attention and we need to ensure that they suffer no further negative impacts.
The third schedule goes to mortgage brokerage. Schedule 3 of the bill introduces a 'best interests' duty for mortgage brokers that will ensure that consumers interests are prioritised when a mortgage broker provides credit assistance. The draft regulations set out by the government require that the value of up-front commissions be linked to the amount drawn down by borrowers rather than the loan amount. It bans campaign and volume based commissions and payments and caps 'soft-dollar' benefits.
We support these reforms and note that the Productivity Commission has found the competitiveness of Australia's home loan market is now dependent on mortgage brokers. I know colleagues who have sat with local mortgage brokers and I know that, like others in this chamber, I spend a considerable amount of time with the mortgage brokers in my electorate hearing stories of opportunities where my local people are working diligently to assist people, particularly those on the margins, to enter the housing market. They are strong advocates for ensuring that, in this space, people behave in an honest and a responsible manner. We must, however, ensure that the reforms that are in this schedule work as they are meant to.
Despite promising a review of the mortgage broker reforms in three years, this appears nowhere in this legislation. I would further call on the government to ensure that that review happens so that we can have confidence that my local mortgage brokers, operating in a community that is in a growth corridor—we are building thousands of houses a year, and there are thousands of mortgage contracts being drawn up in a year. My community needs to know that they can, in all confidence, use a mortgage broker if that is their choice and know that they are going to be treated fairly in the longer term. The opposition will not be blocking any part of this legislation, but it is not a blank cheque. Labor will work tirelessly to make sure that this review occurs in three years.
In conclusion, it's a year on and the government haven't done enough to implement the royal commission's recommendations. At this moment, in this parliament, only six of the 76 recommendations have been implemented. When this bill passes the parliament there will be 10 of the 76 recommendations implemented. I know that I speak for those on this side of the House, who heard the harrowing stories and saw the rorts and the rip-offs, and I know that in my community we want to be able to know that our banking and financial services sector is operating in a fiscally and morally responsible way. The inaction coming from those opposite is not giving us comfort.
Their inaction means that families who suffer claims-handling issues from the devastating bushfires, hail storms or other extreme weather events this summer are still left without protection. The Morrison government missed their own deadline to introduce this legislation by the end of 2019, and I know that's going to reverberate in communities in Victoria who've been impacted dreadfully by the bushfires. No compensation scheme of last resort is in place for distraught customers. No new disciplinary system is in place to punish unscrupulous financial advisers. Mortgage brokers have no legislated duty to act in the best interest of their customers. Unscrupulous operators will be able to hawk junk insurance over the phone, and car dealers will still be able to claim commissions on dodgy add-on insurance products. ASIC still lacks essential enforcement powers, and industry codes of conduct remain completely unenforceable.
The Morrison government has a dismal record when it comes to going soft after this royal commission. The Prime Minister and the Treasurer pretended to care about the recommendations of the banking royal commission but their actions since tell us another story. While the coalition continues to ignore those recommendations, Labor will always push to fight for consumers, to protect the Australian people and to ensure that this parliament delivers on its promises.
The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 is late. Like many of the government's responses to the royal commission, it comes delayed to this parliament. This particular provision relating to unfair contract terms in insurance contracts was identified as something of a priority by the Hayne royal commission into financial services when it reported in February last year. Aside from that, this is an issue that has been identified by this parliament for close to a decade now as something that required urgent attention to protect consumers from what is often a very complicated financial transaction relating to the negotiation of insurance contracts.
These are really important reforms for consumers. They provide additional and fairer protection for consumers when it comes to insurance and funeral insurance and to dealing with mortgage brokers and accessing mortgage broker services. As I said, these are complicated financial transactions. They often involve very long product disclosure statements. Most people don't read these statements, so they are not aware of the finer details when they are entering into these contracts. In relation to insurance, when people go to make claims and they haven't read the fine print, they find that they are not eligible for compensation for particular items they thought they were insured for. On many occasions, to the average Australian, the negotiation and the inclusion of those terms would seem unfair.
I mentioned that these are issues that have been identified by this parliament going back almost a decade. It was first identified under the previous Labor government, when David Bradbury was the minister. In 2013 he attempted to bring legislation to this parliament to enforce unfair contract terms in the insurance contracts regime. Unfortunately, the parliament lapsed before that could be prosecuted. In addition, there have been numerous inquiries imploring the government to act on this issue. Recommendation 6 of the ACCC's first interim report on the Northern Australia insurance inquiry in 2018 recommended provisions such as these. Then there was recommendation 3.1 of the report of the 2018 Parliamentary Joint Committee on Corporations and Financial Services inquiry into the life insurance industry; recommendation 11 of the 2017 Senate Economics Committee inquiry into the general insurance industry; and proposal 10 of the 2017 Australian Consumer Law Review. So the government's argument that the royal commission only reported 12 months ago and the government has been consulting—there has been an exposure draft—and gaining the necessary evidence to bring this to parliament does not hold up. This is an issue that has been identified through parliamentary and other inquiries for close to a decade now. Unfortunately, it is too late. Many Australians have suffered at the hands of large insurance companies when they should have been protected by earlier action from this government on these issues. Nonetheless, this bill does finally bring the unfair contract term regime to the parliament and Labor will be supporting this particular provision.
The bill contains three schedules which implement some of the recommendations of the financial services royal commission. Schedule 1 extends the existing protections of the unfair contract terms regime under the ASIC Act to insurance contracts governed by the Insurance Contracts Act. Schedule 2 extends consumer protection provisions of the ASIC Act to cover funeral insurance policies. Schedule 3 sets out a new best interest duty for mortgage brokers and allows for new regulations to restrict conflicted remuneration being received by mortgage brokers.
Schedule 1 finally implements the financial services royal commission recommendation 4.7 to extend the provisions and protections of the ASIC Act to unfair contract term provisions to insurance contracts covered by the Insurance Contracts Act. This means the bill will only apply to insurance contracts taken out by consumers or small businesses, not group insurers. One of the problems under our current insurance contracts regime is that the ASIC Act presently excludes terms that define the main subject matter of the contract from the unfair contract term regime. This bill will rectify that deficiency and it will amend the ASIC Act to provide that the main subject matter of an insurance contract is limited to the description of what is being insured.
The bill will also amend the ASIC Act to exclude terms that set the quantum or existence of the excess or deductibles in an insurance contract from the unfair contract term regime. This bill also amends the ASIC Act to allow for third-party beneficiaries to bring actions against insurers under an unfair contract term regime. They would be examples where a son or daughter of someone under a particular form of personal insurance seeks to bring a claim that's been denied by an insurer. This regime will allow a person to bring an action under the provisions of the act where they believe that there has been unfairness. But the test of unfairness, importantly, under this bill relates to what's been negotiated between the parties to the contract—in other words, the insurance for which the person was covered, not the third-party beneficiaries. It also maintains the current obligation under the Insurance Contracts Act for the parties to insurance contracts to act with utmost good faith.
In addition, the bill will ensure that terms that define the main subject matter of an insurance contract will be excluded from the UCT regime; however, terms defining the main subject matter of an insurance contract will be limited to terms which define what is being insured: for example, a house, a car or a person. Terms defining the upfront price payable for an insurance contract will continue to be excluded from the unfair contract term regime. Terms defining the quantum or existence of the excess or deductible of an insurance contract will also be excluded from the regime if they are disclosed up front and they are transparent and known by the person taking out the insurance.
Some examples of how this particular bill, once it is enacted, will assist consumers and rectify, hopefully, or provide the opportunity for people to take actions to rectify deficiencies in insurance contracts include home building insurance terms that provide that the most the insurer will pay in the event of loss of damage to a building is the cost to the insurer of rebuilding or repairing the building as opposed to the actual cost of the repair, which may be higher for the insured. When you go to insure your house you believe, if it burns down or something like that, it is going to be repaired in a similar vein to what you had there in the past. There have been provisions in contracts that allow insurers to get away with not repairing or not providing recompense to what was there in the past.
Other examples include: car insurance terms that require the insured to provide the name, registration and contact details of an uninsured at-fault driver when making a claim; consumer credit insurance terms that prevent an insured from making a disability claim if they were not diagnosed with a disability prior to leaving work; and travel insurance terms that allow a claim to be denied on the basis of a blanket mental health exclusion. They are examples of some of the provisions which will provide people with the opportunity to launch actions if actions such as those are taken by insurers in the future, once this act is enacted.
Schedule 2 of the bill implements the financial services royal commission recommendation 4.2, which recommended the removal of the exclusion of funeral expenses policies from the definition of 'financial products' under the Corporations Act and also recommended amending the ASIC Act to put beyond doubt that the consumer protection provisions under that act apply to funeral expenses policies. The ASIC Act currently provides that funeral benefits are not financial products and are, therefore, not subject to the consumer protection provisions of the act. The effect of this carve-out from the act is that providers of funeral expenses policies do not have to obtain an Australian Financial Services licence, are not bound by the general conduct obligations contained in section 912A of the Corporations Act and are not restrained by the antihawking provisions in the Corporations Act. As a result of that, we've seen some terrible behaviour that was highlighted in the financial services royal commission in this space by people and organisations selling dodgy products to, in particular and unfortunately, First Australians—Aboriginal and Torres Strait Islander Australians—in situations where people are vulnerable.
The royal commission uncovered evidence of the significant harm that can be caused to vulnerable consumers through poor sales practices adopted by some funeral expenses policy providers. Funeral expenses policies provide for the payment of funeral costs up to a nominated limit, and the payout of a policy only covers the cost of the funeral or things incidental to it, but nothing else. Some of the stories that were uncovered by the royal commission in the examples found that people with funeral insurance were paying considerably more in premiums than the payout that they were actually getting upon the case of death. There is a significant concern amongst consumer advocates that the Aboriginal Community Benefit Fund, which was heavily criticised in the royal commission, may not be able to conform to these changes. A failure of this organisation may leave a large number—it's estimated at about 19,000—of Indigenous policyholders without any insurance, after paying for it for many years. The royal commission heard evidence that this fund was accused of ripping off and misleading Indigenous families by creating pressure through sales tactics to sell them expensive funeral plans. When the fund's CEO appeared before the commission, it became clear he had no background in insurance at all and no qualifications that you would expect to be necessary for someone selling these types of policies to people.
The shadow minister, the member for Whitlam, has moved a second reading amendment calling on the government to protect the customers of the Aboriginal Community Benefit Fund. People simply cannot be made worse off because of the passage of this bill—that's something that we implore the government to take notice of. The government must protect these people in this situation. It's been identified by the royal commission as a big issue, and, if the passage of this bill means that that particular fund falls over, those people deserve protection. They've paid for that insurance over the course of their lifetimes.
Schedule 3 implements some of the financial services royal commission recommendations in respect to mortgage brokers, specifically recommendations 1.2 and 1.3, which recommended applying our best interest duty for mortgage brokers and banning conflicted remuneration for mortgage brokers. One would think that mortgage brokers would act in the best interests of their clients, but, unfortunately, as the royal commission uncovered and as numerous inquiries have uncovered, like most of financial service transactions in this country over the course of the last decade, that hasn't been the case. Notably, the government has chosen not to accept royal commission recommendation 1.3, unfortunately. This schedule, instead, provides for regulations to restrict the circumstances under which conflicted remuneration can be given in relation to mortgage brokers' services. The best interest duty will require mortgage brokers to act in the best interests of their clients and put their clients' interests as a priority when providing credit assistance. As I said earlier, one would hope that they do act in that manner, but that hasn't been the case. This government doesn't have the best record, I've got to say, when it comes to implementing best interest duties for financial services for consumers.
We all know that the government opposed FOFA when it was originally introduced by the Labor Party back in 2012, which provided a best interest duty generally for the provision of financial services in this country. Believe it or not, those opposite opposed that. They opposed the provision of a best interest duty in the FOFA regulations in that catch-all provision. The regulations restricting conflicted remuneration are expected to prohibit a number of forms of conflicted remuneration, including volume-based benefits, campaign-based benefits and benefits that include a clawback period greater than two years.
In conclusion, we support this bill. I do want to thank the Consumer Action Law Centre, CHOICE, Super Consumers Australia, the Financial Rights Legal Centre and WEstjustice for their feedback in Labor formulating our position on this important reform. It's overdue but it's now time for the government to get on and implement these important reforms and protect consumers in financial services.
People, including the previous speaker, the member for Kingsford Smith, have outlined in very clear detail what Labor's position is in relation to the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 and that is, of course, that we will support it, but we've moved some second reading amendments, and they are done very, very seriously. I want to restrict my remarks to schedule 2, which extends consumer protection provisions of the ASIC Act 2001 to cover funeral expense policies.
I have spoken previously to the Treasurer about the seriousness of this particular part of the legislation. It goes very much to what I am sure previous speakers have spoken about from this side of the House and that is around funerals. The Hayne royal commission has been clearly outlined, and it made some very real comments about the efficacy or lack of efficacy of the Aboriginal Community Benefits Fund. I just want to speak very clearly about that and the absolute need for the government to make sure that the people who have invested in that scheme—and we know that there are thousands of those people—are not disenfranchised because of the passing of this bill and the potential for organisations to fall over.
Within the Aboriginal community—and I will outline it here very clearly—the life expectancy, as people know, is much, much shorter than in others. The rate of disease is much, much higher. I have to say that there are many funerals that I have been to that are of people that are very young. Had they not been Aboriginal, they would still be with us. We know that infant mortality is much higher. We know that death from homicide is much higher. We know death from suicide is much higher. We know death from a number of diseases, including cancer and in particular heart disease, is much, much higher. We know diabetes is much, much higher. These are often comorbidities. So the issue of death is also, from a cultural perspective, viewed in a very different way. I can't tell you, Madam Speaker, how many funerals I've been to where people say to me, 'The only time we see each other now is at funerals,' and that is the reality for First Nations people in this country.
Thousands and thousands of First Nations people have taken the step of investing early, and they believe they've done it appropriately, in funeral benefit funds. I pay tribute to my very dear friend, Mr Graham Mooney, who died a dreadful death. He died far too young. I spent most of my holidays, as many others did, helping to organise and officiate at Graham's funeral. Graham had invested in this fund. It is so important that the government and the departmental people understand that this is a very real issue. We're talking about people who are poor. We're talking about people who have not wanted to burden their families, because they knew their families could not bear the cost of a funeral, so they have invested in this fund, often in very difficult circumstances. It is absolutely critical that this group of consumers is taken particular notice of, and that particular care is taken of them, if the passing of this legislation is going to null and void those insurances.
Many of them have been paid over and over again, because the investment was often when people were very young. In fact, there are many circumstances where parents actually signed their children up to these funeral funds because of the circumstances that I have outlined. So I urge the government, from a very human perspective, to please take notice of this and to please make sure that this group of consumers—I think you were talking about how many, Mr Jones?
About 19,000 people—that they are not disadvantaged by this legislation. That would be a dreadful unintended consequence. That would be a cruel unintended consequence. Once again, I put on record that it is absolutely critical that this group of consumers is considered in the passing of this legislation. If they are not, it makes a mockery of the reason why we are supporting this bill, and if they are not, then it really does add another dreadful mark to a sorry history.
Like I have said, people have invested in good faith for the absolute right reason, and that is not to burden their families with the expense of a funeral. They have invested in these funds because they know the death rates of Aboriginal people and the ages of Aboriginal people in this country. We're not talking about statistics here; we're talking about real people and real families. Once again, I urge the government to make sure that the consideration in the implementation very much considers appropriately the group of people I'm speaking about.
I present a replacement explanatory memorandum to the Financial Sector Reform (Hayne Royal Commission Response-Stronger Regulators (2019 Measures)) Bill 2019.
Firstly, I would like to thank those members who have contributed to this debate. The government is committed to implementing its response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by extending unfair contract terms to insurance contracts; ensuring that adequate consumer protection provisions apply to funeral expense policies; introducing a best-interest duty requirement for mortgage brokers; and reforming mortgage broker remuneration.
Schedule 1 of the bill implements recommendation 4.7 of the royal commission. Extending an unfair contract terms regime to insurance contracts will ensure that consumers and small businesses are protected from insurers using unfair terms in standard form contracts. By preventing insurers from including unfair terms in insurance contracts and providing a mechanism to enforce, it enhances consumer rights and provides consistency in financial service regulation. The bill has been tailored to the specific features of insurance contracts to ensure its effectiveness. Applying the unfair contract terms regime to insurance is an important component of the reforms to this sector which, together, represents real, beneficial change to the insurance industry.
Schedule 2 of the bill ensures that the consumer protection provisions in the ASIC Act apply to funeral expenses policies. Many vulnerable consumers have been harmed by the poor sales practices adopted by funeral expenses policy providers. These reforms will subject providers of funeral expenses policies to the Australian financial services licensing regime.
Schedule 3 of the bill will impose a duty on mortgage brokers to act in the best interests of the consumer when providing credit assistance regulated by the National Consumer Credit Protection Act 2009. The reforms being introduced to mortgage broker remuneration will require the value of upfront commissions to be linked to the amount drawn down by borrowers instead of the loan amount, ban campaign and volume based commissions and payments, and cap soft-dollar benefits. Further, the reforms introduce a limit to the period over which commissions can be clawed back from aggregators and mortgage brokers to two years and prohibit the cost of clawback being passed on to consumers. Collectively, these reforms will mitigate the incentive for mortgage brokers to suggest loans that are not in the best interests of the consumer and will improve consumer outcomes. I commend the bill to the House.
The original question was that this bill now be read a second time. To this the honourable member for Whitlam has moved as an amendment that all words after 'That' be omitted with a view to substituting other words. The question is that the amendment be agreed to.