The Australian Securities and Investments Commission (ASIC) has today announced its interim position in relation to the regulation of mutual risk products (MRPs).

MRPs are risk products that provide an alternative to conventional general insurance products. Generally, MRPs involve participation in a ‘mutual’ scheme based around particular professions, small business associations, franchise operations or community groups (MRP scheme). MRP schemes may cover a range of risks, such as professional indemnity and public liability risks.

‘In general, ASIC considers MRPs to be financial products for the purposes of the Corporations Act because they represent both facilities for managing financial risk and interests in a managed investment scheme. As such, ASIC generally expects MRP providers to comply with the managed investment scheme and licensing provisions of the Act’, ASIC Executive Director Financial Services Regulation, Mr Ian Johnston said.

‘In specific, limited circumstances, ASIC will consider granting relief from the managed investment and licensing provisions of the Act’, he said.

The approach outlined in this information release is intended to provide guidance to industry about:

• the application of the managed investment and licensing provisions of the Act
• the circumstances in which ASIC will consider granting relief from these provisions, and
• ASIC’s general approach to licensing people who provide financial services in relation to MRPs.

In the event that the law is amended, or its current position changes, ASIC will provide further guidance to industry.

MRPs and MRP schemes

In general, there are two types of MRP schemes – mutual discretionary funds (MDFs) and mutual non-discretionary funds (MNDFs). Both these schemes involve members contributing money, which is then pooled and held by the person operating the scheme (the MRP provider).

The MRP provider uses the pool of money for purposes such as acquiring general insurance products (e.g. group insurance) to cover specified risks of the members and for paying claims by members up to a certain limit (such as the excess on the general insurance product(s), e.g. the first $200,000 of any claim).

The two types of schemes differ in that generally, MDFs only provide members with a right to have their claim properly considered – the payment of claims or provision of financial assistance is at the discretion of the MRP provider. MNDFs provide members with a right to have their claim paid, and the MRP provider has a legal obligation to pay members claims.

The approach outlined in this information release will apply in relation to all MRPs, regardless of whether the scheme involved is a MDF or a MNDF.

Application of the managed investment provisions of the Act

In general, ASIC considers that MRPs are financial products because they represent interests in a managed investment scheme. As such, ASIC generally requires that MRP providers comply with the managed investment provisions in Chapter 5C of the Act.

ASIC has adopted the interim position that it will consider granting conditional relief from the managed investment scheme registration requirement in s601ED of the Act, on a case-by-case basis, where:

• the MRP provider holds an AFSL with the necessary licence authorisations, and
• any money received as contributions for a MRP or assets held by the MRP provider as a result of these contributions are held on trust for the members by the MRP provider, only invested in an account held with an Australian authorised deposit-taking institution (ADI) or a cash management trust, or otherwise used to acquire general insurance policies on behalf of the members, pay claims by members or pay any remuneration of the MRP provider in accordance with its agreement with the members.

‘ASIC will consider granting relief in these circumstances because there is no significant dependency on the investment performance of the pool of money and the MRP provider does not perform a role as an investment manager’, Mr Johnston said.

To qualify for conditional relief, applicants must apply to ASIC in accordance with Policy Statement 51: Applications for relief.

Application of the licensing provisions

ASIC considers that MRPs are financial products because they represent facilities for managing financial risk.

In general, ASIC requires any person who carries on a business of providing financial services in relation to MRPs (such as MRP providers) to hold an Australian financial services licence (AFSL). The AFSL licence authorisations required will depend on the activities of the particular financial service provider.

For example, where ASIC has granted conditional relief from the managed investment scheme registration requirements (as described above), a MRP provider may require authorisations to:

• issue interests in a managed investment scheme
• apply for general insurance products, deposit taking facilities of an ADI or managed investment products on behalf of members, and
• depending on the particular circumstances, provide custodial services by holding general insurance products, deposit taking facilities of an ADI or managed investment products on trust for, or on behalf of, members.

Applicants for AFSL’s will need to consider which authorisations are appropriate for their particular circumstances and, where necessary, seek their own professional advice.

AFSL holders who provide financial services in relation to MRPs will be subject to the standard licence conditions set out in Pro Forma 209 Australian Financial Services Licence [PF209].

MRP providers will also be subject to an additional AFSL licence condition aimed at providing enhanced disclosure for consumers. This licence condition will require MRP providers to warn consumers of any risks related to MRP providers (and MRPs) not being prudentially regulated.

Specifically, this licence condition will require MRP providers, when issuing or offering to issue MRPs, to inform consumers:

• that the MRP provider is neither authorised under, nor subject to the provisions of, the Insurance Act 1973
• that the MRP is not a product regulated by APRA, and
• of the extent to which the MRP provider will ensure that it has adequate financial resources to pay future claims by members.

MRP providers must provide this warning to all retail and wholesale clients.

‘It is important that people who take cover from these type of arrangements realise that this is not insurance in the legal sense. There is no solvency or prudential regulation of such products by the Australian Prudential Regulation Authority, nor by ASIC’, Mr Johnston said.

‘ASIC’s licencing of entities offering these schemes recognises that they are financial products, but people who participate in the schemes must make their own assessment about the ability and obligation of the scheme to make any payments required’, he said.

When applying for an AFSL, applicants should clearly state whether they provide financial services in relation to MRPs and, if so, describe the nature of the financial services and scheme(s) involved. This information will assist ASIC in considering licence applications.

ASIC will only consider granting relief from the licensing provisions in Chapter 7 of the Act to address atypical or unforeseen circumstances and unintended consequences of those provisions.

The criteria that ASIC will apply in considering applications for relief are those set out in Policy Statement 167 Licensing: Discretionary powers and transition [PS167.3-167.12]. Applications for relief should also comply with Policy Statement 51: Applications for relief.