Some further observations on anti-hawking and cross-positioning in financial services

We have previously written about our 12 principles that apply to the implementation of the new anti-hawking regime (NAHR), as well as some observations on the evolving structure of insurance contracts and distribution resulting from the NAHR.

In this article, we make some further observations on the scope of an invitation, consent, causation, and the scope for regulatory dialogue.

Cross-Positioning – The Scope of an Invitation

The scope of the concept of an “invitation” in the NAHR is wide.

Where a customer contacts the sales representative about Product A but the sales representative wants to cross-position Product B, in what circumstances can this occur and not constitute an unsolicited invitation under the NAHR?

The simplest scenario is where the customer’s scope of enquiry/request reasonably encompasses Product B. In this scenario, the discussion of Product B is solicited on the basis of inferred consent (which is permitted under the NAHR for products reasonably within the scope of the customer’s request).

Another similar solicited scenario is where the customer enquires about Product B of his or her own initiative, unprompted by the sales representative.

However, if the sales representative mentions Product B unprompted and not in one of these two scenarios or the scenarios outlined below, the mention of Product B is likely to be construed as an unsolicited invitation and a de facto presumption is created. We will call this the Invitation Rule.

The possible exceptions to the Invitation Rule

It is suggested that in addition to the above-mentioned scenarios, there are three basic possible exceptions where (what we have called) the de facto presumption could be rebutted. There are possible rebuttals based on the following:

• Matching customer needs to relevant products

The customer contacts the sales representative and states that they have or want cover under an insurance policy they specify but in reality, that policy does not provide the cover the customer wants. In our view, here, the sales representative can point out that that the requested policy does not provide the cover but rather, another policy provides that cover. Provided that the representative who is offering the other product is responding to an expressed need of the customer, the presumption in the Invitation Rule is rebutted. Or perhaps more accurately, the sales representative has merely clarified the scope of the customer’s request in relation to the cover they want.

This could apply to a gap of cover being evident in a claims scenario, although it is probably not routine that the customer is, in making the claim, expressing a need for the relevant non-covered type of insurance. This scenario could also apply where, for example, a customer requests a home and contents policy to ensure protection for the boat parked in their garage. In this scenario, it would be permissible for the sale representative to clarify to the customer that a different insurance policy is needed to cover the boat. This is because such a conversation is reasonably within the scope of the customer’s request.

• Pricing

The customer contacts the sales representative and indicates that they wish to purchase either a non-financial product (e.g. roadside assistance) or a financial product (e.g. comprehensive car insurance).

Where the pricing structure for the customer’s requested product is such that there is a difference (e.g. discount) if the person holds another financial product available from the same issuer, the sales representative can mention that fact (i.e. explaining the different pricing structures that are available). However, care needs to be exercised here to ensure the sales representative’s conduct does not constitute an implied invitation for the customer to ask or apply for the other financial product in order to take advantage of the pricing differential. The customer can clearly however request that other financial product of their own initiative without offending the NAHR.

• Loss of a valuable right

Where the customer contacts the sales representative about a non-financial product or a financial product, and the sales representative is aware that the customer holds another product which is about to lapse the sales representative can point out the fact that the customer’s other product is about to lapse. This is arguably not prohibited under the NAHR, even if the lapsing product bears no relationship to the product which the customer contacted the sales representative about. This is because it is a discussion about the existing product already held by the customer. Further, we anticipate that the proposed regulations on anti-hawking foreshadowed by Treasury will provide a grace period during which customers can be contacted before or after a financial product they hold has lapsed or expired.

In our view, even absent a specific exemption in the regulations to contact customers about their existing financial products, the presumption in this scenario could arguably be rebutted because the sales representative is not mentioning the lapsing product in order to invite the customer to apply for it to be issued to them. There could however be some degree of argument about this (given a renewal will typically result in a new financial product being issued) and hence, we are proposing raising this with ASIC (see below).

• Insurance as a prerequisite for another product

In a scenario where insurance is needed as a prerequisite to a customer holding another financial product (e.g. a home or car loan), there is a difference here between the sales representative mentioning the relevance of, and need for, the insurance versus the sales representative offering to arrange for the issue of the insurance to the customer. The former, in our view, is not prohibited under the NAHR, whereas the latter could be (unless the customer makes a specific request for insurance).

The scope of consent

We know that a customer can proactively agree to be contacted about certain financial products. However, the consent must be specific to those products.

A consent to receive a call about a broad class of financial products is unlikely to be specific enough – unless circumstances make it clear what the specific financial products are that the customer’s consent relates to.

Breaking the chain of causation

Readers will know that we regard the issue of breaking the causal nexus to be difficult from a legal perspective.

For example, the chain of causation is not broken where a sales representative mentions a financial product in an unsolicited call, sends information about that product to the customer, and proceeds in the same call (or a later one) to arrange for the issue of the financial product to the customer. The mere provision of information (including through non-live, digital channels) is not a sufficient intervening event to break the chain of causation.

While the Explanatory Memorandum provides that the chain of causation will be broken if the customer initiates contact with the provider having received and considered the information sent to them during or after the first unsolicited call, this does not accord with the legislation, which applies ordinary principles of interpretation to the ‘because of’ test which forms part of the prohibition under the NAHR. This issue is also addressed in the recently released consultation draft of ASIC Regulatory Guide 38 The hawking prohibition (Draft RG 38), which will be the subject of a separate note from us. But importantly, Draft RG 38 states [at RG 38.25]:

“The prohibition may still apply to offers, requests or invitations that take place through a medium other than one that is a real-time interaction. For example, emailing a consumer an offer during or directly after an unsolicited outbound sales call with them would be ‘because of’ that call.”

This statement from ASIC also aligns with the traditional legal interpretation of the term ‘because of’.

In a different scenario, can the chain of causation be broken when a sales representative mentions a particular financial product and the customer rings back of his or her own accord to ask about that product? On a technical legal view, we consider the answer is likely to be no, as the initiative of the customer is unlikely to be treated as a sufficient intervening event to break the chain of causation. However, the Explanatory Memorandum adopts a more practical view that such steps by the customer can break the chain of causation. On this point, ASIC has provided some guidance on its position in Draft RG 38 at [RG 38.28]:

“The causal nexus may also be broken if between an unsolicited contact and subsequent offer, request or invitation, the consumer has taken active steps to consent to further contact regarding the offer, request or invitation, and has had a reasonable opportunity to consider any information that they have been provided about a financial product and to assess its suitability prior to receiving the offer: see paragraph 5.55 of the Explanatory Memorandum.”

We consider that this aligns with the policy intent behind the anti-hawking regime, which aims to empower customers to ask about products they are interested in.

Mention of a financial product by a customer is a separate contact

It follows from what we have said elsewhere and in this briefing note, that for the NAHR to work, it must proceed on the basis that each mention of a financial product by a client can constitute a separate contact. So when a client calls the representative and raises a query about, or expresses a need in relation to a financial product, the client is consenting to a conversation about the product by virtue of making the call.

The Explanatory Memorandum notes that the NAHR allows for the offer of multiple products “if the consumer consented to being contacted about multiple products before the contact, or the consumer’s consent is sufficiently broad so as to reasonably apply to more than one product”.

The evolutionary consent

Where a client enquires about a product at inception of the contact but then asks about another product during the same conversation, that second query should be treated as a separate contact for the purposes of the NAHR. Expressed another way, the client’s consent has evolved into consenting to a conversation about the second product. In our view, this allows the conversation on the second product to proceed on a solicited basis.

Some regulatory dialogue

In our view it would be very useful to raise the following scenarios with ASIC and Treasury, and to even request a no action position or exemption in the regulations:

1. As we canvass above, mentioning a financial product triggers the Invitation Rule, on a strict and proper legal interpretation of the NAHR legislation. We consider that where a sales representative mentions a financial product purely on an information only basis and then sends the customer information by other channels, such as email/SMS, this should be permissible from a policy perspective. In our view however, this is caught by the NAHR but should be exempted, given that the actual sale of the product would occur in a later interaction with the customer, and is not analogous to a potentially pressured sales scenario. This would also be consistent with the examples provided in Example 5.3 and Example 5.6 of the Explanatory Memorandum, thereby appropriately reflecting the policy intent.
2. Similarly, using the marketing material exemption pursuant to section 992A(7) of the Corporations Act does not, in our view, allow marketing material to be used to break the chain of causation once an unsolicited invitation for a financial product has been made (e.g. during a phone call). Rather, the legal interpretation (which we favour) is that this provision merely confirms that sending of standard marketing material is not captured by the NAHR. A contrary interpretation is possible to the effect that the marketing material can be used to break the chain of causation because the provision of the marketing material is a new and separate interaction with the customer. We favour the first interpretation above from a legal perspective, but clarity and preferably a no action position would be desirable. Again, this is because there is no potential pressure selling scenario in this case, which is what the NAHR seeks to prevent.
3. On causation, in short, we believe the current “because of” test is too wide and goes well beyond what is logical and reasonable in these circumstances. For this reason, we are working on a revised version of the causation test, which we would seek to socialise with ASIC.

Some commentary on various examples from the Explanatory Memorandum

Example 5.2

In this example, a superannuation fund runs an information session; in that session, the representative, Ros, informs the attendees of “the different superannuation products that the Very Good Super Fund has available”.

Leaving aside whether offerings within the Very Good Super Fund are separate financial products (but assuming that they are), this example seems to proceed on the basis that the introduction of these products by the representative is not hawking. This is likely to be explicable because the attendees have consented to hearing about such products by attending the session.

The example goes on to say that as Gary is leaving the session, Ros hands him an application form and asks him to fill it out. The example states this is unsolicited because “Gary did not consent to being invited to apply for a superannuation product before Ros gave him the application form and asked him to fill it out”. This example is difficult; if Gary has consented to hear about the various superannuation products available from the Very Good Super Fund, then is this effectively consent to be invited to ask about the product? If it is, then is it also consent to be invited to apply for the product? Or is any consent able to be implied by attending the session too generic and not specific to the products invited to be applied for? On this point, Draft RG 38 provides some insight into ASIC’s position at [RG 38.57]:

“This means that a consumer’s consent must demonstrate they understand they are consenting to being contacted for the purpose of being offered, or invited to purchase or apply for, a financial product. For consent to be clear, it must not be vague or ambiguous: see paragraph 5.79 of the Explanatory Memorandum.”

In any event, it is submitted that Ros, instead of giving an application form, could have given Gary some marketing material which complied with section 1018A of the Corporations Act as:

• Gary had consented to be informed about the products and hence a mention of the products by Ros is not an unsolicited invitation; and
• the giving of the marketing material is exempt from being unsolicited contact under section 992A(7) of the Corporations Act, as noted above.

Example 5.3

In this example, the issue of causation is dealt with. It is said that the client, Jonathan, sets up a meeting with his bank to discuss the refinancing of his mortgage. During the meeting, the bank representative provides Jonathan with some brochures relating to insurance products that the bank offers.

Jonathan calls the bank subsequently and asks for a quote for life insurance. The example states that the quote (and offer of life insurance) is not prohibited because the chain of causation is broken, “because Jonathan took positive steps to consent to being contacted in relation to the policy, had reasonable opportunity to consider the information, and was not pressured into providing that consent”.

This example is interesting because the sale following the initial introduction of insurance by the bank representative is not seen as being made “because of” the initial unsolicited contact. However, this interpretation exhibits a narrow view of the concept of causation, which is not consistent with the usual legal parameters of the concept of causation.

In saying this, we are conscious that the legal interpretation we believe is correct is extremely restrictive, if not illogical and inconvenient, and for this reason, we have included it in the topics for regulatory dialogue noted above.

Example 5.6

In this example, Alex, the customer, calls Trusty Bank and enquires about his insurance needs (viz “sort out” insurance arrangements related to the refinancing of his mortgage). The example states that Emily, the bank representative, can legitimately provide quotes in relation to home building and landlord insurance. However, during the meeting, the representative also asks about home and contents insurance in relation to Alex’s residential property, to which Emily responds by providing that information.

It is stated that the discussion of the residential home and contents insurance is outside of the scope of consent because it does not relate to Alex’s investment property. We disagree with this principle from a legal perspective, as the client has clearly consented to the enquiry about the home and contents insurance and the needs of the client encompass this enquiry.

This example states that the giving of information is not hawking. This only seems true if the information is provided in response to a request from the customer. Otherwise, the unprompted provision of information could, and is likely to, be an implied invitation.

Again, we are conscious that the legal interpretation gives rise to significant commercial restrictions which do not align with the policy intent of the NAHR, and hence has been included in the topics for our regulatory dialogue.