Borrowers who took out consumer credit insurance (CCI) may be entitled to compensation following an Australian Securities and Investments Commission (ASIC) review that found they were “extremely poor value for money”.
ASIC’s scathing report on consumer credit insurance offered by 11 banks and lenders found that sales practices and design of products delivered poor outcomes for consumers.
CCI is optional cover usually sold by lenders to consumers with a credit card, personal loan or home loan. It protects consumers if they are unable to meet their repayments due to an unemployment, sickness or injury or to pay the outstanding loan balance upon death.
Compensation of more than $51 million has already been paid to over 186,000 consumers and the corporate watchdog estimates that that lenders will end up paying 300,000 affected consumers over $100 million.
ASIC commissioner Sean Hughes says: “We are deeply troubled by the findings in our report, and the stories they tell of unfair practices occurring within Australia’s largest and most well-known financial institutions. Lenders and insurers have had more than enough time to improve sales practices and provide better value for consumers.”
The review found consumers were paid an alarming 11 cents in claims for every dollar they paid in premiums for CCI sold with credit cards. This only increased slightly to 19 cents in claims paid on CCI sold with loans.
Consumers were sold CCI despite the fact they were ineligible to claim under their policy as a part of the lenders’ sales techniques and telephone sales staff used high-pressure selling and consumers were given non-compliant personal advice to buy unsuitable policies.
The lenders that currently offer CCI on products include: ANZ with home loans, Bank of Queensland with personal and home loans, Commonwealth Bank with home loans, Credit Union Australia with personal and home loans, Latitude with credit cards and personal loans and People’s Choice with home loans.
Hughes says: “If we do not see early, significant and sustained improvement in the design and sale of consumer credit insurance, our next steps may involve the deployment of our new product intervention power where we see a risk of significant consumer detriment.”
Consumers were incorrectly charged for cover including being charged ongoing premiums when they no longer had a loan and many lenders did not have proper processes to help consumers in hardship make a claim under their policy.
A spokesperson for CBA says: “Customers that have existing CCI policies and weren’t able to claim the entitlements are being refunded. We are quite advanced in remediation of CCI and expect to complete refunds by the end of the year.”
In addition to remediation, ASIC is addressing the issues by undertaking investigations into the suspected misconduct of several entities involved in the CCI product market, working to ban outbound phone sales of CCI and as of 1 July expects lenders to incorporate a four-day deferred sales model for all CCI product.
Hughes says: “An inevitable consequence of these widespread failings and mis-selling practices will involve ASIC taking significant enforcement action against some of the entities named in our report.”
ASIC’s report also sets out important design and distribution standards for CCI sold by lenders. Lenders and insurers are expected to meet these standards or cease selling CCI until they meet the benchmark.
An ANZ spokesperson says: “ASIC’s report noted that ANZ’s home loan insurance solution had the most favourable claims ratio for this product type among the lenders identified.”
ASIC’s latest report comes after an October 2011 report on the same issue that made 10 recommendations to reflect best practice and ensure informed consumers. The recommendations covered sales scripts, disclosure, training programs and monitoring systems and the lenders.
Hughes said: “Regrettably, the ongoing systemic failings and misconduct we have seen in the CCI market demonstrate that a range of robust regulatory responses is required.”
The lenders that were reviewed are: ANZ Bank; Australian Central Credit Union; Bank of Queensland; Bendigo and Adelaide Bank; Citigroup; Commonwealth Bank of Australia and Bankwest; Credit Union Australia; Latitude Finance and Latitude Personal Finance; National Australia Bank; Suncorp-Metway; and Westpac.