Leading law firm Slater and Gordon is investigating potential class actions against Australian banks on behalf of consumers who have been sold seemingly worthless credit card insurance.
Consumer credit insurance is often sold alongside financial products and provides coverage if a person becomes unable to meet repayments, usually due to death, disablement, serious illness or involuntary employment.
Slater and Gordon Class Actions Senior Associate Andrew Paull said Australian credit card holders could have paid tens of millions of dollars for insurance that offered them little or no coverage.
“Consumer credit insurance in Australia is riddled with consumer protection issues and is notorious for being unsuitable and consistently poor value,” Mr Paull said.
“We have found substantial evidence to suggest that a large number of Australian credit card holders are paying hundreds, if not thousands, of dollars a year for essentially worthless insurance.
“Many policyholders are ineligible to claim some or all of the available benefits and others are either completely unaware they have the insurance or incorrectly believe it is a requirement for obtaining a credit card.
"The banks should know when this insurance is likely to be of no or limited value to their customers, however the evidence suggests that they have continued to push these products widely and have collected millions in premiums while doing so."
Which consumers could be included in these class actions?
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 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 (including casual and contract workers);
People with pre-exising medical conditions;
People who are aged 65 and over;
People with no dependents;
People who already hold effective income protection insurance; and
People who did not know they were paying for consumer cr
How widespread is this problem?
According to industry statistics, consumer credit insurance claims between 2011 and 2016 were rejected five times as often as general insurance claims.
Figures published by APRA show that in 2017 only 25 per cent of income from consumer credit insurance premiums was returned through claims payouts, which is almost three times less than the average payout ratio of 74 per cent for other types of insurance.
Mr Paull said the high denial and low claim rates associated with consumer credit insurance stem from arguably unconscionable practices in breach of consumer laws and financial regulations.
“This type of insurance appears to be regularly sold to consumers who are ineligible to claim, such as people aged 65 and over,” Mr Paull said.
“Casual, contract or self-employed workers are also usually subject to exclusions from income protection coverage, but often unaware they are ineligible when they agree to purchase the insurance.
“Consumer credit insurance also may be unsuitable for policyholders with no dependents to provide for upon death, those who already hold effective income protection insurance and those with no income to protect, including those who receive only Centrelink benefits.
“Exorbitant pricing structures, which are often misunderstood by consumers, are likely to be another reason for the massive profitability of consumer credit insurance.”
Why are these practices unlawful?
Mr Paull said these practices could amount to unconscionable conduct in breach of section 12CB of the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act).
“The courts have previously found that the sale of consumer credit insurance to those who are unlikely to be able to claim may constitute unconscionable conduct,” Mr Paull said.
“If a breach of the ASIC Act was 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.”
How much money have credit card holders paid for junk insurance?
Mr Paull said the total potential refund was difficult to estimate, but could be in the tens of millions of dollars.
“Exact figures of the number of Australian credit card holders who would be eligible to participate in the proposed class actions are not easily available at this point,” Mr Paull said.
“However, the Commonwealth Bank took some steps to rectify their practices in August last year and March this year, refunding $26 million to customers who were sold unsuitable consumer credit insurance.
“This group included a lot of students with low limit credit cards and some unemployed customers who were unable to claim for unemployment or temporary and permanent disability cover.
“This refund provides an indication of the potential magnitude of this issue, meaning certain classes of credit card consumers could have paid tens of millions of dollars for seemingly useless and unconscionably sold insurance products.”
What reforms are needed?
Due to the widespread consumer protection issues, ASIC has recently established a Consumer Credit Insurance Working Group made up of consumer advocates and representatives from the banking industry.
The working group will work together to progress a range of reforms, such as deferred sales methods, to improve consumer awareness of Consumer Credit Insurance.
But Mr Paull said these steps offer no remedy for consumers who have been paying thousands of dollars for what is seemingly junk credit card insurance.
“The working group has definitely been a step forward for improving the sale of consumer credit insurance,” Mr Paull said.
“But these reforms do not excuse the misconduct that has occurred in the past and essentially allow banks to pocket consumers’ money and run.”
For further information or to register interest in these class actions, consumers can visit: www.slatergordon.com.au/CCI