Tempering their sense of justice made banks billions in dud insurance

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This was published 4 years ago

Opinion

Tempering their sense of justice made banks billions in dud insurance

The words "temper your sense of justice" caused a furore when CBA boss Matt Comyn recounted to the banking royal commission that this was the message from his boss, Ian Narev, when he suggested the bank stop mis-selling dud insurance to unsuspecting customers.

Comyn was running CBA’s retail bank at the time of the 2015 meeting and was becoming increasingly uncomfortable that Consumer Credit Insurance products were being sold to customers under false pretences.

But it now seems the entire financial services sector has been tempering its sense of justice on this product for almost a decade.

A report released by the Australian Securities and Investments Commission (ASIC), Consumer credit insurance: Poor value products and harmful sales practices, reveals that between 2011 and 2018 eleven financial institutions including the big four banks, CBA, National Australia Bank, Australia & New Zealand Banking Group, Westpac, Bendigo and Adelaide Bank and Suncorp, flogged CCI products to millions of customers and made a motza.

This junk insurance generated almost $5 billion in premiums over that time period. The payout was less than $1 billion in claims, which made it hugely profitable but grossly unethical.

The royal commission is shown Matt Comyn’s handwritten notes about the CBA selling junk credit card insurance.

The royal commission is shown Matt Comyn’s handwritten notes about the CBA selling junk credit card insurance.

The banks, and other financial institutions, turned a blind eye as they signed up unsuspecting customers who believed the insurance would cover their mortgages, credit cards and other kinds of loans if they got sick, had an accident, lost their job or died. Little did they know the hurdles to claims were so high that most would be rejected.

The profit before people culture resulted in the financial institutions adopting aggressive sales tactics using third party telemarketers who were incentivised to sell as many products to as many customers as they could.

It resulted in misconduct with many customers saying they were sold the insurance without their knowledge or consent.

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Problems known for years

The CCI gravy train rollicked on for years, despite it blowing up in the UK in 2011 where a similar product mis-sold by banks, including NAB’s UK subsidiaries, cost the industry more than £40 billion in compensation in the biggest insurance scandal in history.

Fast forward to 2019 and the claims ratio payout is still 19 per cent, mis-selling is still being detected and some institutions continue to sell the defective products

ASIC followed up the UK scandal and wrote to 15 Australian institutions in October 2011 raising serious concerns about CCI including a claims ratio of 19.4 per cent, which is too low. ASIC made 10 recommendations back for the industry to clean up its act.

Fast forward to 2019 and the claims ratio payout is still 19 per cent, mis-selling is still being detected and some institutions continue to sell the defective products.

According to ASIC CBA and ANZ continue to sell CCI home loan insurance and Bank of Queensland are still selling CCI personal and home loan insurance.

It should be a reminder that self regulation doesn’t work. Despite all the industry bleating over the years that it is capable of fixing its own problems, it's now clear that light touch regulation failed consumers.

It took a royal commission and ASIC threatening enforcement and banning orders for the industry to start cleaning up its act.

ASIC says it is now looking at enforcement action on some of the eleven financial institutions as well as banning the unsolicited outbound sale of CCI by telephone. One of those facing enforcement action is CBA.

In lockstep, the prudential regulator on Thursday also issued a statement saying it would force ANZ, Westpac and NAB to hold an extra $500 million each in capital to improve their risk culture and governance. Last year it $1 billion capital add-on to CBA after a damning report into its culture and governance.

ASIC’s report said CCI products were complex yet typically sold under a no advice or general advice model.

ASIC Commissioner Sean Hughes says the regulator will take enforcement action over junk insurance.

ASIC Commissioner Sean Hughes says the regulator will take enforcement action over junk insurance.Credit: AFR

"When complex products are sold through unsolicited contact, there is an increased risk that consumers do not need, want or understand the product, resulting in poor consumer outcomes," the report said.

As the pressure has come on most have withdrawn from the industry. ASIC, meanwhile, has promised to hit the wrongdoers with enforcement action and a remediation program.

ASIC Commissioner Sean Hughes said remediation could involve 300,000 affected consumers who will be paid more than $100 million. He said about half of the remediation had already been paid but he didn’t rule out it could be higher.

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Given the sheer volume of products sold it certainly could be far higher.

Between 2011 and 2018 CCI insurance sold with credit cards earned $1.78 billion in premiums and paid out $200 million as consumers received only 11 cents in paid claims for every dollar paid in premiums.

In some cases customers were given non-compliant personal advice to buy unsuitable policies and incorrectly charged for CCI. Some were charged ongoing CCI premiums even though they no longer had a loan.

It is one of a long list of products and antics that have been going on for years, where customers have been ripped off blind. Trust will take a long time to rebuild.

Adele Ferguson’s book on the financial services sector, Banking Bad, will be released on August 5. To order a copy click here

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