The Impending General Prohibition of Hawking Financial Products and what this will mean for Financial Service Providers

30 April 2020
Edward Martin, Partner, Sydney Liam Hennessy, Director, Brisbane

The Federal Government is preparing to introduce the ‘Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2020 Measures)) Bill 2020: Hawking of financial products‘ (the Bill) in response to the recommendations of the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that all hawking of insurance and superannuation products should be prohibited.

The changes foreshadowed are intended to expand existing prohibitions on the hawking of financial products by financial services providers (FSPs) to retail clients and are expected to commence on 1 July 2020.

The Bill introduces a robust prohibition of the hawking of financial products – that is, offers to sell or issue financial products which are made in the course of, or because of, ‘unsolicited contact’ are prohibited (General Prohibition). It is intended to provide certainty to the anti-hawking regime and close existing loopholes.  The bill is on the agenda for when parliament resumes on 12 May 2020 and, assuming the Bill passes in its current form, there will be questions as to whether it achieves these ends, in particular in providing certainty around the definition of “unsolicited contact”.

With the prospect of criminal sanctions for breach, FSPs will need to ensure their risk and compliance functions are finely attuned to the new requirements.

The New Laws   

Given its stated intention, it can be expected that the General Prohibition will be interpreted in favour of consumers. The immediate challenge facing FSPs is attempting to define and understand the extent of the new obligations and restrictions imposed on them.

The General Prohibition provides that a person must not offer a financial product for issue, transfer or sale to another person, or request or invite another person to ask or apply for a financial product if:

    1. the person is a retail client; and
    2. the offer, request or invitation is made in the course of, or because of, an unsolicited contact with the other person.

To establish a contravention of the General Prohibition, it must be demonstrated that an offer was made in the course of or because of unsolicited contact by the FSP.

Key changes

  • ‘Unsolicited contact’

 On the terms of the Bill, contact is unsolicited if:

    • it is not requested by a consumer; and
    • the contact is made by telephone, in a face-to-face meeting or any other form of contact which a reasonable person would consider creates the expectation of an immediate response from the consumer.

Unlike the current prohibition, ‘unsolicited contact’ captures any conversations or discussions which happen in real-time and where a customer may feel obligated to immediately respond to an offer. Specific examples of unsolicited contact include:

    • telephone calls;
    • face-to-face meetings;
    • online video chat;
    • web chat services; and
    • conversations in instant messaging apps.

Permitted forms of contact include advertising and standard email or postal communication, as well as ordinary corporate transactions such as sending investors offer documents as those forms do not create the expectation of an immediate response.

Where contact is solicited:

  • It must involve a conscious decision by the customer to seek a financial product, not simply a compliant answer (e.g. not unticking a box on an online form).
  • A customer’s request to be contacted must be clear and the customer must understand that they are requesting to be contacted about a specific financial product. In situations where the request is unclear, the FSP must seek out more information to get a clear indication of the type of product the customer is interested in.
  • A customer must be provided with sufficient time and information to initiate the contact and the method of contact. Situations that involve incentives for customers to hastily consent to be contacted about a financial product (e.g. as part of the terms and conditions of a competition) will not be viewed as a sufficient understanding of a request to be contacted.
  • A request must be consistent with a customer specifying the method of contact. The follow up contact must be made within 6 weeks of the customer’s request. It can be withdrawn or varied at any time and in any form by the customer before the contact occurs.

The definition of “unsolicited contact” is likely to create uncertainty for FSPs which will be compounded by the advent of new communication technologies.

  • Offer

An offer includes an invitation to apply for a financial product or an invitation to request a financial product. An offeror cannot avoid the prohibition by approaching a consumer and asking the consumer to request a financial product or by asking the consumer to fill out an application to be sold a financial product. To determine whether an offer falls within the scope of the consumer’s request, FSPs must determine whether there is a similar purpose or function, similar associated risks or commonality of class between the two products.

  • Retail clients

The General Prohibition will only apply to retail clients. FSPs may continue to offer financial products to wholesale clients and sophisticated investors, as those terms are defined under sections 761G and 761GA of the Corporations Act 2001.

  • ‘Cross-selling’

 The Bill will constrain current practices of cross-selling additional financial products to new or existing customers. FSPs will still be permitted to cross-sell, but only where:

      1. a consumer requests a financial product (i.e. the contact is not unsolicited); and
      2. the FSP offers an additional financial product to the consumer which is reasonably within the scope of the consumer’s request (for example, sufficiently related insurance products).
  • Application

Exceptions in the current anti-hawking provisions which curtail or reduce the effectiveness of the prohibitions are removed.  The General Prohibition applies to all types of financial products, including insurance and superannuation products, securities and interests in managed investment schemes (MIS). The current exception for unsolicited offers made during certain prescribed hours will no longer apply. The General Prohibition will apply at all times.

  • Exceptions

The General Prohibition will not apply to:

    • contacting existing customers about existing financial products that have not lapsed, been cancelled, or otherwise expired;
    • financial services licensees making offers of securities to clients who have acquired or disposed of securities with them in the previous 12 months;
    • financial services licensees making offers of interests in MIS to clients who have acquired or disposed of interests in MIS with them in the previous 12 months;
    • any offer for the issue, transfer or sale of listed securities or an interest in a listed MIS that is made by telephone by a financial services licensee; or
    • existing consumer protection regimes.

The General Prohibition will not apply where another regime already provides adequate customer protection. This includes:

    • Advice given to a client by a financial advisor with a duty to act in the best interests of client
    • Offers made under eligible employee share schemes
    • Offers of medical indemnity insurance made to a medical or health professional
    • Crowd-sourced funding offers
    • Offers of interests in a litigation funding scheme and not to be a MIS
    • Offers relating to superannuation sub-plan changes, payment splits and movement to members retirement phase
  • Add-on insurance

An exception for add-on insurance products applies where an offer is subject to the rules for selling add-on insurance products under the Australian Securities and Investments Commission Act 2001. Offers of add-on insurance products which are made after the end of the 6 week period from a customer requesting not to be contacted about add-on insurance will be considered hawking.

  • Penalties

A breach of the General Prohibition will attract a maximum criminal penalty of 6 months imprisonment and a maximum civil penalty of 60 penalty units.

The Bill includes a new civil remedy in the form of a right of return for the customer for any financial product purchased. A right of return can also result in the termination of a legal relationship between the client and issuer and any contract between the parties will be terminated with no cost to the consumer.

Key takeaways and recommendations

The stated object of the Bill is to strengthen the existing prohibitions on the hawking of financial products to effectively protect consumers from harm.

FSPs must aim to strike a balance between compliance with the increased consumer protections and maximising opportunities afforded by the exceptions in the Bill allowing for commercially viable forms of selling and cross-selling financial products.

Expectation of an immediate response?

When considering appropriate methods of selling financial products, the key question FSPs should ask themselves is this: does this form of contact create the expectation of an immediate response?

In most cases, the answer will be clear-cut (for example telephone calls and face-to-face meetings) but inevitably, some forms of contact will not be, in which case FSPs may require legal advice.

Policies, procedures and training     

FSPs should first identify and eliminate existing practices which rely on forms of unsolicited ‘real time’ contact that create an ‘expectation of an immediate response’.

‘Real time’ correspondence policies and guidelines for staff must be overhauled to ensure that the General Prohibition and its exceptions are understood and implemented on a company-wide scale.

Retraining of sales and customer-service staff is recommended to ensure policies and guidelines are strictly adhered to in consumer-facing roles. One unsolicited phone call or unrelated offer of comprehensive car insurance to a home insurance customer could attract severe penalties, including criminal liability.

Cross-selling

FSPs should identify which of their financial products have similar functions or purposes, which products have associated risks and which products belong in the same broad class of financial products. These discrete baskets of products can still be cross-sold to consumers, provided FSPs are in compliance with any other applicable provisions of the Bill.

Innovation

While the Bill will present FSPs with new challenges, it will also provide opportunities for innovation. FSPs that adapt best to the new environment will enjoy a distinct advantage over their competitors, particularly those FSPs that can harness new technologies to engage with consumers while still acting in compliance with Bill.

 


Authored by:

Liam Hennessy, Director
Edward Martin, Partner
Angela Nunn, Special Counsel
Philip O’Brien, Associate

The authors would like to thank James Dorman for his assistance in preparing this article.

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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