Kimberley Kitching (Victoria, Australian Labor Party, Shadow Assistant Minister for Government Accountability) Share this | Link to this | Hansard source

The Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 has been a while coming. It took the government 27 starts before it voted for a royal commission, and it seems to be taking it a commensurately long time to implement the recommendations of that royal commission. This bill finally implements four of the government's long list of unmet commitments from its response to the banking royal commission. This bill, when it finally passes the parliament, will bring the government to a grand total of 10 out of the 76 recommendations with the actions completed.

This bill does three things. Schedule 1 of the bill extends unfair contract term 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 regulation. I will step out the effect of each of these changes and why they are important.

Schedule 1 of the bill brings insurance contracts from the Insurance Contracts Act 1984 into the unfair contracts regime established under the ASIC Act. This is important because of the widespread use of standard form contracts by many businesses. These are essentially used on a 'take it or leave it' basis. I need to be clear. Although this is a reasonable business practice, 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 contract terms are nullified if they are found to be unfair, but until now insurance contracts have been exempt from this regime.

This has been highlighted as an issue for a while now. Commissioner Hayne, in his final report back in February, recommended that unfair contract terms be extended to cover insurance contracts. It was recommendation 6 of the Australian Competition and Consumer Commission's interim report into northern Australian insurance in 2018. It was recommendation 3.1 of the 2018 Parliamentary Joint Committee on Corporations and Financial Services bipartisan report into the life insurance industry. It was recommendation 11 of the 2017 Senate Economics References Committee's inquiry into the general insurance industry. And it was proposal 10 of the 2017 Australian Consumer Law Review.

There are some clear indications of harm. A 2012 government report estimated that, from available data on insurance claims, the detriments faced by customers as a result could be up to $10 million per annum. Since 2012 we have only seen the number and intensity of floods and bushfires increase. Australian insurance customers have suffered at least $20 million in detriments from unfair contract terms, and there has been report after report recommending that this government take action on this issue.

There is a clear question of priorities, of course, as well. Why has the government delayed introducing this legislation? I guess it's better late than never. The new law will bring insurance contracts into the unfair contract terms regime, but there are some sensible further refinements to address the unique issues relating to insurance contracts. Terms that define the main subject matter of an insurance contract will be excluded from the regime. Terms determining the upfront prices, excesses and deductibles will be excluded where they are disclosed in a transparent manner. And the duty of utmost good faith will continue to apply 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.

In relation to funeral insurance, schedule 2 of the bill ensures that consumer protection provisions of the Australian Securities and Investments Commission Act 2001 apply to funeral expenses policies. The amendments do not impact the treatment of prepaid funerals, which continue to operate as funeral benefits. Some of the most distressing stories arising from the royal commission were in relation to funeral insurance. Labor welcomes this change. Commissioner Hayne was searing in his condemnation of so-called funeral expenses policies.

We also need to recognise the particular importance of Aboriginal and Torres Strait Islander people living in remote and regional Australia who are likely to purchase funeral insurance. The story of the so-called Aboriginal Community Benefit Fund is particularly extraordinary—a for-profit funeral insurance company that was neither run by Indigenous Australians nor run for their benefit or the benefit of their communities. This company, now trading as Youpla Inc., sold funeral insurance products to Indigenous Australians which lead to them paying more in premiums than their families could ever potentially claim in benefits. This company until recently had a direct relationship with Centrelink's Centrepay system, allowing them to deduct premiums directly from Centrelink payments. This company built a business model on exploiting the genuine desire of Indigenous Australians to ensure that their families were not left penniless at their passage. While Labor welcome the amendments in this schedule and see that they will put an end to a particularly sorry business model, we want to ensure that the approximately 19,000 policyholders who bought funeral insurance products in good faith are not left in limbo.

Schedule 3 of the bill introduces a best-interests duty for mortgage brokers that will ensure the consumer's interests are prioritised when a mortgage broker provides credit assistance. This will mean that 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 upfront commissions be linked to the amount drawn down by borrowers instead of the loan payment, ban campaign and volume based commissions and payments, and cap soft dollar benefits. Further, the period over which commissions can be clawed back from aggregators and mortgage brokers will be limited to two years, and passing on this cost to consumers will be prohibited.

We support these reforms and note that the Productivity Commission has found that the competitiveness of Australia's home loan market is now dependent on mortgage brokers. It will be important to ensure that these reforms work as intended. I note that the government has committed to a review of the mortgage broker reforms in three years time and yet this commitment appears nowhere in the legislation. While Labor will not be blocking passage of this bill, we will be working hard to ensure that this review takes place as promised.

Peter Whish-Wilson (Tasmania, Australian Greens) Share this | Link to this | Hansard source

I start by saying how glad I am that we're now receiving some legislation directly from the Hayne royal commission into financial services. The Greens worked very hard over nearly five years to get that royal commission up. I understand that this government is planning to bring before both the House and the Senate up to 42 pieces of legislation that directly relate to the recommendations of the Hayne royal commission.

I also add for anyone interested in this that a large number of bills were brought before both the Senate and the House prior to the royal commission. We were aware of many problems in the financial services sector, dating back to some of the original inquiries I was involved in from 2013, and this house legislated some significant reform. I pay credit to Kelly O'Dwyer and other ministers who had been active over this time. We didn't feel like it was enough, though. We wanted a full, independent inquiry into much of what the Senate and the senators who attended the various Senate inquiries had heard. We wanted a royal commission that had investigative powers, that had resources, that had adequate time and that had broad enough terms of reference to deal with some of the structurally inherent problems in the financial services sector.

The royal commission uncovered much that shocked the nation. Senators attended the many Senate inquiries and heard from victims of financial crime. Many of the victims have been in constant contact with my office over many years, as they have been with other senators' offices. I acknowledge Senator Williams's contribution to this debate and Senator Dastyari's contribution to getting a royal commission up. This was a team effort across all political parties. In the end even Senator O'Sullivan—and I will utter his name in this chamber—played an important role in finally getting the Hayne royal commission up. It is good to see this Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019 before us today. I look forward to speaking to many bills in this place.

I will be brief in my contribution today. The terms 'best interests obligations' and 'conflicted remuneration' have been debated ad nauseam in this chamber since at least 2010. Labor brought in the future of financial advice laws, which was a very large reform, trying to stamp out conflicted remuneration. But, as we found out with the government's attempt to water down the FOFA laws, things did slip the net. One of the things that slipped the net was conflicted remuneration within the mortgage broking sector. That was focused on by the Hayne royal commission. I was very proud that the Senate was able to avoid watering down the FOFA laws that were brought in by Labor in 2012, but this was missed in the original legislation. It's high time to try and crack down on it. We want to make sure that this bill applies to all commissions received by mortgage brokers. I'll have some questions to ask on that if we go into committee stage. We want to make sure that mortgage brokers are stopped from receiving conflicted remuneration of any sort. We know that with the attempts to water down the FOFA laws there were some new catchphrases thrown in, like a checklist approach. Rather than perhaps commissions being paid or remuneration that might have been conflicted, employees were going to be remunerated in other ways from the bank. Either way, you had to look at where the incentives lined up as to whether employees would have actually been conflicted in their financial advice.

We want to know whether mortgage brokers will still be able to be paid commissions by landowners for facilitating property sales—I have just received advice from the Parliamentary Library in relation to that—and whether mortgage brokers have to disclose conflicted remuneration received from landowners facilitating property sales.

One thing that does concern me is that some mortgage brokers are still owned by banks, so they're vertically integrated within the banking structures. One thing that did disappoint me from the Hayne royal commission was that the Greens, my office, made a 96-page submission to the commissioner in the final stages of the royal commission, putting forward recommendations we would like the commission to look at, including breaking up the banks, looking at the vertically integrated business model. In the years that we were looking at this, we didn't believe it was possible to totally stamp out conflicted remuneration or some of the bad behaviour, the profit based culture that had permeated this industry and has caused so many problems, while the banks were totally vertically integrated. Interestingly enough, many have gone down the voluntary road of breaking up their vertically integrated business model, even without the government having to step in. They've decided that, for various reasons, it's too hard for them. Nevertheless there are still banks that, when a customer walks in and speaks to the teller, are happy to try and sell everything to them. That's still an ongoing issue.

In addition to the new best interests obligation, this bill requires mortgage brokers to resolve conflicts of interest in the consumer's favour. It sounds pretty logical. You would hope that that would have always been the case, but we heard many examples where it wasn't. In particular, if the mortgage broker knows or reasonably ought to know that there is a conflict between the interests of the consumer and the interests of the broker or a related party, the mortgage broker must give priority to the consumer's interest. This requirement is based on section 961J of the Corporations Act, which places an equivalent obligation on financial advisers.

That obligation, to give priority to the consumer's interests, is not limited to conflicts of interest that mortgage brokers currently know about. Mortgage brokers are expected to take active steps to identify all conflicts of interest covered by section 158LB to minimise the risk of a contravention, including obligations that can arise because of their commercial relationships with third parties. I'm not quite sure how that applies to a mortgage broker that is owned by a bank, if that is integrated within that organisation—whether they would even be classified as a third party. For example, if a mortgage broker has referral arrangements for the real estate agent, such that they are an associate, then the broker would need to consider the conflicts that could arise and ensure that they give priority to the interests of the consumer over their own interests—mostly their remuneration—or the interests of the real estate agent.

What constitutes reasonable steps will vary from case to case, according to the content of the obligation. Failure to take reasonable steps would include a failure to respond to or address identified problems that create a risk of a contravention—that is, licensees will need to act to prevent contraventions of the law and not simply respond to contraventions once they have happened. The reasonable steps are still open to interpretation.

The Greens have a very strong view that banking is an essential service. It's not a get-rich-quick scheme like it has been in this country and other nations for many, many years. Since banking has been deregulated in Australia, households have been carrying more risk. We've seen rising economic inequality, and we strongly believe that returning banking back to basics with strong government regulation and intervention to protect customers and improve stability is crucial. I think the Hayne royal commission's uncovered a shocking degree of rot within the foundations of the Australian banking and financial system. We're now one of the most heavily financialised economies in the world, with an enormous pool of money that creates enormous opportunity for fraud, for bribery, for misconduct and for pushing people into dodgy products and other systemic abuses of customers that this sector is supposed to serve. Let's have no doubt at all that the regulation that is before us today—and the other legislation coming to the Senate: the other 41 pieces of legislation, if that reporting is accurate—is designed to fix a systemic problem.

I remember asking a question of the late—sorry, I shouldn't say 'the late'; of former Senator George Brandis—

Paul Scarr (Queensland, Liberal Party) Share this | Link to this | Hansard source

He's still alive!

Peter Whish-Wilson (Tasmania, Australian Greens) Share this | Link to this | Hansard source

who's still alive, I understand!—in question time back in 2015 about some of the misconduct that we'd seen, and he very famously replied to me that it was just a few bad apples, which of course we'd all heard before, and how dare I insinuate that people who worked in banks were somehow criminal. That wasn't what I was insinuating, but I was insinuating that there are structural conflicts of interest within the banks and within these business models that over time have led to a culture and a cultural problem of profits before people. Of course we've seen the wash-up of that. Anyone who attended the Senate inquiries and heard from the hundreds of victims who had lost their homes, livelihoods and even their lives because of the way they'd been treated by financial advisers, the banks and other financial services companies would want to do something about it. I'll be watching with interest to see other legislation that comes before this place, and the Greens will be supporting this bill.

Gerard Rennick (Queensland, Liberal Party) Share this | Link to this | Hansard source

I rise today in support of the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019. All 76 key recommendations from the 2019 Hayne royal commission were directed towards resolving specific issues of negligence and institutional misconduct, and addressing the negative impact on public confidence in Australia's banking and financial services sector. Of the 76 reform recommendations, 54 were directed to the government, 12 to the financial regulators and the remaining 10 to the industry to implement.

The Morrison government has made it clear that it will take action on all 54 government recommendations and has announced a further 18 commitments to help address the issues raised in the commissioner's final report. The government is on track to meet these commitments and take action on the commission's recommendations.

This bill is part of the Morrison government's strong commitment to take action to better protect consumers and regain public confidence in our financial sector. Specifically, this bill seeks to address concerns identified by the royal commission within the mortgage broking industry—in particular, issues that limit confidence in professional standards and cause criticism of established remuneration structures.

The government is also addressing royal commission recommendations 4.2 and 4.7 with respect to the application of unfair contract terms within the Australian Consumer Law and the unethical approach that has been identified by the royal commission regarding funeral insurance. Funeral insurance policies have been found to unfairly target at-risk Australians by selling policies that hold little to no value in many circumstances. Commissioner Hayne revealed that poorer, less well-educated Australians are typically the ones most likely to be entangled in overpriced, often meaningless contracts with funeral insurers.

The recent banking royal commission highlighted a particular insurance fund, the Aboriginal Community Benefit Fund, that was found to have over two-thirds of its funeral insurance policyholders under the age of 30. It was also found that over a third of their policyholders were under 15 years of age. You can't help but ask the question: why are so many people under 30 being sold funeral insurance, let alone children under 15? This is quite obviously a rort. Clearly, their premiums will exceed any possible payout, leading to undue financial hardship for these families. This is simply unacceptable, especially from an industry that, in many cases, is supposed to provide protection for families struggling with the prospect of high funeral expenses.

The Morrison government has committed to protecting these vulnerable Australians. The current framework of the Corporations Act has allowed these companies to be exempt from the scrutiny of the Australian Securities and Investments Commission. By amending the definition of 'financial services' within the Corporations Act, this exemption will be repealed to better ensure that Australians receive fair and equitable service from funeral insurance providers.

To further implement recommendation 4.2, this bill also removes any ambiguities within the ASIC Act that may currently exist to confirm beyond doubt that insurers will not be given a free pass. With respect to recommendation 4.7, the government will also implement a long-overdue addition to the unfair contract terms to now include all insurance brokers. There is simply no sound basis, in legal principle or in business, to suspect that an insurer would suffer an increased burden should they be included under such terms. The only negative consequence for any insurer will be if their claims are not being settled efficiently, honestly and fairly. And if that were the case, such a situation should not be tolerated by the insurance industry or by Consumer Law. By enacting this recommendation, it is a priority for this government to ensure that consumers and small business can renew their insurance policies without fear of being subjected to unfair contractual obligations.

Small business and consumers alike can rest easy knowing that the Morrison government is holding insurance brokers accountable by ensuring that they conduct their business in an open, fair and efficient manner that is fit for purpose. Australians can be assured that their financial commitments—whether they are small-business ventures or loans obtained to purchase a house or a car—will be treated with the utmost care and to the highest standard of professionalism and confidence.

For years, mortgage brokers have been able to act in their own interests, interfering with the best interests of their clients. It must be acknowledged that many brokers do act in the interests of their clients and without the need for purpose-built legislation to rein in bad behaviour. Unfortunately, the evidence of the royal commission made it quite clear that some within the industry have taken advantage of the system. As Liberals, we believe in reducing government regulation, in reducing red tape and in reducing government interference in the private sector. However, it is clear from the findings of the financial services royal commission that this industry requires immediate legislative boundaries in order to ensure better consumer outcomes.

In practice, the proposed 'best interests duty', defined by law as a legal obligation to ensure that the best interests of the clients are to be upheld, should already be the foundations of the mortgage broker's business. I do commend those brokers who already apply this framework. However, it is clear that this is not always the case. As I'm sure even the opposition will agree, this obligation must be front and centre to assure the Australian consumer that they are receiving the best advice for them, rather than the advice which best fills the broker's pocket.

An established duty of care is already in place for many professionals, such as doctors, teachers and construction contractors. They all must act in the best interests of their patients, students and clients, as required by law. Why should mortgage brokers be any different? After all, a home loan is one of the biggest financial commitments Australians make during their lives. It should rightly be expected that such a commitment, when guided by experts, would be dealt with professionally. It is hardly unreasonable to apply the same standard to mortgage brokers as the law applies to countless other professionals.

There is almost universal support for this proposal across the industry. Key mortgage brokers and lenders have all accepted a legally imposed duty of care as a welcome change that will work hard to regain consumer confidence. Striking the right balance with the mortgage broking industry is made all the more difficult by the currently conflicted remuneration structures. This government aims to eliminate the negative effect of such payments to better ensure that Australians receive the best quality advice. To this end, all campaign and volume based commissions, incentives and payments will be banned by this bill. It is the role of a mortgage broker to be impartial as to the product or lender that he or she recommends. While such payments continue to exist, this impartiality comes under pressure. Broker recommendations under existing commissions are likely to be made irrespective of the client's interests in order to maximise financial advantage for the brokers.

This government is committed to ensuring that conflicted benefits, whether monetary or not, are not made or accepted by brokers and lenders. This provision acts on recommendation 1.2 of the Hayne royal commission report. The government notes that trailing commissions have also been called into question by the royal commission. However, based upon a significant body of advice from industry experts, it has been determined that the best course of action is to hold off on such changes due to potential worker distortion and associated unintended consequences. It is not in the interests of this government nor the Australian people to see the mortgage broker industry crumble. There are approximately 16,000 mortgage brokering businesses in Australia employing over 27,000 people who collectively offer invaluable cost-effective advice to a great many Australians.

The industry review that the government has proposed is to take place in three years and will look at all remuneration structures for mortgage brokers, including trailing commissions, to better determine the effect on the industry and the likely impact on consumer protection standards. The Morrison government wants to ensure that the mortgage broking industry survives and prospers. We do not want to cripple an entire industry with sudden large-scale changes piled on top of each other all at once. This government prefers a process by which the industry is given time to adapt to newly implemented changes. Following a review process, future changes can then be fully considered and properly evaluated as standalone propositions and integrated into the industry, if necessary, without unreasonable or perverse consequences. The Morrison government respects all recommendations of the royal commission and has also heard the concerns of mortgage brokers. We listened and now we have acted.

It is the government's view that an unbiased review process in three years should be conducted into these matters. The review process will consider the impact that the currently proposed legislation will have on the industry. It will also determine whether changes to trailing commissions and the introduction of a 'borrower pays' remuneration structure are sustainable or even desirable. The government would not want to see sound mortgage broker advice become a commodity that only the rich can afford. We acknowledge the hard work and dedication of a majority of mortgage brokers in providing a high-quality, cost-effective service. This bill simply reinforces what many in the industry already practise, and this bill further highlights the government's commitment to restoring consumer confidence in our banking and financial service industry by assuring Australians that they will receive fair, ethical and efficient consumer service.

The Morrison government is confident that the measures contained in this bill constitute much-needed reforms to directly benefit all Australian buyers, borrowers and homebuyers. I commend the bill to the Senate.

Malarndirri McCarthy (NT, Australian Labor Party) Share this | Link to this | Hansard source

Labor is supporting this bill, as previous speakers have detailed, but there are valid concerns about the implications for thousands of Aboriginal and Torres Strait Islander people who have signed up for funeral cover under the Aboriginal Community Benefit Fund. I'd like to bring this to the attention of the Senate because I think, Minister, it's enormously important that these stories of First Nations people are heard here and placed on the record. Certainly, in terms of my constituents in the Northern Territory and, indeed, right across Australia, I would like to see a profound effort to look at the concerns that I'm going to raise in my speech.

Schedule 2 of this legislation extends consumer protection provisions of the ASIC Act 2001 to cover funeral insurance policies. The interim report of the Hayne royal commission identified a number of issues with funeral insurance—in particular, the sale of funeral insurance products to First Nations people. Recommendation 4.2 from the royal commission interim report proposed removing the exemptions for funeral expenses policies. It says the law should be amended to remove the exclusion of funeral expenses policies from the definition of 'financial product' and put, beyond doubt, that the consumer protection provisions of the ASIC Act apply to funeral expenses policies. There is a history of vulnerable people being targeted and exploited by dodgy selling practices when it comes to funeral expenses policies.

I will digress a bit to give you an example from across the Northern Territory. We have over 200 remote communities, and our death rates are so enormously high. We're obviously going to hear more about that next week from the Prime Minister and the opposition leader to the parliament in the Closethe gap report. In terms of funerals, in lots of communities—we have over 100 Aboriginal languages—there is sorry business at some place, or more than one place, across the Northern Territory every week. Sorry business is where someone has passed away or where those who are sick, usually on renal dialysis or with other health complications, choose to go back home because they want to be on country. The costs involved in holding funerals in these places across remote regions of Australia are enormously high, like in the protection of the body in a morgue. A lot of the morgues are not in these communities, therefore places like Alice Springs, Tennant Creek, Katherine and Darwin and Nhulunbuy become the focus. Places in Arnhem Land that cannot hold bodies have to work out places in the wet season to fly their loved ones in. The cost, just of burial, is extremely high in those remote places.

The Hayne royal commission heard some disturbing and, quite frankly, sickening examples of how First Nations people have been targeted by companies, with some having what can only be described as dodgy selling practices. I would go so far to say it's worse than dodgy. It is certainly about greed. It is certainly about an uncaring position towards those who are enormously vulnerable in Australia.

It must be remembered that First Nations people have lower life expectancy, higher morbidity rates and a high risk of life-threatening illness. We spend a lot of time at funerals. I'm constantly involved with families and constituents across the Northern Territory with some aspect of sorry business. Just over the Christmas and New Year break we were remembering a number of family members for people in Arnhem Land, in Gulf Country and also in the Wadeye region, the west of the Territory. Too much time and too much money from the First Nations community is spent in the death industry. It's something this Senate could actually have a really good look at.

I mentioned the cost of having funerals, but there are other additional costs that come in when relocating loved ones from the hospitals or morgues in Darwin, Katherine, Tennant Creek, Alice Springs and Nhulunbuy. There are questions of costs, like: will they fly their loved ones or will they come by road? What about in the wet season when some of those roads are cut? Then we have issues with particular places like Borroloola, where my family come from. For the other communities that do have morgues, when the power goes down—when technology goes down due to flooding or any other circumstances—there is a roll-on effect on the cost. And then there is the emotional wellbeing cost to families in how to deal with the loss of a loved one.

If I can just reflect on my clan system with the Yanyuwa Garrwa people: when someone passes away a couple of things come into place. The first thing is the respect of that person who's died. We can't say their name. In my language we call that person 'mudinyi'. 'Mudinyi' means that person has passed away and we can't say their name anymore. We follow that respect right up to the burial of the person.

For many families, the burial of a person can take up to three months, before they can actually have the funeral. So, the sorry-business period is from the immediate moment that a loved one dies to when the loved one is buried. If, financially, people have been unable to afford the cost of a funeral, afford the cost of transporting a body by plane or by vehicle, then to also have to pay the cost of a coffin—all these things are considered in that period of sorry-business mourning.

Sometimes in Arnhem Land that can blow out to six months. If you talk to some of the hospitals in the Northern Territory, they will tell you that they've had bodies in there for many, many months. This is unfortunately the reality of First Nations people, particularly in the Northern Territory, and I'm absolutely certain that it's replicated in Far North Queensland and certainly in the far west of Western Australia, and possibly across the country. Again, the Senate needs to be able to examine just what is going on in this space of sorry business and death.

The Hayne royal commission clearly outlined and made some very real comments about the efficacy—or lack of efficacy—of the Aboriginal Community Benefit Fund, and I do 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. My colleagues in the other place have written to the minister drawing his attention to the 19,000 people who have invested in the Aboriginal Community Benefit Fund over many years. They invested in good faith and should not be left out of pocket, disadvantaged because of this legislation.

I would also say that more needs to be done to prevent all Australians and in particular First Nations people in remote areas from being fleeced by very, very expensive funeral plans. I believe we need to look at the overall expenses and the profits being made by the industry that surrounds death. People should not be exploited at one of the most vulnerable times of their lives.

Wendy Askew (Tasmania, Liberal Party) Share this | Link to this | Hansard source

I take this opportunity to make a brief contribution on the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019. This bill is further proof that the Morrison coalition government is continuing to fulfil our commitment to taking on all 76 recommendation of the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. During his speech to the Victorian Chamber of Commerce and Industry in Melbourne on 19 August 2019, the Treasurer announced the implementation roadmap, which set out how the government would deliver on its comprehensive response to the commission's recommendations. At that point the Treasurer indicated that we had already started to implement some of our commitments, and I will quote from that speech, noting that the date is 19 August:

Implementation is already substantially under way

The Government has made significant progress in implementing its response. We have already implemented 15 of our commitments, 8 of which relate to Commissioner Hayne's recommendations and 7 to our additional commitments. We have 24 streams of work under way.

Further, he went on to say:

Commitments already implemented include:

• Banning superannuation funds from treating employers, which will ensure that trustees do not use inappropriate means to influence employers to select a fund for their employees.

• Ensuring that trustees and directors of superannuation funds are subject to civil penalties for breaches of their best interests obligations.

• Funding the payment of around $30 million in legacy unpaid determinations from the Financial Ombudsman Service and the Credit and Investments Ombudsman.

During his response, Commissioner Hayne encouraged changes to be made carefully and simply, and the bill before us today seeks to respond to a further four of these recommendations.

This commitment to taking action on the recommendations laid out by Commissioner Hayne represents the largest and most comprehensive corporate and financial services law reform package in 30 years. It's important to emphasise that implementing the recommendations of the royal commission is critical to restoring trust and confidence in Australia's financial system, and it's part of the Morrison government's plan for an ongoing stronger economy. As the minister's incorporated second reading speech to this chamber states:

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 have been exempt from regulation by these laws.

Schedule 1 will increase protection for consumers and small businesses purchasing general and life insurance products. It will give effect to the Royal Commission recommendation 4.7 and bring insurance's regulation into line with that for the rest of the financial services sector.

Ensuring consumers and small businesses can purchase or renew their insurance policies with confidence is important. Insurance cover for homes, motor vehicles, building contents and income protection helps limit loss and support households and, in turn, the broader economy.

Deterring insurers from drafting unfair terms in standard contracts and providing a remedy in cases where they are found will support fair treatment of consumers and small businesses.

Furthermore, schedule 2 of this bill will ensure adequate consumer protection provisions apply to funeral expenses policies. During the conduct of the royal commission, evidence was uncovered surrounding 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. They will be subject to the Australian financial services licensing regime. This bill will ensure that the 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 that consumers have appropriate protections when taking out policies to help fund the costs associated with a funeral.

Schedule 3 of the bill will introduce a duty for mortgage brokers to act in the best interests of consumers, with a view to better aligning the interests of consumers and mortgage brokers, and will reform mortgage broker remuneration, with a view to mitigating the incentive for brokers to suggest loans that are not in consumers' best interests, as well as reducing impediments to consumer loan switching. The royal commission identified evidence of mortgage brokers recommending loans based on the commissions they would receive. Both the best interests 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 the customer. The new rules will also limit the period over which commissions can be clawed back from aggregators and brokers to two years and will prohibit the cost of clawback from being passed on to consumers.

Reflecting on the progress to date in relation to the recommendations, I also reflected on my earlier career and the brokers and insurance agents that I had dealt with on a regular basis. During my first speech in this place in April last year, I acknowledged that most of my career had been in banking. At that time, I went on to say:

… I am the first to say that poor practices should be exposed and those undertaking them should be held to account. But it is important not to overlook the diligent work being undertaken by tens of thousands of loyal and committed staff who get great job satisfaction in assisting Australians with their everyday banking needs. The only thing that separates a bank officer from a bank customer is a counter. We all share the same pressures of home budgets, making ends meet, working out how to buy a house, planning for retirement and dealing with unexpected expenses which can arise. My experience with former banking colleagues and with senior managers is that almost everyone I met approached their job and their responsibilities with integrity and care for the circumstances of the individual customer.

The implementation of the recommendations will only serve to benefit and further protect those working in the financial sector. However, those sentiments still remain. We must remember that staff on the front line, whether in retail banking, broking or insurance, deserve our respect and to be treated that way in our daily interactions. The irresponsible actions of just a few can harm so many.

Having said that, those of us in this chamber must remain focused on providing an environment where all Australians are not being taken advantage of by unfair contracts, not being exploited in vulnerable times of their lives or not having their best interests supported by lenders. This bill seeks to address these issues, and I commend this bill to the Senate.

Slade Brockman (WA, Liberal Party) Share this | Link to this | Hansard source

I too rise to speak on the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019. I will follow on from the contribution of Senator Askew to highlight or perhaps expand on some of the points she made. In the wash-up of the Hayne royal commission, as we look at some of the revelations that shocked the Australian community and shocked members of this place in terms of the depth and breadth and systemic nature of some of the problems in the industry, we also must remember that 30 years of continuous economic growth had many underpinnings, but one was a robust and highly performing financial sector. We can't ignore that fact as we now deal with the repercussions and recommendations of the Hayne royal commission. So, whilst there were problems and there are problems, and those problems need to be addressed, there is also a fundamental underpinning of a very good structure across the financial system, across our banking system. It is a competitive market with a number of smaller players, who I personally think need to be encouraged and supported by our regulatory regime, but we also have four major institutions in that space. So we do have to remember both the good and the bad. When we are dealing with these issues we must deal with them in a responsible way and in a way that enhances our financial services system. And that is what this bill seeks to do.

In terms of the three issues covered by this bill, obviously insurance contracts are front of mind at the moment as we deal with the recovery following the bushfires in January and ongoing. In the north we've had some significant rain events, which will also call on our insurance providers, and we obviously still have the remainder of the fire season this year to go. So the insurance issues are very much front of mind for many Australians. Schedule 1 of the bill ensures that unfair contract terms in insurance contracts are read in such a way as to protect consumers. So unfair contract terms should not be read in such a way as to be to the detriment of consumers. We need to stop technical restrictions in contract terms that in practice result in a level of functional underinsurance, where people believe themselves to be covered by the overarching nature of the policy they hold. It's about protecting consumers who, in this context, do lack bargaining power and receive a contract on a 'take it or leave it' basis. Particularly where there are thin markets—and they do exist, as many in this place have heard, particularly in the north of Australia—effectively the contracts are 'take it or leave it'—there aren't other providers or companies to go to and negotiate a better deal. Even if there were, chances are it would be another 'take it or leave it' proposition.

Let's face it: insurance contracts can also be very complex for consumers. I believe it's important that we encourage consumers to engage with some of the complexities of the financial services system rather than saying that regulation can foresee all circumstances in a particular contract. But, at the same time, we don't want consumers in these circumstances to be unfairly dealt with where they believe they have insurance and they effectively don't have it due to an unfair exclusion or onerous condition within the contract. This provides a protection in cases where an insurer has attempted to deny a claim or restrict the payout available to a consumer or 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 up-front price as premiums and excess or deductions payable, and defining the main subject matter of the contract as what is being insured. This is in line with the royal commission recommendation for point 7.

On the issue of the main subject matter—and I think this is key to this particular schedule—it's the idea that the main subject matter of an insurance contract can never be described as an unfair contract term. So, if the main subject matter is an insurance contract for a particular property—a four-bedroom, brick and tile house—then that is outside the idea of the unfair contract term regime. If a husband and wife purchase life insurance then the individuals involved and the sum that is insured are the main subject matter, and that is outside the unfair contract terms regime. However, other aspects, extraneous matters to the central contract of insurance, will be within the unfair contract terms.

I will move on to the funeral expense facilities which are covered in schedule 2. As Senator McCarthy very eloquently described, the royal commission did find, particularly amongst Indigenous communities, a level of exploitation of people in relation to the payment of funeral expenses in advance. That was certainly something that shocked many of us—the level of unfairness and exploitation that was involved in some of those examples. It wasn't just the Indigenous community; vulnerable consumers across Australia were open to being exploited in this way by some of the funeral expense policy providers. The current exemption in the Corporations Act that has allowed providers to escape the scrutiny of the Australian Securities and Investments Commission will be removed. That will mean that they will now become subject to the Australian financial services licensing regime. That means that the consumer protection provisions of the ASIC Act will now apply to funeral expense policies, clarifying any ambiguities that may exist in the current arrangements. The removal of the exemption will ensure that consumers have appropriate protections when taking out policies to help fund the costs associated with a funeral. The provision of prepaid funerals will also be unaffected by these reforms on the grounds that they will be able to rely on the funeral benefit exemption in the Corporations Act. This bill will come into effect after royal assent, and providers of funeral expense policies that do not have a financial services licence will have until 1 April 2020 to gain one.

Just briefly and finally, schedule 3 of the bill addresses the issue of mortgage brokers. This schedule fulfils the government's commitment to implementing the response to two recommendations from the royal commission. It introduces a best-interest duty for mortgage brokers and reforms mortgage-broker remuneration. The regulation sets 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. This obligation will bring the law in line with what consumers currently expect of mortgage brokers. Together, the bill and the regulation will make changes to mortgage-broker remuneration by requiring the value of up-front commissions to be linked to the amount drawn down by borrowers instead of the loan amount, by banning campaign and volume based commissions and payments, and by 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 will prohibit the cost of clawback being passed on to consumers.

There was some evidence provided at the royal commission that mortgage brokers were recommending loans based on the commissions they received. These changes will mitigate the incentives for mortgage brokers to suggest loans that are not in the best interest of the consumer.

Again, we have a long way to go in terms of our response to the Hayne royal commission. It was a significant body of work. It is important that we hasten slowly. We need to make sure we get the balance right. We need to make sure that the regulation and changes to the legal framework that we put in place for our financial sector do strike the correct balance. We do not want a financial services sector that has served this country very well to be tied up in too much red tape. However, we also need to ensure that the Australian public have confidence in the financial sector and have confidence that, when they are in dealings with the financial sector, they will be treated in an ethical, a responsible and a legal way.

Susan McDonald (Queensland, National Party) Share this | Link to this | Hansard source

I rise to speak in support of the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019. There are a number of things that we do after forming government and in being part of this place, but I think there is nothing more important than providing Australians with the confidence that the systems that they operate in are effective and fair.

I know that the decision to hold the financial services royal commission was debated widely, and I want to commend former senators Wacka Williams and Barry O'Sullivan and other Nationals for the part they played in ensuring that this royal commission went ahead, because this is a very serious topic, particularly for regional Australians.

Some of the matters that have come out around insurance in regional Australia could not be more topical than they are right now. Last year, we saw the floods in the north and north-west of Queensland, and we have seen bushfires and other events most regularly in my home state of Queensland that mean that consumers often have the unfortunate and unhappy experience of discovering that, although they thought they were well insured and covered, that is not the case. That is a very, very serious issue, because insurance right across Australia is becoming increasingly expensive. I hear stories about it being more and more difficult to insure individuals, businesses and homes. Sometimes they are self-insuring, meaning they are not insuring at all, but often they cannot get insurance. The most shocking part is that there are businesses, strata title units and other residences, particularly in North Queensland, that cannot get insurance at all. This is a very difficult situation, given that banks and financial institutions require these assets to be insured. So this royal commission was very important and I'm very pleased to speak to the response and protecting consumers bill.

Life can be full of much drama, and it is, but there is nothing quite so difficult as financial headwinds. This is why the Morrison government is acting to give added peace of mind to millions of hardworking people who want to know that they are getting what they paid for.

The Insurance Contracts Act will be amended to allow the ASIC Act unfair contracts law to apply to insurance. I am especially happy to commend this act because, as I've already touched on, the cost of insurance in my home region of North Queensland is prohibitive, forcing people to underinsure or forgo insurance altogether. There are businesses in North Queensland who remain completely uninsured. These are in some cases well-known and high-profile businesses, but they run the risk of not being paid out in the event of a claim and are setting money aside for those events that we know will come again, particularly in North Queensland and particularly cyclones and flood events.

The Insurance Contracts Act will offer protection to consumers who lack bargaining power when they receive their contracts on a take-it-or-leave-it basis. These consumers are very 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 up-front price as premiums and excess or deductibles 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 the court for a declaration that a term of an insurance contract is unfair, and if they succeed that term will be void.

Schedule 2 of this bill deals with funeral expenses. For anyone who has gone through the tragic and terribly sad time of losing a close family member, it is shocking to find that this is potentially a time when they will have the double impact of an unfortunate experience with their funeral expenses. 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. A funeral expenses policy or facility involves the payment of a premium over a period of time to insure against the event of a funeral. It differs from insurance in that the payout may only be used to meet the costs of the funeral and those things incidental to it.

The funeral expenses exemption in the Corporations Regulations 2001 excludes funeral expenses policies from being a financial product under the Corporations Act 2001. This means that providers of funeral expenses policies are not regulated under the Australian financial services legal framework. The exemption has allowed these providers to escape the scrutiny of the Australian Securities and Investments Commission. As part of its response to recommendation 4.2 of the royal commission's final report, the government has committed to removing the exclusion of funeral expenses policies from the definition of 'financial product' in the Corporations Regulations 2001 and put beyond doubt that the consumer protection provision of the Australian Securities and Investments Commission Act 2001 do apply to funeral expenses policies.

The government is acting on the evidence presented by the financial services royal commission that many Indigenous people living in regional and remote communities are being misled and pressured into funeral expenses policies. This bill will ensure that the 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 that consumers have appropriate protections when taking out policies to help fund the costs associated with funerals.

The provision of prepaid funerals will be unaffected by these reforms on the grounds that they will be able to rely on the funeral benefit exemption in the Corporations Act. This bill will come into effect after royal assent, and 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 of the bill deals with mortgage brokers and fulfils the government's commitment to implement its response to two recommendations from the royal commission into misconduct in the banking, superannuation and financial services industry royal commission. The bill will introduce a best interests duty for mortgage brokers and reform mortgage broker remuneration. The best interests duty will require mortgage brokers to act in the best interests of consumers when providing credit assistance in relation to credit contracts. This obligation will bring the law into line with what consumers currently expect of mortgage brokers. The bill and regulations may change as to mortgage broker remuneration by requiring the value of up-front commissions to be linked to the amount drawn down by borrowers instead of the loan amount; banning campaign and volume based commissions 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 clawback from being passed on to consumers.

The royal commission identified evidence of mortgage brokers recommending loans based on the commissions that they would receive. Both the best interests duty and reforms to mortgage broker remuneration will mitigate the incentive for mortgage brokers to suggest loans not in the best interests of the consumer.

I wish to speak, though, to the mortgage brokers across the nation who work diligently and work hard to ensure that their customers are being kept up to date with the best and most suitable product for them, particularly in their home loans and other assets that they hold. The mortgage brokers are able to more easily compare and contrast the different products that are available from financial institutions. I have mortgage brokers in my town of Townsville that I know do a terrific job of contacting their customers on an annual basis to review the product that they had recommended the previous year and to ensure that their customers were receiving the best product and the most suitable product for them. I want to commend those people who provide a very necessary financial service to those in the community who may not have the time or the expertise to compare various products and ensure they get the best product for them.

This government is helping people to gain confidence during some of the most difficult times in their lives—that is, when they've lost a loved one or need to make an insurance claim—and to particularly deal with it quickly after disaster strikes.

It is a shocking situation that in North Queensland, and particularly in Townsville, there remain so many homes that have not yet been repaired following the floods, because of the methodology used by panel building appointments. One local builder I spoke to only last week has been given the job of repairing only six homes in Townsville when there remain so very many that have not yet been touched. So there is still much work to be done in the insurance industry. I'm very sure that this government will continue to provide support to consumers to ensure that there are better outcomes. These recommendations also help protect consumers from unfairly getting into financial situations which can have harrowing and lifelong consequences. I commend this bill to the House.

Paul Scarr (Queensland, Liberal Party) Share this | Link to this | Hansard source

At the outset, I'd just like to acknowledge the contributions of a number of senators who've spoken before me. First, to Senator Whish-Wilson: I acknowledge his involvement in many inquiries and his passion in relation to this issue over a number of years. As a relatively new senator, that's a pretty good example for me to follow. You did refer to my good friend George Brandis, who was a senator in this place and served with distinction over a number of years. I must say, as someone who was in a position as a secretary of a listed public company and advised directors of listed public companies over many years: if someone had asked me before the Hayne royal commission whether or not there was such a systemic cultural problem in some of our oldest and largest financial institutions, I would have found it hard to believe. I was deeply stunned by some of the evidence that came out of the Hayne royal commission, so I think George Brandis was not alone in terms of those views.

I'd also like to acknowledge, as my good friend Senator McDonald has, the contribution of former Senator—as he then was—Barry O'Sullivan to the debate in relation to the royal commission. I think Barry also, in that regard, performed an extraordinarily important role, as did the member for Wide Bay, Llew O'Brien, in terms of ensuring that the Hayne royal commission came into being. I'll also, finally, as an introductory comment, just place on the record how much I agree with Senator McDonald's comments in relation to people in my state of Queensland, especially in the regional areas, being able to access insurance on a reasonable basis. Senator McDonald outlined a few issues there, which I think a number of us representing the state of Queensland will be pursuing.

Prior to talking about the specifics of the legislation—and I will deal mainly with the part of the legislation dealing with insurance contracts—I want to refer to two case studies that are detailed in the Hayne report, because, to me, these case studies put into stark relief why this legislation is so necessary. The first case study involves an insured, a fellow Australian, who suffered a heart attack in January 2014. The gentleman had had his life insurance policy in place since 2000. He suffered his heart attack in January 2014. Like many Australians, he would have applied for insurance, entered into a life insurance policy, had the policy sitting there, been loyally paying his premiums over a number of years, had his heart attack in January 2014 and then sought to make a claim. What he found was the insurer—and I'll name them: CommInsure—had actually changed the definition of 'heart attack' under his insurance policy.

Now, most Australians would think a heart attack is a heart attack. You wouldn't necessarily be looking for the fine detail to ascertain the definition of 'heart attack'. I'll state the definition here: 'A heart attack requires an elevation in levels of troponin I above 2.0 mcg per litre.' I don't think any reasonable Australian would be searching through their insurance policy to ascertain what the definition of a heart attack was, nor—even if they did—would they have any understanding of what such a definition meant.

After the heart attack, the insured made a complaint to CommInsure in June 2014. CommInsure did not change its decision. We then saw the power of the media and the importance of a free press in this country, when the ABC's Four Corners program and Fairfax Media, as it then was, reported on concerns about CommInsure's life insurance business. As a result of those reports, CommInsure decided to amend the definition of 'heart attack' again—and that occurred in 2016—and to backdate that definition to 11 May 2014. But that didn't help the insured, because he had his heart attack in January 2014. So the insured was still in a position where he wasn't able to claim on that insurance. There was then engagement between CommInsure and the Financial Ombudsman Service, toing and froing, all the while the insured not having access to his policy, a policy which he first applied for in the year 2000 and for which he had been loyally paying his premiums. It wasn't until 2016 that, eventually, CBA/CommInsure came to the party and made an ex gratia payment, more than two years after the insured suffered the heart attack. From my perspective, that is an example of why this legislation is so necessary. If the insured hears this debate in the Senate, I hope he knows that at least now—and it's taken until 2020—we have legislation before the Senate which will be passed and which will hopefully address people in a similar position.

In terms of the principles governing this legislation, I'd like to make a few points. Firstly, this legislation does not impinge upon freedom of contract—the reasonable interests of both the insured and the insurer. I believe it will promote people entering into insurance contracts, it will assist in those insurance contracts being provided at a reasonable cost and it will protect the most vulnerable in our society. I think that's important. And, when I talk about the most vulnerable in society, that includes people like many of our people in the First Nations but also those who have undergone a tragic event in their own life and are at their most vulnerable at that point in time. All of us have those moments in our life, and it's important that at those times we have protection.

The mechanics of the legislation are such that, if an insurance contract is subject to the unfair contract terms regime, a term in that insurance contract may be declared unfair and therefore void. It's important to note in this context that the term could be unfair on its face—it doesn't matter what the individual case is—or the application of the term in an individual case could be unfair. That's an important principle. Whether or not the specific term is unfair depends upon whether or not one of three tests are met: whether it would cause a significant imbalance in the party's rights and obligations arising under the contract; whether or not it's not reasonably necessary in order to protect the legitimate interests of the party that would be advantaged by the term; and whether or not it would cause detriment to a party if it were to be applied or relied on. Examples of terms that are unfair in this context are provided in the explanatory statement, and they include:

• a term that allows the insurer to, instead of making a repair, elect to settle the claim with a cash payment calculated according to the cost of repair to the insurer, rather than how much it would cost the insured to make the repair;

• a term that is an unnecessary barrier to the insured lodging a legitimate claim (for example, requiring the payment of a large excess before the insurer considers a claim or requiring the insured to lodge the claim within an unreasonably short timeframe)—

and in this context we're talking about insured who have suffered tragic events—

• a term in a contract that contains unexpected payment arrangements (for example, that would enable the insurer to unilaterally start making direct debit deductions to an account of the consumer despite the consumer selecting a different payment method);

• a term in a disability insurance contract—

and this goes back to the initial case study I referred to—

that uses an outdated, and therefore inaccurate and restrictive, medical definition to determine whether the consumer meets the criteria to be eligible to have a claim paid; or

• a term in a contract that significantly reduces the cover offered where compliance with the preconditions for being covered is unfeasible (for example, a term in a travel insurance policy that only covers loss of luggage when it has been personally attended by the insured at all times)—

which we know is an impossible condition to meet.

The act does protect the legitimate interests of insurers and it gives examples of terms which would not fall foul of the unfair contract term regime. These include where an insurer has, in a bona fide way, referred to actuarial evidence in order to calibrate the pricing of an insurance contract. It also includes the insertion of standard terms in a contract which are required for the insurer to obtain reinsurance—both legitimate interests of the insurer.

The last point I'd like to make is in relation to an exclusion which deals with the main subject of an insurance contract. This was referred to by my good friend Senator Brockman. The unfair contracts regime will not respond to what is at the heart of the contract. The examples go to someone who purchases home insurance for a specific property with a specific definition and a specific amount—the fundamental terms of the contract which go to the heart of the deal and are clearly stated, being obvious to both the insured and the insurer when the contract is entered into. I don't think Australians are expecting the main subject of the contract to be regulated in this way. What they are most concerned with is the fine print, if I can put it that way, that undermines the efficacy of the contract.

I think the legislation satisfies all of the principles which should be adhered to in relation to such legislation. Hopefully it will promote confidence in the insurance industry. It will assist people when they obtain their insurance to get what they bargained for and get what they're contracted for and it will protect the most vulnerable in our society. I commend the legislation to the Senate.

Matthew Canavan (Queensland, Liberal National Party, Minister for Resources and Northern Australia) Share this | Link to this | Hansard source

I rise also to support the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019. It's a bill that implements some of the recommendations of the Hayne royal commission. I'd like to firstly pay tribute to some of my former and current Nationals colleagues who played a big role in establishing the Hayne royal commission in the first place, particularly former senators Barry O'Sullivan and John Williams, who were at the forefront of advocating for this commission, and also the member for Wide Bay, Mr Llew O'Brien.

I must say on the record that, at the time, I had some robust conversations with my colleagues about this. I was not convinced of the merits of the case, but I take the opportunity to put on the record here that I was absolutely wrong, as has been shown clearly through what was uncovered in the royal commission. I recognise that many of the Labor members of parliament were also ahead of the game on this and put it forward first, but it does take a degree of courage and fortitude to advocate for a position that goes against your own side, as Barry, Llew and 'Wacka' did a couple of years ago. It's a great tradition in the National Party that we respect the different views of people within our party room. We give them the opportunity to express their views privately to us but also publicly without massive retribution. There's some degree of admonition at times, but they are free to do that. By being able to step just a little bit out of line, they have been able to deliver enormous benefits to Australian consumers by eventually successfully establishing this inquiry and, today, seeing the fruits of that, with stronger regulations to protect consumers. While Senator O'Sullivan and Senator Williams are no longer here to see the passage of this legislation, they can take great heart that their names are written all over this. It would not be here but for their efforts.

This example shows that we must always be cynical of the loud voices in our community that have a certain position, and we should seek to respect what we hear from farmers and from small businesses. These complaints were coming through, but many of us were reassured at times by the big banks that everything was fine and that these were isolated problems and it wasn't part of a widespread culture. But we know better now. After this commission we know better that there were indeed more systemic problems within the financial sector. What's important here for us, as a principle, is that it is always more important for us to listen to and act on the views of our constituents before simply seeking to please our colleagues here in Canberra. We have to work collaboratively as a team, but, ultimately, we're all here to represent the people who put us here. That's what I try to do in my role as a senator for Queensland—and certainly Barry, Llew and 'Wacka' have all provided a great example of how to do that.

I will now turn to the specific provisions of the bill. This bill is part of the response to the Hayne royal commission, and there's other legislation coming forward to respond to what was a very comprehensive report on the financial sector. This bill basically does three things. The three measures go to unfair contract terms—extending those to insurance contracts—dealing with misconduct in the funeral expenses industry and changes to obligations for mortgage brokers. On unfair contracts, I want to say that the coalition has a proud record of extending and supporting the regulation of unfair contract terms. I recognise that it was the former Labor government that first introduced unfair contract terms into our consumer laws. But, when the coalition came into government in 2013, we extended those unfair contract terms to small businesses, which I think was very important. When small businesses interact with larger businesses, they often are in the same power-type position as a small consumer, and they deserve similar protections to those a consumer gets. Those laws have been successful and they have stood the test of time.

Given that experience over the last decade, it makes sense that we extend unfair contract term legislation to the insurance industry through this bill. Schedule 1 of this bill will do that. It will mean that national unfair contract terms that currently only protect consumers and small businesses will now be extended to standard form insurance contracts. Until now insurance contracts have been exempt from regulation by these laws. The Insurance Contract Act will be amended to allow the ASIC Act's unfair contract laws to apply to insurance. 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 up-front price as premiums and excess or deductibles payable and defining the main subject matter of the contract as what is being insured. This change is in line with the Hayne commission's recommendation 4.7. Consumers and ASIC will be able to apply to the court for a declaration that a term of an insurance contract is unfair. If they succeed, the term will be void, as occurs under other unfair contract terms legislation. It is a very important change. It will mean better outcomes for consumers. A coalition government will always stand up for the rights and interests of consumers and protect them accordingly.

The second part of this bill, as I mentioned, deals with misconduct that the Hayne royal commission exposed in the funeral industry. Obviously, this is an industry where people interact at times of great heartache and sometimes hardship. It's extremely important that we ensure that particularly the people who at times would be in a vulnerable position are fully protected by the law, and there are strict regulations imposed on anyone seeking to in any way abuse someone's vulnerability. The Hayne royal commission uncovered evidence of significant harm caused by the poor sales practices adopted by some funeral expenses policy providers.

There is an exemption in the Corporations Act that has allowed these providers to escape the scrutiny of ASIC, the Australian Securities and Investments Commission. We are going to remove that exemption and they will now be subject to the Australian financial services licensing regime because the products they offer often do have a financial element in terms of requiring payment over a period of time. So the bill will ensure consumer protection provisions of the ASIC Act apply to funeral expenses policies, clarifying any ambiguity that may exist in these matters.

The removal of this exemption will ensure that consumers have appropriate protections 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 grounds that they 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 one by 1 April this year.

Obviously, the Hayne royal commission uncovered misconduct across the financial sector. Another area where misconduct was identified was the mortgage broking industry. But I do want to stress upfront that I think the mortgage broking industry is incredibly important to the financial performance of the Australian economy. It's incredibly important to many Australian consumers whose home loans originated through a broking service. It is extremely important in rural and regional country areas, where often there's not a large presence of major banks but there may be a small broker who can help connect a family in a small town to financial service providers and home loan providers right across the country and, indeed, across the world. That allows someone living in Longreach, Cloncurry or Ingham the opportunity to access global capital markets through a mortgage broking system. We must ensure we have a healthy mortgage-broking system so that all Australians, not just those who happen to live in large markets, can benefit from that competition.

While I said there was evidence of some issues in the mortgage broking sector, I want to place on record that, in this area, having read the Hayne royal commission report, I don't think—with all respect to Justice Hayne—the conclusions he drew were exactly correct. We were supportive of the Hayne royal commission. As I've mentioned before, he did a comprehensive, excellent job. But no-one is a deity and no report should be accepted at face value. It should be interrogated by this place, interrogated by the government and interrogated through consulting with those affected by any potential recommendations, and we should come to a considered view after factoring those things into account.

I understood the issues that Justice Hayne had identified, but I didn't think he drew quite the proper comparisons between the mortgage broking sector and the plain-vanilla mortgage services operated by banks or deposit-taking institutions. For example, Justice Hayne made a significant issue of trailing commissions. When a consumer conducts business with a mortgage broker and originates a loan through that broker, there might be a fee upfront, maybe paid by the bank, but, over time, the broker will get additional money as the loan continues to be serviced or operated. Now, Hayne described those trailing commissions, in his own words, as 'money for nothing'. He asked:

Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?

Prime facie, that's a compelling and almost rhetorical question. But I don't think it withstands examination in terms of how financial markets operate, particularly financial markets that involve the creation of long-term debt products for consumers who are often capital constrained.

While the trailing commission for a mortgage broker might not always be transparent to the consumer, although it should be, it's obvious there's a payment or transfer from the loan-originating institution through to the broker. As a direct payment, you can quantify it and you can see it—and, obviously, Hayne investigated it. But a trailing commission is not that much different from exactly how banks work when they originate home loans. The banks have trailing commissions; they're called net interest margins. That's how they make their money.

I've got a loan through the Commonwealth Bank, and they don't charge you much upfront to originate the loan. They've got a lot of costs upfront. They've got overheads. They've got to assess my application. They've got to have a branch network for it to go into. They don't recover all of those costs upfront through a fee. They often waive those fees. I've even seen ads by major banks that they'll pay you money to originate a loan. You get a subsidy to originate a loan. But they recover their costs. They're not doing it out of charity. Those banks recover their costs over time by charging me and other Australian families a higher interest rate than the rate they themselves borrow at—which is perfectly fine; that's how banks work. That's how they've worked, going back to Renaissance times: they make their money on the margin between the interest rates they charge and the interest rates they have to pay, to get money from consumers into the bank or on capital markets. That is a trailing commission. That gap, that interest margin that exists over the 30 years of my home loan and other people's home loans, is a trailing commission. It's no different from the mortgage broker; it's just not very transparent. It's all internal to the bank.

And so, if we are going to ban trailing commissions for mortgage brokers, which was suggested by Hayne, the question that arises is: why would you let banks do the same thing? That would be ridiculous. The whole reason you have a model like that is that people who are going to borrow money, obviously, at that time often don't have the capital they need to buy a house or buy a large product. So they can't pay upfront fees, and they would like—or at least they have a preference—to defer some of the overhead costs of originating the loan through the life of the loan, as they do through the costs of buying or building a home as well. So I didn't think it made sense, from an economic point of view, to ban those trailing commissions.

I welcome the fact that the government is not proceeding with that recommendation. If we did, I think it would put mortgage brokers at a disadvantage relative to banks that don't use mortgage brokers. That would mean smaller banks and smaller deposit-taking institutions would be put at a disadvantage compared to bigger banks, and we'd have this perverse outcome—that a royal commission that was set up largely to deal with malpractice in large financial institutions led to a result where those same large financial institutions would actually benefit, unfairly, compared to smaller financial institutions that rely on mortgage broking for their lifeblood.

The government will not proceed with that, but it will proceed, in this bill, with a best interests duty on the mortgage-broking industry. That's a sensible reform recommended by Hayne. It will see the outlawing of a number of different types of fees, such as volume based commissions. There will be a limit of just two years to clawback provisions in contracts. And we will review the operation of these reforms in three years time and look again at this issue of trailing commissions.

I support the measures in this bill. They will enhance protections for consumers, and it is a sensible response to the Hayne royal commission. Once again, I thank my Nationals colleagues for their efforts, and the fruits of those efforts are what we're seeing here. I look forward to the further changes that will come forward as a result of the Hayne royal commission's findings.

Jane Hume (Victoria, Liberal Party, Assistant Minister for Superannuation, Financial Services and Financial Technology) Share this | Link to this | Hansard source

First, I would like to thank those senators who have contributed to the debate on this bill, the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Bill 2019, particularly those who have expressed support for the measures in the bill, support which has been almost universal, and those who have expressed some very heartfelt and personal views about some of the measures in this bill, and particularly Senator McCarthy: thank you very much for your contribution.

The government is committed to implementing its response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by extending the unfair contract terms regime to insurance contracts, by ensuring adequate consumer protection provisions apply to funeral expenses policies, and by introducing a best interests duty requirement for mortgage brokers and reforming mortgage broker remuneration.

Schedule 1 of this bill implements recommendation 4.7 of the royal commission. Extending the 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 them, it enhances consumer rights and provides consistency in financial services 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 represent real and beneficial changes to the insurance industry.

Commissioner Hayne discovered evidence of harm being inflicted upon vulnerable consumers by providers of funeral expenses policies. That harm derived from the provision of poor sales practices and the distribution of low-value products by these providers. Schedule 2 of the bill will ensure that the consumer protection provisions of the ASIC Act apply to funeral expenses policies, removing any ambiguity that may currently exist.

Schedule 3 of the bill amends the National Consumer Credit Protection Act to require mortgage brokers to act in the best interests of the consumer when providing credit assistance. This ensures the law is in line with consumer expectations when interacting with a mortgage broker.

Mortgage broker remuneration will also be reformed 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 commissions and payments and also capping 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 onto 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 this bill to the Senate.

Question agreed to.

Bill read a second time.