New Zealand: New Zealand Insurance Law Reform Begins

2008 will see some major changes for the New Zealand insurance industry with the tabling of two Bills in late 2007 for the financial industry at large, and a further bill specific to insurance contracts to be tabled shortly.

In December 2007, the Financial Service Providers (Registration and Dispute Resolution) Bill and the Financial Advisers Bill were publicly released. In addition, a Cabinet paper was released early this year confirming Cabinet's intention to introduce the Insurance Contracts Bill into Parliament shortly. (At this stage, it is uncertain when these far-reaching reforms will be implemented. It may be several years yet.)

Financial Service Providers (Registration and Dispute Resolution) Bill

As the title indicates, the Financial Service Providers (Registration and Dispute Resolution) Bill (NZ) (FSP Bill) sets up a registration system for financial service providers, and establishes a requirement that they all belong to an industry-based approved dispute resolution system. The key purpose of the FSP Bill is to improve consumer access to redress in the financial sector.

Registration

The new registration system will identify all entities providing financial services in the New Zealand market. It will apply to anyone in the business of providing a 'financial service' or a 'financial adviser service'. The FSP Bill has defined 'financial service', very widely to include, among others:

• Banks.
• Managed funds.
• Securities issuers.
• Finance companies.
• Foreign currency exchanges.
• Insurers and insurance brokers.

It defines 'Financial adviser service' as:

• The giving of financial advice in the course of business.
• The receipt and handling of investment money in the course of business.

A financial service provider cannot provide a financial service unless that person is registered. Registration will be by way of application (in the case of providers of 'financial services') or by way of notification from the relevant approved professional body (APB) (in the case of providers of 'financial adviser services').

The main requirements for registration are that the person or its controlling owners, directors and senior managers are not otherwise disqualified (for example, by virtue of being a bankrupt or the subject of certain banning orders or criminal convictions), and that the person is a member of an approved dispute resolution scheme (ADRS).

The Bill sets up a register that will be kept in electronic form and will be searchable by the public.

Dispute Resolution

The FSP Bill also establishes access to a comprehensive, industry-based ADRS to improve consumer access to redress in the financial sector. Existing voluntary, industry-based dispute resolution schemes, such as the Banking Ombudsman, and the Insurance and Savings Ombudsman, already provide access to redress for consumers. However, they do not currently extend to credit unions, finance companies, financial advisers, and some superannuation schemes. At this stage, there is no Code of Practice.

As noted above, the main requirement for registration is that the person be a member of an ADSR in order to transact with consumers. The FSP Bill also recognises that small businesses (businesses that have no more than 19 full time equivalent employees) can be as vulnerable as natural persons, and 'consumers' in this context includes small to medium sized enterprises.

It is expected that more than one scheme will be approved, and that financial service providers will be able to elect which scheme to join.

Financial Advisers Bill

The Financial Advisers Bill (NZ) (FA Bill) establishes a co-regulatory regime for financial advisers, where the Securities Commission and industry-based APBs will work together to create and monitor standards for financial advisers. Submissions for the FA Bill are invited and a closing date has not yet been set.

The FA Bill does two main things:

• Imposes statutory conduct obligations and statutory disclosure obligations on financial advisers.
• Establishes a co-regulatory regime for financial advisers, to be overseen by the Securities Commission and industry-based APBs.

Under the FA Bill, financial advisers will be required to disclose:

• The adviser's experience, qualifications and professional standing.
• The name of the APB and ADRS of which the adviser is a member.
• Whether the adviser has been convicted of certain criminal offences.
• The nature and level of any fees charged.
• Potential conflicts of interest, including commissions. (For the latter, the adviser must disclose the amount or rate of remuneration and who is paying it.)

The types of products the adviser advises about, and if the adviser only provides advice about one or more product provider's products, the names of those

• Financial Service Providers (Registratiproviders.
• A brief description of the adviser's procedures for handling client money.

A breach may result in civil and criminal penalties. For an individual, the maximum fine is $100,000; for a corporate, $300,000.

There is currently no requirement for financial advisers to have professional indemnity cover.

Insurance Contracts Bill

The Insurance Contracts Bill (NZ) (IC Bill) is expected shortly and will reform two key areas of insurance law:

• The duty of disclosure.
• The agency status of insurance intermediaries.

Duty of disclosure

The obligations of the parties are to be codified in the IC Bill. At present they are partly found in the common law (non-disclosure) and the Insurance Law Reform Act 1977 (NZ) (misrepresentation). proper law of which is New Zealand.

Insurers and insurance intermediaries must warn insureds about the duty of disclosure and the consequences of breaching it. The IC Bill will contain a model disclosure warning. The disclosure warning must be delivered to insureds before inception, renewal and any change in the cover, or within five working days afterwards. It is not yet clear whether a broker who is the agent of the insured will be required to give the same notice.

The insured will have a cooling-off period of five working days from receipt of the disclosure warning. During this period the insured may cancel the insurance and receive a full refund of the premium and any fees.

A failure to provide the warning may result in criminal penalties and civil remedies.

The remedies for non-disclosure and misrepresentation will be the same and will apply to all classes of insurance, except marine insurance (which appears to remain unchanged). (It will be interesting to see how reinsurance is dealt with generally in the Act.) The nature of the remedies is one of the big changes.

The current remedy of avoidance from the start will only be available if either:

• The non-disclosure or misrepresentation is fraudulent.
• The answer given to a specific question in the proposal form is substantially incorrect and material (based on a 'reasonable insured' test).
• It is exercised within the first 30 working days of cover (to allow for covernotes).
• The contract is one of reinsurance.

Where none of these apply and the non-disclosure or misrepresentation is substantially incorrect and material (based on a 'reasonable insured' test) , the insurers remedy is limited to either:

• Reducing the claim payment amount or declining the claim.
• Cancelling the policy going forward only.
• Adjusting the premium going forward only.
• Continuing the policy but adjusting the terms going forward only.

The type and level of remedy will be proportional to the seriousness of the breach. Presently, no details are given. However, it is anticipated that details will be fleshed out in the legislation.

All existing insurance law statutes (except for the Marine Insurance Act 1908 (NZ)) will be repealed and incorporated, with appropriate amendments, into the new IC Bill.

Insurance intermediaries

In the discussion documents released before the Cabinet paper, the proposal was to move away from commission entitlements as a way of determining agency, and instead rely on the existence of written appointments. The insurance intermediary was the agent of the party who appointed him or her in writing.

Where no written appointment was in place, the default position was that the intermediary was the agent of the insured.

The duty of disclosure applies only to contracts the on and Dispute Resolution) Bill

As the title indicates, the Financial Service Providers (Registration and Dispute Resolution) Bill (NZ) (FSP Bill) sets up a registration system for financial service providers, and establishes a requirement that they all belong to an industry-based approved dispute resolution system. The

The Cabinet paper signals a key change. The proposed default position will now be that the intermediary is the agent of the insurer. This will have potentially significant ramifications for underwriters. This is because the agency status will determine where responsibility ultimately lies for all the intermediary's actions in relation to disclosure warnings, passing on information, giving of advice.

Curiously, the intermediary is still required to provide written disclosure to the insured advising who the intermediary is acting for and the general effects of this agency status. Failure to do so will attract criminal penalties.

Once this IC Bill is introduced into Parliament we will be providing more in depth analysis of its ramifications for the insurance industry.

Conclusion

These Bills are now either before the Finance and Expenditure Select Committee, or shortly will be. Submissions on the FSP Bill closed on 28 February 2008. The dates for submissions on the other Bills are not available yet.

A further update is currently being prepared by our Managed Funds team, which will focus on the detail of the FA Bill, particularly the disclosure obligations of financial advisers, including many of the practical issues in applying the proposed changes.

We recommend all interested parties make submissions on these Bills. They will have a major impact on the industry. We are following the reforms closely and we are happy to assist.

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