ASIC CLASS ORDER [CO 06/623]
EXPLANATORY STATEMENT
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
Paragraphs 992B(1)(c) and 1020F(1)(c) – Declarations
The Australian Securities and Investments Commission (ASIC) makes Class Order [CO 06/623] under paragraphs 992B(1)(c) and1020F(1)(c) of the Corporations Act 2001 (the Act). Paragraph 992B(1)(c) provides that ASIC may declare that Part 7.8 of the Act applies in relation to a person or class of persons as if specified provisions were modified and paragraph 1020F(1)(c) provides that ASIC may declare that Part 7.9 of the Act applies in relation to a person or a class of persons as if specified provisions were modified.
1. Background
Part 7.8 of the Act requires a financial services licensee who receives money in relation to a financial product to establish and maintain a trust account to hold client money separately for the benefit of the client.
An issuer or a seller of financial products who receives money from a client for the product before the product is issued (for whatever reason) must put the money into an account that meets the requirements of section 1017E of the Act.
The Part 7.8 trust account obligations do not apply to money received for the issue of a financial product by the issuer of the product. However, in certain circumstances involving the issue of insurance products, the person receiving money for the issue of the product may not be the issuer. Those circumstances include co-insurance arrangements (where there is more than one insurer responsible for the issue of the insurance product), bundled insurance contracts (where a contract of insurance provides multiple insurance products and each product may be issued by a different insurer) and arrangements for the collection of premiums among companies that are part of an insurance conglomerate group (for example, one insurer who is a member of the group may receive money as an agent of one or more other members of the group).
If one insurer (Insurer A) receives money for an insurance product that is issued by another insurer (Insurer B) on Insurer B’s behalf, then it is unclear whether Insurer A must keep the money in Insurer A’s trust account in accordance with Part 7.8 or pay the money in to an account that meets the requirements of section 1017E on Insurer B’s behalf.
ASIC received submissions that the operation of the above provisions may present the following practical difficulties:
(a) where insurance products are issued together as a package, it is often impractical and costly for single payments made for the whole insurance package to be separated out and deposited into different accounts at the time of their receipt; and
(b) currently there is little or no flexibility in the manner in which insurance conglomerate groups handle receipt of client money and generally speaking one insurer in the group receives client money as agent of other insurers in the group.
These practical difficulties are likely to affect all major general insurers as a result of the high incidence of multiple related product issuers and bundled insurance products in the general insurance industry.
2. Purpose of the class order
The purpose of Class Order [CO 06/623] is to resolve any ambiguity about how the law operates and achieve an appropriate balance between the regulatory burden imposed on general insurers by the trust account requirements and the need to ensure that consumers receive sufficient protection in respect of client monies.
3. The class order
The class order will operate so that the Part 7.8 requirements do not need to be met by an insurer who receives money for an insurance product as the agent of the insurer who is the issuer of the product if the section 1017E requirements are met and the issuing insurer does not need to meet the section 1017E requirements if the issuer's agent has met the Part 7.8 requirements regarding that money.
Intended operation and likely impact of the class order
The class order is intended to enable insurers to meet their statutory trust account obligations using their existing infrastructure and current accounting systems.
Based on ASIC's consultation with the industry, it appears likely that most general insurers will benefit from the relief given by this class order.
4. Consultation with affected parties
ASIC undertook significant consultation with the industry body representing general insurers - the Insurance Council of Australia.
ASIC also consulted a number of general insurers that were either directly or indirectly affected by the trust account requirements under the Act.
Overview
The Australian Securities and Investments Commission (ASIC) introduced Class Order [CO 06/623] under the Corporations Act 2001 to address ambiguities in the trust account requirements for insurance products. The Act requires financial services licensees to establish trust accounts to hold client money separately, but there was confusion regarding whether an insurer who receives money for an insurance product as an agent of another insurer must comply with the trust account requirements. This confusion was particularly problematic in situations involving co-insurance arrangements, bundled insurance contracts, and insurance conglomerate groups. The Class Order aims to resolve these ambiguities by clarifying that an agent insurer does not need to meet the trust account requirements if the issuing insurer meets the requirements under section 1017E, and vice versa. This approach seeks to balance the regulatory burden on insurers with the need to protect consumers' money, leveraging existing infrastructure and accounting systems within the industry.
Scope and Application
The ASIC Class Order [CO 06/623] applies to financial services licensees who receive money in relation to a financial product, including major general insurers in the context of insurance products. This class order modifies provisions under Part 7.8 and Part 7.9 of the Corporations Act 2001, specifically addressing the trust account requirements for client monies received for insurance products. It aims to clarify and balance the obligations of issuers and sellers of financial products, particularly in scenarios involving co-insurance arrangements, bundled insurance contracts, and collections among insurance conglomerate groups. The class order provides relief by allowing an insurer who receives money for an insurance product as the agent of the issuer to comply with section 1017E instead of Part 7.8, provided the issuer meets Part 7.8 requirements regarding that money. This modification is designed to alleviate practical difficulties such as the impracticality and cost of separating single payments for bundled insurance products at the time of receipt. The order operates nationally, affecting all major general insurers within the Australian jurisdiction. There are no stated exclusions or thresholds in the class order itself, but compliance may be further detailed through subordinate instruments issued by ASIC.
Key Provisions
The ASIC Class Order [CO 06/623] under the Corporations Act 2001, particularly sections 992B(1)(c) and 1020F(1)(c), introduces modifications to the application of Part 7.8 and Part 7.9 of the Act. This class order aims to provide clarity on the trust account obligations for financial services licensees and issuers of financial products, specifically insurance products. Section 992B(1)(c) allows ASIC to declare that Part 7.8 of the Act applies with specified modifications, while section 1020F(1)(c) allows for similar modifications to Part 7.9.
Under the Act, financial services licensees must establish and maintain a trust account to hold client money separately for the benefit of the client, as stipulated in section 1017E. The class order addresses ambiguity in the application of these requirements to insurers, particularly in complex scenarios such as co-insurance arrangements, bundled insurance contracts, and insurance conglomerate groups. The class order specifies that an insurer who receives money for an insurance product as an agent of another insurer (the issuer) does not need to meet the Part 7.8 trust account requirements if the section 1017E requirements are met, and vice versa. This is intended to alleviate practical difficulties, such as the impracticality of separating single payments for bundled insurance products and the inflexibility in how insurance conglomerate groups handle client money.
The class order imposes specific obligations on insurers receiving money for insurance products issued by another insurer. If an insurer receives money on behalf of the issuer, they must ensure that the section 1017E requirements are met. Similarly, the issuing insurer must ensure that the Part 7.8 trust account requirements are fulfilled if their agent has met the section 1017E requirements. This creates a reciprocal obligation ensuring that client money is adequately protected regardless of the complexity of the issuance process.
In the event of non-compliance with the obligations under this class order, the consequences can be significant. The Act provides for both civil and criminal penalties for breaches of its provisions. For example, failure to properly segregate and account for client money can result in substantial fines and, in severe cases, imprisonment for directors or officers of the company involved. The maximum penalties are determined by the severity of the breach and can include fines up to several thousand dollars, as well as imprisonment terms that can extend to several years. Additionally, civil penalties can be imposed by ASIC, which may include financial penalties and orders for restitution to affected clients.