Wednesday, 9 December 2020
Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, Corporations (Fees) Amendment (Hayne Royal Commission Response) Bill 2020; Consideration in Detail
(1) Schedule 3, page 36 (after line 14), at the end of section 12DX, add:
Pre-condition for making regulations
(3) Before making regulations for the purposes of subsection (1), the Governor-General must ensure the Minister is satisfied that the class of add-on insurance products has historically been good value.
This bill grants the Treasurer the power to exempt from the deferred sales model certain types of add-on insurance to be made via regulation. The amendment that I present today makes it necessary for add-on insurance products to receive an exemption to be regarded as having a history of good value for consumers. This amendment comes about as a result of the extensive consultations about this bill that the member for Whitlam and I have conducted with consumer groups over the course of the last couple of weeks. They were under the apprehension that, when the government was putting the deferred sales model together, it would be a complete model and there wouldn't be opportunities for particular products to be exempted. Consumer groups such as CHOICE and the Consumer Action Law Centre have raised significant concerns about the carve-out for travel insurance flagged by the Treasurer in his second reading speech. The concern is that this could leave Australians open to unscrupulous sales tactics and to being sold unsuitable and expensive travel insurance. This would further compound the major problems we saw with travel insurance during the COVID-19 crisis. Consumer groups said:
Commissioner Hayne recommended 'industry-wide' reform as well as abolishing exemptions and loopholes.
After a massive spike in travel insurance complaints during the pandemic, we believe that any exemptions should be limited to those which are good-value-for-money products only. CHOICE has pointed out that in 2020 it found that buying travel insurance through add-on channels can cost consumers up to 350 per cent more than buying it directly. Travel agents receive commissions of up to 65 per cent on the premiums that people pay, and airlines use online pressure tactics to make sales. We know that Qantas provides customers with only 10 minutes to read a 15,000-word product disclosure statement before flight purchase times out.
It's clear that add-on products do not have a history of being good value for consumers. For example, using a family of four who travel to Bali for 10 days, CHOICE said that Qantas will sell add-on travel insurance for $230. You can get the same product and the same cover directly from Travel Insurance Direct for $136. So Qantas is making a mark-up on their product of 69 per cent. Even poorer value is the example of Jetstar—good old Jetstar: never miss an opportunity! For the same family and the same trip it would charge a whopping $517. But the same cover could be bought directly from Good To Go! for $144. That's a 259 per cent mark-up from Jetstar—not bad if you can get it! This is simply a bad deal for many Australian consumers and hardworking families looking to take a well-earned holiday.
So travel insurance sold as an add-on product should be worthy of an exemption if it can prove that it is good value for money for the consumer. That's in the amendment that I've moved:
(3) Before making regulations for the purposes of subsection (1), the Governor-General must ensure the Minister is satisfied that the class of add-on insurance products has historically been good value.
If that amendment is included in this legislation it puts pressure on organisations like Qantas, Jetstar and travel agents that are selling travel insurance—and other organisations that are going to be seeking these exemptions by the minister to the deferred sales model—to prove that their product is good value for money.
I would argue that a 259 per cent mark-up on a product sold through a major airline in Australia is not good value for money and that therefore the minister shouldn't be granting an exemption to products such as this. It's clear that the add-on travel insurance industry has been very poor value for Australian consumers, with no signs of improving. If the government lets them off the hook with this exemption then we're not going to see any improvement in the industry, and the whole purpose of the Royal Commission in this area will be lost.
It is a real pleasure to rise on this important amendment by the member for Kingsford Smith, which goes to the issue of the exemption provided to add-on travel insurance. We know from behavioural economics that customers tend to make systematic mistakes when it comes to insurance. People tend to underestimate very large risks, such as the risk of death or catastrophic injury, and tend to overestimate the dangers of small risks, such as damaging your smart phone or getting your baggage lost when you're on holidays. Unfortunately, those who sell insurance are all too aware of these behavioural biases and so the value of mobile phone loss insurance tends to be very small. Conversely, if you're a seller of mobile phone insurance, you make out like a bandit. The profit margins on small-products insurance are extraordinarily high. These are products which are just not an actuarial good deal for customers. Behaviourally, that's because it's a kind salient loss; we have all lost a mobile phone, damaged a mobile phone or know someone who has, so we can easily envisage it happening to ourselves. But it doesn't follow that therefore it's a good deal to take out insurance for it.
The same goes for certain kinds of travel insurance where the profit margins can be very big, reflecting the fact that the payouts are much smaller than the premiums. Sure, some customers do end up making a claim which exceeds the premium they paid, but these are policies which often have a combination of exempt categories. For example, if you lose cash—often one of the first targets of thieves when people are travelling—it can be difficult to reclaim it. There can be limits on the value of items which are stolen and there can be significant deductibles, and so customers find themselves making a claim but then discovering that the insurer will only cover half of that claim.
We're very sceptical about the value of this insurance and about the government's willingness to provide it with an exemption to the usual rules. We're not the only ones who are sceptical about this. As the member for Kingsford Smith has highlighted, he and the member for Whitlam, the shadow Assistant Treasurer, have engaged in extensive consultations with consumer groups. Those consumer groups have raised the concern that we need to be very careful before providing a carte blanche exemption from appropriate regulations around the sale of this form of insurance.
Labor has a strong record of standing up for consumers. It was Labor, under Lionel Murphy, that put in place the competition and consumer framework that is fundamental to the Australian economy today. It was Labor, in the early 1990s, that spearheaded the competition and consumer reforms that led to the last big surge in productivity. If we want to get productivity going again in this country, we have to turbocharge competition. Only Labor can do that, because only Labor is the party of competition. Those opposite too often find themselves in thrall to vested interests—standing on the side of producers rather than consumers, being unwilling to recognise what the latest behavioural science has told us about the risks to consumers. They believe that scorched-earth, free market economics will do fine. They're acolytes of Ayn Rand, and their motto is caveat emptor, or let the buyer beware—leave them out in the consumer marketplace with nothing to defend themselves.
Mr Fletcher interjecting—
The minister at the table is saying it's a straw man. Minister, if it's a straw man, then stand on the side of consumers when it comes to travel insurance. Stand up for consumers on the issue of travel insurance. Your constituents, Minister, would be delighted if you stood in favour of them rather than padding the profits of travel insurers who are gouging consumers.
When it comes to legislation, the devil is in the detail with this government. It's always the case that, whatever happens, they come out with the headline but never with the follow-up. The follow-up is usually what causes the most pain. This is no exception. As the member for Kingsford Smith rightly pointed out, this is about consumers who are being forced to pay more and to get less. To have a government that says, 'We'll get the minister to decide what happens'—once again, just as we've seen with every other royal commission that's been put forward, the government's decided, 'We'll have a royal commission just to shut people up, but then we'll go ahead and do our own thing.' That's exactly what's happening here.
We see that the minister wants to make the control to have exemptions—talk about putting a fox in charge of the henhouse. This is exactly what will happen: we will see this minister, as we see with other ministers when it comes to this sort of stuff, go and look after his mates and write exemptions carte blanche. The people who will be affected are the consumers—once again.
The one thing you can guarantee when it comes to this government is that they will never, ever stand up for Australians; they stand on them. The only thing they value is money. The only thing they seem to value is ensuring that people are, as they say, put in their place—'know their place', I think, was the term. 'Stick to your knitting' was the catchphrase for this government.
As the member for Kingsford Smith pointed out, we're seeing people who—at a time when we've gone through a tough pandemic and are in the middle of this Morrison recession—might be looking forward to going away for a holiday. Then they're forced to pay exorbitant amounts for something that may not be deliverable. We talk about travel insurance, and we look at things like Qantas. We've already seen the ability of Qantas to be an absolutely wonderful corporate citizen, taking money hand over fist from the government, sacking workers willy-nilly and leaving thousands of people out of a job. When it comes to travel insurance for a family of four, we're talking over $100 difference—$100 difference for one simple thing—because you can buy the travel insurance direct for around $136, whereas Qantas will charge you $230.
The other thing that they do, in a quick way to fool people, to leave people in the lurch, is to not allow you even a quarter of an hour to sit down and read 1,500 words. I know some of us in here think we're great speed readers, but, come on, let's be serious. That's the important thing here: we're seeing consumers being ripped off, being forced to pay above and beyond the quota, and not being given the opportunity or the chance to thoroughly understand what this means. Now we've got a minister who sits there and says, 'Look, I'm the great font of knowledge and fairness. I'll be the one who makes the decisions on exemptions.' This is not right and it's not fair. We know that the government will continue to do what they're doing at the moment—and that's always to make a headline that says they're going to be great and they're going to be helpful. But, when it comes to the detail, we find it is the average Australians—the families out there, the mums and dads in our communities—who are the ones being impacted.
Whether it's travel insurance or insurance relating to motor vehicles—I'm very passionate about my motor vehicles—there hasn't been a person, I think, who's ever come to me and said that they've been forced to buy repair cover, or wheel and tyre cover, and that it's always worked out well.' It never does. No-one gets the opportunity, when they're forced to do something straightaway, to sit down and read it—when they're purchasing something that sometimes is the second-biggest purchase they make in their life, outside of their family home.
What we need to do—and I think the royal commission brought this into place—is ensure that people are given proper opportunity to scrutinise things, to sit down and think them through and make sure that they're getting value for money. But the government wants to say: 'No, no. Let's just scrap that. We know best. We're the ones in charge. We're the ones who wrote the headline. We're the ones who put out the press release. You don't need to worry. All is good.'
When it comes to all being good, I go back to what I said about what's happening with the likes of Qantas, where we've seen thousands of workers being ripped off, losing their jobs, fighting to get back jobs that they already had, while the government keeps putting money into it—and I'm not even going to step onto Rex airlines, because we know that's pure pork-barrelling by the National Party.
The important thing here is: we've got to make sure that protections are in place to look after consumers—the mums and dads out there in the street who are working hard and trying to survive. It's tough enough as it is during this Morrison recession. But these add-on travel insurance products have been shown to be nothing more than poor value, and we need to address this by supporting the amendment by the member for Kingsford Smith.
I want to commend the member for Kingsford Smith for bringing this important amendment to the House. The amendment deals with schedule 3 of the bill before the House, the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, which is the provision within the bill that implements the government's commitment to an industry-wide deferred sales model for add-on insurance.
How does this work? Many members of the House would be familiar with this. You go and buy a car. The helpful salesperson—genuinely, I say—will say, 'You want to ensure that you've got your green slip sorted out, your compulsory third party sorted out.' There's nothing wrong with that; it's compulsory. It's a very competitive market with generally well-priced insurance. But it won't surprise many members of this place who have bought a car recently to know that the helpful salesperson will then try and upsell you another form of insurance: 'Sir, you know that we have tyre and rim insurance available for that car. Would you like to get tyre and rim insurance?' If you're a hapless consumer who's happened to take out tyre and rim insurance, you'll probably realise some time down the track that you have purchased—and I won't call it junk insurance—a low-value product. It's low value when you look at the claims ratio. There's a whole bunch of reasons we know it's a very low-value product.
The royal commission highlighted that some of these products were often representing extremely poor value for consumers and were poor-value products sold in a high-pressure environment. You're trying to get out the door, and the salesperson is trying to give you yet more products in addition to the one that you came into the store to buy. These are high-pressure sales tactics.
The existing schedule to the bill will ensure that consumers are given not one, not two, not three but four days to consider their purchase of insurance. There's nothing wrong with the person who sold you the product telling you: 'We've got an insurance product available to you. I can't sell it to you now. I'll contact you in another four or five days to see whether you want it.' They cannot make it a condition or bundle it up in the sale at that point in time. In other commercial dealings we call this a cooling-off period. It gives the consumer the ability to confer with other insurance providers, other underwriters, as to how that product compares with a bunch of other products, to see whether they are getting good value, which is a sensible move. But Labor wants to ensure that, if the government takes the view that a deferred sales model is not appropriate for a particular product, it has to be a high-value product.
An example that the Treasurer specifically indicated in his second reading speech is travel insurance. It may be the case that travel insurance warrants a carve-out from the deferred sales model. It has been put to me by industry representatives that the consequence of not having travel insurance and some fateful event occurring while you're overseas is enormous. Whether it's a health incident where you have to pay immediately the cost of that health insurance while not knowing the details of a health system, whether it's lost baggage or lost essential products, or whether it's some change to your airline's ticketing arrangement, the consequences can be dramatic for somebody in a very vulnerable circumstance. So the travel industry says, 'Whatever the merits of the deferred sales model, you need to think about the fact that a consumer in these circumstances is likely to expose themselves to great risk, and there is a very high risk that the consumer forgets to take out that insurance.' They may be right, but we want to look at the actual value of that product. And if the value of the product— (Time expired)
I think it's worth going back to the royal commission that has motivated the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 and so much reform in this space. I will delve into the detail of the problems that have arisen in relation to the assertion that there might be an exemption given for travel insurance and the importance of this particular amendment being suggested by the member for Kingsford Smith. But I think it's worth remembering that this royal commission was resisted by the government and they voted against it 26 times. It should be no surprise that we on this side of the House and many representing consumers' interests in the industry and in the community are looking at any bill brought forward by this government with a great deal of interest and, indeed, scepticism. The devil, as the previous speaker on this side of the House said, is in the detail, and it is absolutely imperative that we get the devil right.
The royal commission which, as I said, was resisted 26 times by those opposite, highlighted, to the rightful horror of the community, a number of practices that were outrageous. We saw a number of people in the community lose their life savings. We saw a number of people in the community dealt with in a way that was highly inappropriate—cold calling, selling people products that weren't fit for purpose or charging people fees for no service. That shocked the community, and the community rightly expected that this government would follow through on the recommendations of the royal commission. As an aside, I will say it is also shocking that this government is in the process of walking away from the very first of the royal commission's recommendations in relation to responsible lending. This government has shown a willingness to delay and water down recommendations in far too many instances.
What we see in relation to this particular bill and the much-needed amendment that has been proposed by the member for Kingsford Smith is that, in relation to the proposed industry-wide deferred sales model for add-on insurance products, it would be entirely inappropriate for the minister to grant a blanket exemption for travel insurance, based upon what we saw at the royal commission and based upon what we know about the potential for consumer abuse. Fifteen recommendations relating to the insurance sector arose from the royal commission. There were recommendations in relation to commissions, codes of practice and claims handling, but one of the important recommendations was in relation to the ways in which insurance companies and other financial service companies interact with consumers. Consumers should not be exposed to purchasing add-on products without a cooling-off period.
The royal commission highlighted that a number of these products often represent poor value for consumers and are often sold using pressure-selling tactics. During the royal commission, many of us would remember hearing testimony from people who were essentially abused by being pressured to buy products. Many of us would have read transcripts of telephone conversations. It's exactly those situations that we need to bear in mind when determining the appropriate way to regulate these kinds of transactions.
As I indicated, it is entirely inappropriate for there to be a blanket exemption for travel insurance, given the scope for inappropriate pressure sales to arise in that context. I should stress that the recommendation arising from the royal commission in relation to this matter has been strongly supported by consumer advocate bodies, by CHOICE, by financial advisers and by representative bodies. This is an important recommendation to get right. If we look at the amendment that has been proposed by the member for Kingsford Smith, it is that, before making regulations for the purposes of granting an exemption, the minister must be satisfied that the class of add-on insurance products has historically been good value.
What reason can the government have for not accepting a recommendation that, in the context of this situation, where there is the potential for abuse and where there is the potential for aggressive selling, the minister must be satisfied these add-on products represent good value? There is no reason. I strongly recommend that this House pass this amendment—an important amendment—in the spirit of the royal commission's recommendations.
I rise, of course, to support the amendment. I feel very strongly that this government, which was dragged kicking and screaming to the royal commission, is now doing what it does best. They are a world expert government in rorts that damage the little people. They support big business. They support their mates. They do nothing about things such as the absolute disgrace of executive remuneration in this country. Only yesterday we heard from some of the shareholder proxy organisations complaining about the lack of transparency in bonuses given to executives in companies who have stopped paying dividends yet can still manage to give huge bonuses, sometimes measured in millions of dollars, to executives. They support rorts from the big end of town, but when rorts damage the little people they don't care.
The amendment will support and protect the little people from some of the insurance rorts that have been occurring for many years, particularly in the travel industry. We've seen this across a huge range of organisations and a huge range of community organisations, such as superannuation companies and insurance companies. They damage the little people who can't afford to pay.
I have a long memory. I've been involved in running my own superannuation company and been involved in private superannuation companies for many, many years, and I've seen the rorts that have occurred with junk insurance. I had great difficulty in trying to stop this in my own situation. I know that many people have lost thousands and thousands of dollars because of the rorts in insurance. Surely it's time to start protecting the little people? This government never does. They never support those who can least support themselves. They damage people who really struggle to make ends meet. They damage people who might save for years to go on a holiday and yet get ripped off with junk insurance or with vastly overpriced insurance which could be got much cheaper independently.
What happens to that money? It goes to big companies, it goes to pay executive salaries, it goes in shareholder profits, and the little people get damaged. This government can't be trusted to look after the little people. I see it in my own electorate now with industrial action being taken against people who have supported the big company Coles for many years by working hard for them, by providing supply chain support and by doing the hard work that gets groceries on our supermarket shelves, yet they are now being locked out. The little people are being damaged again and this government does nothing.
It is disgraceful that the government can't see the need to support people in this insurance rort that is happening in the travel industry. The member for Whitlam has very rightly explained the importance of trying to protect people when they go to get insurance. Companies understand the psychology of offering add-on products. They know how vulnerable people are at in this stage, yet nothing has been done to protect people. We in Labor want to see only high-value products being provided with exemptions from this value-added industry. We believe this amendment will protect the most vulnerable. If our amendment does pass, it will mean that the Treasurer cannot issue exemptions for these products and people will save often several hundreds of dollars on travel insurance. So I stand to fully support the member for Whitlam and the amendment. I cannot understand why the government won't do so.
I moved this amendment because of the extensive consultations that the member for Whitlam and I have had with community groups representing consumers, particularly those consumers who have been in a bad situation with or have been ripped off by the insurers that offer these products. The reason we are moving this amendment is that there has been a litany of cases and studies into add-on insurance which point to the fact that the commissions are outrageous and that, essentially, they are selling junk insurance. In a lot of cases the premium that's paid by the consumer is actually greater than the product insured for the particular type of insurance.
When the royal commission looked at this issue they were very clear in their recommendation that there should be a deferred period—a cooling-off period, if you like—through which the consumer should have the benefit of thinking about whether or not they wish to take out a particular type of insurance. We all know the situation, because we have all been in it. You go along and you buy a car. It's a big purchase and you are all excited. You spend a lot of money, but you are excited about your purchase. Then you are bamboozled with all of these insurance products that can be sold to you by the person selling you the car. It is not disclosed, on many occasions, that that person is receiving a commission for trying to sell you that particular product. They come with extensive product disclosure statements that you never read before you sign on the dotted line and, before you know it, you have walked away with a junk insurance product under which the premium that you pay either upfront or over the life of the insurance is more than the sum insured.
The royal commission was quite clear that that is the model that should be put in place—giving people four days to cool off and think about it. But with this bill the government have come in and said, 'We want to grant the minister the power, through regulation.' Again, this adds to this trend of the government putting things into regulations rather than having the parliament deal with them in the primary legislation. This is giving the power to the Treasurer, of all people, to exempt particular types of insurance products. There's nothing in the bill about whether or not that particular type of insurance is good value for money, whether it has historically been the right product for people in that particular industry or, indeed, whether the people selling it must disclose the commissions they are getting. They can be quite hefty commissions and the products can represent bad value for money for the consumer.
That's why we believe that it's not unreasonable for the Treasurer to agree to this amendment and for the Treasurer to have to demonstrate that he or she is satisfied that that class of add-on insurance—which the Treasurer is about to give an exemption to—represents a product that has historically been good value for money. If this amendment goes through, it will ensure the integrity of what the royal commissioner recommended in his recommendation about the deferred-sales model. It will ensure that insurers can't get away with pulling the wool over the government's eyes and getting them to grant an exemption simply because they're a powerful lobby group or they're a member of a representative organisation that is a powerful lobby group and has the ear of government and manages to convince enough members of the government at the time to convince the minister to exempt a particular product.
I mentioned in my earlier speech some examples of insurance where the consumer does not get good value for money. When you look at the travel insurance industry it can't be said, on the whole, that all those products represent good value for money. I gave the example of Jetstar increasing their premium by upwards of 250 per cent as a mark-up. I don't think that represents good value for money for the consumer. So, it's not unreasonable for this parliament to agree to ensure that the legislation contains that guarantee that the product is good value for money for the consumer before the minister signs off on that exemption.
Before going into this concept of what 'good value' is—and that is at the heart of the amendment moved by the member for Kingsford Smith—I want to go back and reflect on the observations that were made by Commissioner Ken Hayne in his final report to the Treasurer, the report that brings this schedule in this bill, the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, before the House. He made a number of observations arising out of submissions and evidence to the commission in relation to add-on insurance. He said:
I consider that add-on insurance should generally be sold under a deferred-sales model.
And it's important to make this point: here we are only talking about add-on insurance, not other forms of insurance—that is, insurance that is sold ancillary to and in connection with a product at the point of sale. Commissioner Hayne went on to say:
Under such a model, insurers or their representatives would be required to wait for a specified period of time before attempting to sell add-on insurance products to their customers …
This recommendation went hand in hand with the recommendation that there be a cap on the commissions that salespeople could earn for selling this sort of add-on insurance.
You can see exactly why he made this recommendation. He observed a sales culture operating within retail outlets, and in many instances the commissions that were being earned by the salespeople for selling the add-on insurance were greater than the earnings they got from selling the principal product. Let me explain. If they were selling a flight somewhere, the commission earned from selling travel insurance was a substantial part of the remuneration received by the travel agent. If they were selling a new car, the commission earned by selling add-on insurance associated with that car—but not the CTP, I hasten to add—was a substantial part of the remuneration of that salesperson, rather than the selling of the vehicle itself. Commissioner Hayne observed that this led to a very heady situation where all the incentives were there.
He also made quite a counterintuitive observation in the area of competition. Normally we would think that intense competition within a market would drive prices down and drive the quality of a product up. But what he observed in relation to add-on insurance is that actually the opposite is the case. He observed:
for those add-on insurance products—and this is a really important point—
So you can see the reasoning behind this. What he is, in essence, recommending is that there should be a very small window indeed. He reflected upon evidence given by ASIC in the royal commission on this very matter, where ASIC informed the commission:
In the current sales environment, combining the sale of the car, finance and add-on products into one process restricts the capacity of consumers to consider these matters and make rational, informed purchasing decisions. The deferred sales model aims to address this by inserting a pause into the sales process.
This goes to the heart of the amendment moved by the member for Kingsford Smith. If there is a rule and the government proposes to create an exception to that rule, that should be a very hard gate to pass through. If we are to take a consumer perspective of this, that gate should only be able to be travelled through if the product, as a class of product, is good value to the consumer, because that's what we're on about here—ensuring that, if the Treasurer uses the extraordinary powers that he is proposing to grant himself in this schedule to the bill, of exempting somebody from a general rule that the royal commission said should apply, then it should be good value to the consumer.
(1) Schedule 9, item 66, page 106 (lines 29 to 33), omit paragraphs (a) and (b), substitute,
(a) liabilities imposed on or after 1 January 2022; and
(b) amounts that become payable under infringement notices (however described) given on or after 1 January 2022.