Registering for the consumer credit insurance class action
Slater and Gordon is investigating potential class actions against Australian banks on behalf of consumers who have been sold seemingly worthless or junk credit card insurance.
We have found substantial evidence which suggests that a large number of people have paid tens of millions of dollars for this insurance, despite the fact they were ineligible to claim some or all of the available benefits.
The level of consumer awareness also appears to be incredibly low, with many people either unaware they have insurance or labouring under the misapprehension that it is a requirement for obtaining a credit card.
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What is consumer credit insurance?
Consumer credit insurance provides coverage if a person becomes unable to meet their repayments, usually due to death, disablement, serious illness or involuntary unemployment.
It is often sold alongside financial products, including credit cards and other loans, and is usually calculated as a percentage of the outstanding balance.
The big four Australian banks charge anywhere between $0.45 and $0.79 per $100 owing per month for consumer credit card insurance.
This means a credit card holder with the national average balance of $4,200 would be paying anywhere between $225 and $400 per year for consumer credit insurance.
Although it often sounds cheap, it is actually very expensive when compared to more traditional insurance products, like life insurance and income protection insurance.
Which consumers are allegedly being sold credit card insurance unconscionably?
Slater and Gordon reviewed the policies of multiple Australian banks and identified the consumer groups most likely to be receiving little or no benefit from consumer credit card insurance.
Those groups include people:
- people with no income or whose only income is from Centrelink (including students, unemployed people, dependent spouses and self-funded retirees);
- people who are self-employed;
- people who are in non-permanent employment;
- people with pre-existing medical conditions;
- people who are aged 65 and over;
- people with no dependents;
- people who already hold effective income protection insurance;
- people who did not know they were paying for consumer credit insurance or thought it was a mandatory requirement to hold a credit card.
For example, an unemployed person would usually only be able to claim against consumer credit insurance in circumstances of death, despite paying for much more comprehensive coverage that included sickness, disablement and unemployment.
How widespread is this issue?
Independent research has revealed that a large proportion of consumer credit insurance claims were rejected and those that were accepted only paid out very small amounts.
In 2016 ASIC required several Australian banks to audit their sales practices in relation to three common consumer products, including consumer credit insurance. The audit found consumer credit insurance to be the standout for product customer complaints, and at a heightened risk of sale without the customer’s informed consent.
According to industry statistics, between 2011 and 2016, consumer credit insurance claims were rejected more than any other insurance product. During this period, claims were declined five times more often than general insurance claims, and 33 times more often than car insurance claims.
APRA data from 2010-2014 shows that on average, only 23 per cent of income from consumer credit insurance premiums were returned through claim payouts, which equates to less than one third of the average payout ratio for car insurance policies.
Why is it unconscionable to sell these groups of people consumer credit insurance?
The high denial and low claim rates associated with consumer credit insurance stem from arguably unconscionable practices in breach of consumer laws.
- Ineligibility: This type of insurance appears to be regularly sold to consumers who are ineligible to claim. ASIC’s 2011 report noted that many policyholders were unaware of their ineligibility, with 66 per cent of financial institutions reviewed using selling scripts that didn’t inform consumers of the major exclusions. The main reasons for ineligibility are:
- Employment status: Most consumer credit insurance policies will not provide involuntary unemployment coverage if the person was previously in ‘non-permanent employment’ (such as casual or contract employment), if they were unemployed or, in many cases, if they were self-employed;
- Age: Most consumer credit insurance policies will not cover people aged 65 and over; and
- Pre-existing medical conditions: Consumer credit insurance policies generally exclude cover for the consequences of any pre-existing conditions. The above categories of people are usually excluded from most or all coverage under the terms and conditions of their consumer credit insurance policies.
- Poorly informed consumers: Both ASIC’s 2011 and 2013 reports have found that the sales practices in the consumer credit insurance industry leave consumers very poorly informed. Policies were sold under misleading or non-existent sales scripts, with the insurance cost structure often poorly explained. In particular:
- many consumers do not realise that they are paying for consumer credit insurance or that it is optional;
- many consumers do not understand the terms and conditions of their polices; and
- many consumers do not understand the cost or duration of their consumer credit insurance.
- Unsuitability: Some consumers are being sold insurance policies they could technically claim against, but when their personal circumstances are considered there is no real benefit. This includes:
- people whose only income is from Centrelink benefits, who cannot claim any benefit from income protection insurance;
- single people with no dependents, who would be able to claim little to no benefit from death coverage; or
- people who already have significant insurance coverage, such as consumers who already have life insurance or income protection insurance.
- Price: Exorbitant pricing structures, which are often misunderstood by consumers, are likely to be another reason for the massive profitability of consumer credit insurance. CHOICE’s 2009 report found that the cost of consumer credit insurance was not competitive when compared to other types of insurance. CHOICE found:
- The industry average for $500,000 of life insurance was $198 per year.
- Income protection for somebody earning a salary of $50,000 was $295 per year. That income protection would pay out 75 per cent of the insured person’s salary for two years after the date of any injury.
- These premiums are comparable to consumer credit insurance products, but the payouts would be miniscule in comparison.
These practices could amount to unconscionable conduct in breach of section 12CB of the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act).
ASIC v Cash Store Pty Ltd
A breach of section 12CB was found in the 2014 landmark case ASIC v Cash Store Pty Ltd, where a payday lender and its funder breached consumer lending laws.
The Cash Store had sold more than 182,000 consumer credit insurance policies over two years, of which only 43 successful claims were made. The total amount paid out on those 43 claims was $25,118, which was 1.1 per cent of the amount paid by customers in premiums.
The Cash Store’s policy was not to explain to borrowers the details of the policies, but simply to advise the customer that a payment protection plan had been arranged for their benefit. They also offered customers consumer credit insurance irrespective of their personal circumstances, such as whether they actually had income that needed protection.
Justice Davies accepted submissions that the insurance was unlikely to be of any use to customers for a payday loan and certainly useless for those who were unemployed, which amounted to unconscionable conduct.
The Federal Court’s findings here set a clear precedent that the sale of consumer credit insurance to those who are unlikely to be able to claim may constitute unconscionable conduct within the meaning of section 12CB.
How much have consumers potentially been unfairly charged?
If a breach of the ASIC Act could be proven, affected classes of people would be able to recover compensation from their insurance providers.
This would most likely be the premiums they had paid in the past six years, as per the limitation specified under section 12GF.
This means a credit card holder with an average Australian balance of $4,200 would have paid between $1,350 and $2,400 for consumer credit insurance over the past six years, depending on the bank that issued their policy.
Exact figures of the number of Australian credit card holders with consumer insurance and who would be eligible to participate in the proposed class actions are not easily available, so it is difficult to estimate how much banks would have to refund in total if unconscionable conduct was established.
However, the Commonwealth Bank has taken some steps to rectify these practices, which offers an indication of the potential magnitude of this issue.
Commonwealth Bank refunds
CBA announced on 7 March 2018 that it would stop selling its consumer credit card insurance.
CBA has also announced two refunds worth $26 million in the last seven months for customers who were sold consumer credit insurance in circumstances that meant they were unlikely to meet the employment criteria to make a claim.
The first refund was announced on 14 August 2017 for $10 million to more than 65,000 customers who were sold CreditCard Plus insurance between 2011 and 2015. The majority of these customers were students with low limit credit cards and some unemployed customers who were unable to claim for unemployment or temporary and permanent disability cover.
If unconscionable practices relating to consumer credit insurance proved to be widespread amongst financial institutions, it could be anticipated they would have to refund customers a similar, if not greater amount.
This would mean certain classes of credit card consumers have potentially paid tens of millions of dollars for seemingly useless and unconscionably sold insurance products.
We note, however, that any person who received a complete refund under the Commonwealth Bank refund program would likely not be eligible to participate in any further claim for refunds as against that bank.
Are you affected?
If you hold consumer credit insurance alongside your Australian credit card, you could potentially fall within this class action.
The full extent of these issues is largely unknown, but our research to date has indicated it is widespread.
For that reason, Slater and Gordon is interested in hearing from all persons with consumer credit insurance and encourage consumers to register their expression of interest