Regulation of insurance under the National Credit Code
Credit-related insurance
Credit-related insurance contracts are regulated under Part 8 of the National Credit Code (the “Code”). A credit-related insurance contract is a contract for insurance that is in connection with a consumer credit contract regulated by the Code and that is one of the following types:
consumer credit insurance (“CCI”);
mortgaged property insurance; or
insurance prescribed by the National Consumer Credit Regulations 2010 (Cth) (the “Regulations”) - as of the date of this article, none is prescribed under the Regulations.
The Code does not apply to insurance for an extended warranty for goods, or insurance over property that is not mortgaged to secure obligations under a regulated credit contract.
Prohibition on compulsory insurance
With some limited exceptions, the Code does not allow a credit provider or a supplier of goods or services to require a debtor or guarantor to take out insurance or to pay the cost of insurance taken out or arranged by the credit provider or supplier. In addition, credit providers and suppliers must not represent to a debtor or guarantor that they are required to pay the cost of such insurance.
The above prohibition does not apply to the following types of insurance:
compulsory third party personal injury insurance;
mortgage indemnity insurance (also known as lenders mortgage insurance); and
insurance over mortgaged property.
A credit provider or supplier is also not allowed to require a debtor or guarantor to take out insurance with a particular insurer (unless the insurer is only one providing the relevant type of insurance) or to make unreasonable requirements as to the terms on which the debtor or guarantor must take out insurance.
Financing mortgaged property insurance
A credit provider must not knowingly provide credit to the debtor to pay the premium or finance the premium on insurance taken out by the debtor over mortgaged property for a period of insurance exceeding 1 year. However, the credit provider may provide credit for or finance successive premium payments for periods of 1 year or less.
In addition, the credit provider must not knowingly debit the premium to the debtor’s account more than 30 days before the beginning of the period of insurance to which it relates.
Commission caps
Any commission paid by an insurer in connection with a consumer credit insurance taken out, or paid for, by the debtor must not exceed 20% of the premium (excluding government charges). The commission cap applies to any commission accepted by the credit provider, the supplier where there is a tied loan contract or continuing credit contract, or the agent of the credit provider or supplier.
If a commission exceeds the 20% cap, the insured is entitled to recover the whole amount or value of the commission from the credit provider or supplier.
The Australian Securities and Investments Commission Act 2001 (Cth) (the “ASIC Act”) gives ASIC the power to set a cap on the value of commissions provided in connection with an add-on insurance product provided to a consumer in connection with the sale or long-term lease of a motor vehicle, the provision of credit connected with the sale or long-term lease of a motor vehicle, or the provision of a warranty in connection with the sale or long-term lease of a motor vehicle. An add-on insurance product includes CCI as well as other risk products typically sold by car dealers. ASIC has not yet set a cap on commissions for these products.
Copy of credit-related insurance contract
If the premium under a credit-related insurance contract is financed under the credit contract, the insurer must ensure that a copy of the policy of the insurance is given to the debtor within 14 days after acceptance of the insurance proposal by the insurer. This requirement does not apply to compulsory third party personal injury insurance.
If the debtor has a beneficial interest in the insurance policy, the credit provider is required to provide the debtor with a written notice setting out the particulars of the policy (as prescribed by the Regulations) within 14 days of the debtor acquiring the beneficial interest.
Credit contract document
If a credit provider knows that the debtor is entering into a credit-related insurance contract and that the insurance is to be financed under the credit contract, the credit contract document must contain:
the name of the insurer;
the amount payable to the insurer, or if it is not ascertainable, its calculation;
the kind of insurance and any other particulars prescribed by the Regulations; and
a statement that commission paid by the insurer for the introduction of the insurance business (if any) is to be paid, and the commission amount (if ascertainable).
Account statements
If, payment to an insurer is made under a credit-related insurance contract which is to be financed under the credit contract during a statement period of a regulated credit contract, the statement of account must contain:
the name of the insurer, the amount paid to the insurer and the kind of insurance; and
if the credit provider is aware of any commission to be paid by the insurer in relation to the insurance contract, the amount of commission (if ascertainable) when the statement is given.
However, the above information is not required to be included in a statement of account if it has previously been disclosed to the debtor in accordance with another provision of the Code.
Hawking prohibition and deferred sales model
Insurance products offered or sold in connection with credit products are subject to the anti-hawking provisions in the Corporations Act 2001 (Cth). For further information, please see our “Anti-hawking explained“ article.
Add-on insurance products are also subject to a deferred sales model under the ASIC Act.
If you need assistance to comply with the Code requirements for insurance, please contact us.