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26 April, 2020

ASIC’s Consultation Paper and draft Regulatory Guide on the Design and Distribution Obligations, which were released just in time for Christmas, contain some important pointers for the insurance industry.

ASIC’s guidance on the Design and Distribution Obligations (DDO)¹ is broad ranging and principles based. The purpose of this article is not to summarise it as a whole, but rather to focus on the issues and questions that have been of specific interest to the insurance industry. So, let’s start with the question that insurers have been grappling with since the first exposure draft legislation was released in 2017.

How granular should the Target Market Determination (TMD) be?

As anticipated, ASIC states in its Regulatory Guide that it will not be offering “definitive guidance on the content and form” of the TMD. In fact, it says very little about the level of granularity required to prepare that document; the reason given being the diverse and varied nature of financial products to which the TMD will apply.

What ASIC does do is to suggest that it may be useful to identify a “negative target market” as part of the TMD, which would set out details of those consumers for whom the product is clearly unsuitable. While not required by the Corporations Act, that is likely to be a sensible approach for many retail insurance products, where those are characterised by a generally broad target market, but with a need to exclude several small and specific classes of customers.

ASIC also provides some insurance-specific examples which offer a little further insight. It refers to Tyre & Rim insurance, which in some cases will not cover vehicles used for commercial purposes (for instance, as a taxi) or which are over a certain age. It also refers to Consumer Credit Insurance, which makes some employment types ineligible to claim on the unemployment component of cover and which offers a life insurance component that may not be needed by some customers. In each case, it should be relatively simple to identify the negative target market groups affected and to build that into the TMD.

These examples, though, offer little guidance on how much further a TMD should delve into the product’s various exclusions, limitations and conditions. In many cases, those terms will affect the value of the product for certain groups of consumers or in certain circumstances. How far issuers should go in limiting the target market or setting Distribution Conditions to address those potential outcomes remains uncertain, and further guidance from ASIC on this would be valuable. In the absence of that, product issuers will have little choice but to take a cautious approach in setting the TMD around these terms.

What approach should be taken to setting the TMD?

For existing products, ASIC notes that issuers may already have a commercial or marketing “target market”. It accepts that issuers may proceed by critically assessing that target market, rather than trying to build a new one up from data alone. This seems sensible, in that it would offer issuers a model target market against which the DDO requirements could be tested.

In carrying out that work, ASIC states that issuers should also develop a “Product Governance Framework”. ASIC places a considerable focus on this framework in its Regulatory Guide, by which it is referring to all the “systems, processes, procedures and arrangements” put in place to comply with the DDO, as well as the key stages in product design, distribution, monitoring and review. ASIC expects issuers to have such a framework in place, for it to be robust and well-documented, and for it to include details of who is responsible for its elements, the timeframes involved and the record-keeping and reporting requirements. These requirements emphasise that the DDO is more than just another compliance requirement; it needs to be an integral part of the insurer’s overall approach to product development and management.

It is worth noting too that, in setting the TMD, ASIC contemplates that some current products may not comply with the DDO legislation at all. This could be due to the risks involved with the product, its low value or that it is “inherently flawed”. ASIC anticipates that such characteristics might render the product unlikely to be consistent with the objectives, financial situation and needs of “any” potential customers.

By way of example, ASIC refers to funeral insurance which, it notes, has had both a low loss ratio (observed by the Royal Commission to be between 25% and 33%) and the potential for a customer to pay more in premium than they would be entitled to receive on a claim. Accepting that some insurance products may have a justifiable need for lower loss ratios (for instance, because of long-term claims volatility) or low claims payments relative to premium (for instance, because of a high claims frequency), products which have these characteristics should be carefully reviewed as part of DDO preparations to determine whether there is a need for fundamental re-design or, in some cases, withdrawal.

How should the TMD be set for bundled products?

ASIC confirms that a separate TMD is required for each separate kind of cover or kind of asset covered in a bundled retail product². It states that this should not prevent an issuer from continuing to offer a bundled product, though does not comment on how that is to be done in practice. Insurers may find that some bundled products, which include a diverse range of retail coverage sections, will produce a challenging range of target markets. While this would not prevent the product being retained in that form, the distribution arrangements needed would likely be quite complicated.

What is required in setting Distribution Conditions?

ASIC refers to the Distribution Conditions, needed to support the TMD, as being just one part of an issuer’s overall “Distribution Strategy”. That strategy is a broader concept, including the issuer’s distribution method, its “Choice Architecture”, the distribution channels to be used, the identity of the actual distributors, the controls to be put in place, the approach to supervision and its processes for managing conflicts of interest.

ASIC states that the issuer’s full Distribution Strategy needs to be consistent with the TMD. While that may go further than the legal requirements relating to Distribution Conditions, it reflects the reality that a Distribution Strategy which is inconsistent with the target market is likely to lead to DDO breaches, irrespective of how good the Distribution Conditions.

For many insurers, a key part of the Distribution Strategy will be its Choice Architecture. By this, ASIC is referring to the “environment, noticed and unnoticed, that influences consumer decisions and actions”. It includes sales processes, for instance how a website sales path is set up, but also design decisions regarding whether to bundle products, how to deal with complexity and where to put default settings.

As ASIC stated in its recent report on disclosure, “choice can never be framed neutrally – ‘any way a choice is presented will influence how the decision-maker chooses'”³. In the context of insurance, ASIC’s point here is that the processes by which customers decide on limits, excesses, optional cover and the like should assist them to make decisions that produce good customer outcomes and avoid bad ones. Where the potential exists for that not to be the case, insurers will need to consider whether the target market may be impacted. While that could be addressed through additional Distribution Conditions, it may in some cases be simpler to first review the Choice Architecture itself.

As to the Distribution Conditions themselves, ASIC refers to the use of knock-out questions, data and additional customer questions to help limit distribution to those reasonably likely to be in the target market. It also points to the importance of issuers using their own past experience with the product to identify relevant risks. Careful regard should therefore be had to known issues with the existing distribution of insurance products and to make sure that those have been demonstrably addressed.

How should excesses and Optional Cover be treated?

In a similar vein, ASIC states that, for products that are customisable at the point of sale, issuers will need to consider whether the target market will vary depending on the differing forms of product available. For insurers, this will involve a consideration, at least, of whether the excesses and optional cover available to customers affect the TMD and therefore require additional Distribution Conditions. As an example, ASIC notes that “incremental changes” to excesses and the addition of specified personal items to home contents insurance may not change the target market. While this offers some comfort, it is likely that some levels of excess or forms of optional cover (for instance, regarding flood cover) would impact the TMD.

How should distributors meet their obligations?

ASIC emphasises the need for distributors to meet their own obligations under DDO and, most importantly, to take “reasonable steps that will, or are likely to” result in distribution of the product being consistent with the TMD. ASIC accepts that these may be “shaped” by the issuer, but that in most circumstances, merely complying with the issuer’s Distribution Conditions will not be sufficient. Distributors must give their own consideration to the steps and controls that need to be put in place. As with other aspects of DDO, this calls for early communication between insurers and their distributors to make sure that an appropriate alignment is achieved.

How should insurance renewals be treated?

Insurers have been particularly concerned about how the DDO requirements are to be met in relation to insurance renewals, given the practical challenges involved in obtaining further information from customers in that context. ASIC’s guidance signals at least the possibility that insurers could meet those requirements without having to contact insureds.

ASIC states that insurers will need to “take reasonable steps to ensure that the renewal process results in outcomes that are consistent with” the TMD. That, it says, will involve the consideration of a range of factors, including the insurer’s own assessment of the events which could lead to the customer’s objectives, situation or needs changing and the likelihood of those events occurring, and relevant data in the insurer’s hands. Insurers will then need to determine whether the data they hold is sufficient to meet their obligations or whether more data is needed from customers in order to adequately inform its analysis.

As to the method of obtaining more information, ASIC does not comment on the proposition that insurers might present a set of statements to customers on renewal and ask them to advise of any inaccuracies. Having regard to ASIC’s general approach on this subject, though, it seems that approach may be viable, particularly given the challenges involved in pursuing alternatives. However, that approach is more likely to meet the “reasonable steps” standard if the statements presented to customers have a sound basis, are sufficiently highlighted to them and the customer is offered a simple mechanism for correction.

How should Review Triggers be set?

In relation to the setting of Review Triggers that would reasonably suggest that the TMD is no longer appropriate, ASIC suggests that insurers focus on available data, such as product claim ratios, denied and withdrawn claims, penetration rates, cancellation rates, average claim times and complaint trends. The challenge with this approach is that, while some of this data is likely to be useful as a “red flag”, it is unlikely in most cases to be determinative that the TMD is no longer appropriate without further investigation. In our view, the Review Triggers themselves will need to be the substantive outcomes of those investigations.

What is a ‘significant dealing’?

Issuers are required to notify ASIC of a “significant dealing” in a financial product that is not consistent with the TMD. ASIC states that, in determining whether this threshold has been met, regard should be had to the proportion of customers purchasing the product who are not in the target market, the actual or potential harm to those customers, and the nature and extent of the inconsistency of distribution with the TMD. While ASIC does not rule out other considerations, these factors are likely to offer useful guidance to insurers in determining whether a significant dealing has occurred and could be applied in a similar manner to the criteria for determining significant breaches under section 912D of the Corporations Act.

When are submissions due?

ASIC has asked for submissions on its Consultation Paper and draft Regulatory Guide by 11 March 2020, with a view to finalisation of the Regulatory Guide sometime later in 2020.

ASIC states that it expects to have a “constructive” relationship with industry during the implementation of DDO. It recognises that DDO is a new form of regulation and that, just as the approach taken by issuers and distributors may develop over time, its own approach to administration is also likely to evolve. Those comments should provide some encouragement to insurance industry participants that, provided an earnest approach is taken to compliance with the new requirements, there will be goodwill applied in building and improving arrangements as experience is gained.

A link to ASIC’s Consultation Paper and Regulatory Guide can be found here:
https://asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-325-product-design-and-distribution-obligations/

For more information on the Design and Distribution Obligations or any aspect of this article, please contact insurance advisory principal, Mathew Kaley.

¹ ASIC Consultation Paper 325 Product design and distribution obligations and draft Regulatory Guide 000 Product design and distribution obligations

² As per Corporations Act ss.764A(1A) and (1B)

³ ASIC Disclosure: Why it shouldn’t be the default, October 2019, p.25

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Litigation and Dispute Resolution

Canadian Court elevates thumbs-up emoji to signature status

In June 2023, a Canadian Court in South-West Terminal Ltd v Achter Land and Cattle Ltd, 2023 SKKB 116, held that the "thumbs-up" emoji carried enough weight to constitute acceptance of contractual terms, analogous to that of a "signature", to establish a legally binding contract. Facts This case involved a contractual dispute between two parties namely South-West Terminal ("SWT"), a grain and crop inputs company; and Achter Land & Cattle Ltd ("ALC"), a farming corporation. SWT sought to purchase several tonnes of flax at a price of $17 per bushel, and in March 2021, Mr Mickleborough, SWT's Farm Marketing Representative, sent a "blast" text message to several sellers indicating this intention. Following this text message, Mr Mickleborough spoke with Mr Achter, owner of ALC, whereby both parties verbally agreed by phone that ALC would supply 86 metric tonnes of flax to SWT at a price of $17 per bushel, in November 2021. After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed. Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)." Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter. Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." The court satisfied that the use of the thumbs-up emoji paralleled the prior abbreviated texts that the parties had used to confirm agreement ("looks good", "yup" and "ok"). This approach had become the established way the parties conducted their business relationship. Significance of the Thumbs-Up Emoji Justice Keene acknowledged the significance of a thumbs-up emoji as something analogous to a signature at paragraph [63]: "This court readily acknowledges that a thumbs-up emoji is a non-traditional means to "sign" a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a "signature" – to identify the signator… and… to convey Achter's acceptance of the flax contract." In support of this, Justice Keene cited the dictionary.com definition of the thumbs-up emoji: "used to express assent, approval or encouragement in digital communications, especially in western cultures", confirming that the thumbs-up emoji is an "action in an electronic form" that can be used to allow express acceptance as contemplated under the Canadian Electronic Information and Documents Act 2000. Justice Keene dismissed the concerns raised by the defence that accepting the thumbs up emoji as a sign of agreement would "open the flood gates" to new interpretations of other emojis, such as the 'fist bump' and 'handshake'. Significantly, the Court held, "I agree this case is novel (at least in Skatchewan), but nevertheless this Court cannot (nor should it) attempt to stem the tide of technology and common usage." Ultimately the Court found in favour of SWT, holding that there was a valid contract between the parties and that the defendant breached by failing to deliver the flax. Keene J made a judgment against ALC for damages in the amount of $82,200.21 payable to SWT plus interest. What does this mean for Australia? This is a Canadian decision meaning that it is not precedent in Australia. However, an Australian court is well within its rights to consider this judgment when dealing with matters that come before it with similar circumstances. This judgment is a reminder that the common law of contract has and will continue to evolve to meet the everchanging realities and challenges of our day-to-day lives. As time has progressed, we have seen the courts transition from sole acceptance of the traditional "wet ink" signature, to electronic signatures. Electronic signatures are legally recognised in Australia and are provided for by the Electronic Transactions Act 1999 and the Electronic Transactions Regulations 2020. Companies are also now able to execute certain documents via electronic means under s 127 of the Corporations Act. We have also seen the rise of electronic platforms such as "DocuSign" used in commercial relationships to facilitate the efficient signing of contracts. Furthermore, this case highlights how courts will interpret the element of "intention" when determining whether a valid contract has been formed, confirming the long-standing principle that it is to be assessed objectively from the perspective of a reasonable and objective bystander who is aware of all the relevant facts. Overall, this is an interesting development for parties engaging in commerce via electronic means and an important reminder to all to be conscious of the fact that contracts have the potential to be agreed to by use of an emoji in today's digital age.

Published by Foez Dewan

29 August, 2023

Government

Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

The McCabes Government team are pleased to have assisted Venues NSW in successfully overturning a District Court decision holding it liable in negligence for injuries sustained by a patron who slipped and fell down a set of steps at a sports stadium; Venues NSW v Kane [2023] NSWCA 192 Principles The NSW Court of Appeal has reaffirmed the principles regarding the interpretation of the matters to be considered under sections5B of the Civil Liability Act 2002 (NSW). There is no obligation in negligence for an occupier to ensure that handrails are applied to all sets of steps in its premises. An occupier will not automatically be liable in negligence if its premises are not compliant with the Building Code of Australia (BCA). Background The plaintiff commenced proceedings in the District Court of NSW against Venues NSW (VNSW) alleging she suffered injuries when she fell down a set of steps at McDonald Jones Stadium in Newcastle on 6 July 2019. The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. The Decision at Trial In finding in favour of the plaintiff, Norton DCJ found that: the steps constituted a "stairwell" and therefore were in breach of the BCA due to the absence of a handrail and the presence of a chamfered edge exceeding 5mm in length. even if handrails were not required, the use of them would have been good and reasonable practice given the stadium was open during periods of darkness, inclement weather, and used by a persons of varying levels of physical agility. VNSW ought to have arranged a risk assessment of the entire stadium, particularly the areas which provided access along stepped surfaces. installation of a handrail (or building stairs with the required chamfered edge) would not impose a serious burden on VNSW, even if required on other similar steps. Issues on Appeal VNSW appealed the decision of Norton DCJ. The primary challenge was to the trial judge's finding that VNSW was in breach of its duty of care in failing to install a handrail. In addition, VNSW challenged the findings that the steps met the definition of a 'stairwell' under the BCA as well as the trial judge's assessment of damages. Decision on Appeal The Court of Appeal found that primary judge's finding of breach of duty on the part of VNSW could not stand for multiple reasons, including that it proceeded on an erroneous construction of s5B of the Civil Liability Act 2002 and the obvious nature of the danger presented by the steps. As to the determination of breach of duty, the Court stressed that the trial judge was wrong to proceed on the basis that the Court simply has regard to each of the seven matters raised in ss 5B and 5C of the CLA and then express a conclusion as to breach. Instead, the Court emphasised that s 5B(1)(c) is a gateway, such that a plaintiff who fails to satisfy that provision cannot succeed, with the matters raised in s 5B(2) being mandatory considerations to be borne in mind when determining s 5B(1)(c). Ultimately, regarding the primary question of breach of duty, the Court found that: The stadium contained hazards which were utterly familiar and obvious to any spectator, namely, steps which needed to be navigated to get to and to leave from the tiered seating. While the trial judge considered the mandatory requirements required by s5B(2) of the CLA, those matters are not exhaustive and the trial judge failed to pay proper to attention to the fact that: the stadium had been certified as BCA compliant eight years before the incident; there was no evidence of previous falls resulting in injury despite the stairs being used by millions of spectators over the previous eight years; and the horizontal surfaces of the steps were highly slip resistant when wet. In light of the above, the Court of Appeal did not accept a reasonable person in the position of VNSW would not have installed a handrail along the stepped aisle. The burden of taking the complained of precautions includes to address similar risks of harm throughout the stadium, i.e. installing handrails on the other stepped aisles. This was a mandatory consideration under s5C(a) which was not properly taken into account. As to the question of BCA compliance, the Court of Appeal did not consider it necessary to make a firm conclusion of this issue given it did not find a breach of duty. The Court did however indicated it did not consider the stepped aisle would constitute a "stairway" under the BCA. The Court of Appeal also found that there was nothing in the trial judge's reasons explicitly connecting the risk assessment she considered VNSW ought to have carried out, with the installation of handrails on any of the aisles in the stadium and therefore could not lead to any findings regarding breach or causation. As to quantum, the Court of Appeal accepted that the trial judge erred in awarding the plaintiff a "buffer" of $10,000 for past economic loss in circumstances where there was no evidence of any loss of income. The Court of Appeal set aside the orders of the District Court and entered judgment for VNSW with costs. Why this case is important? The case confirms there is no obligation in negligence for owners and operators of public or private venues in NSW to have a handrail on every set of steps. It is also a welcome affirmation of the principles surrounding the assessment of breach of duty under s 5B and s 5C of the CLA, particularly in assessing whether precautions are required to be taken in response to hazards which are familiar and obvious to a reasonable person.

Published by Leighton Hawkes

18 August, 2023