The Auckland High Court has ordered life insurer AIA to pay a pecuniary penalty of $700,000 for making false and/or misleading representations to some customers, following proceedings brought by the Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko.
AIA admitted to the conduct last year in court. The FMA and AIA agreed a penalty of $700,000 reflected the seriousness of the breaches. In his judgment, Justice Michael Robinson was satisfied a penalty of this amount was appropriate, taking into account AIA’s:
- cooperation during the FMA’s investigation
- thorough remediation in compensating customers
- system errors being unintentional
In bringing these proceedings, the FMA sought to denounce the misconduct, and hold AIA accountable for the breaches and any harm caused to the 383 affected customers, who were overcharged (or had claims underpaid by) more than $413,000. The FMA also wanted to deter financial institutions from having deficient processes or systems.
The Judge declared that AIA had breached Fair Dealing provisions (Part 2) of the Financial Markets Conduct Act 2013 (the FMC Act) in that AIA made false and/or misleading representations in relation to customers insurance policies.
The FMA case was based on three core breaches by AIA regarding incorrect and misleading communication to customers holding various life insurance and associated policies:
- purported benefits had been automatically added to customer policies when they had not
- charging premiums after the termination of a policy and treating policies as terminated when they should have remained in force, and,
- incorrect inflation adjustments.
Margot Gatland, FMA Head of Enforcement, said: “This outcome reiterates that financial institutions will be held to account if they fail to sufficiently invest in systems, controls and processes that ensure all customers are treated fairly. AIA accepted customers should be able to rely on the robustness of their insurer’s systems. AIA’s misconduct caused real harm by failing to correctly pay cover to a small number of sick or disabled customers.”
The Judge noted: “The FMA submits that for some customers AIA’s conduct will likely have caused emotional harm as well as direct financial harm, particularly those few customers who were declined cover or whose cover ceased prematurely. Those customers were declined disability, income replacement and other health-related cover which is only available in inherently stressful circumstances. The wrongful declinature or premature cessation of cover would exacerbate that stress… I agree with the FMA that these are aggravating factors.”
AIA acknowledged its “system failures should not have occurred and should have been remedied more promptly. AIA has now made significant investment to ensure these issues do not reoccur.”
In relation to general deterrence, the Judge accepted the FMA’s submission that where breaches arise from deficient processes or systems the penalty should deter other market participants from risking similar deficiencies.
Background to the case
The FMA case only captured breaches that occurred from 1 April 2014 – when the FMC Act came into force – but some breaches occurred prior to this and continued after the Act came into effect.
The issues specifically included:
- Passback benefits: AIA wrongly told certain customers they were entitled to passback benefits (cover enhancements to an existing policy), without clarifying that the benefits only applied to post-2003 policies. The information customers received in anniversary letters misrepresented the benefits, and in some cases misled them about their policies.
- Termination Dates issues:
a) Premiums beyond termination: AIA continued to charge premiums when customers had no cover. Letters were sent to certain customers with policies approaching the end of their duration, specifying when cover would cease, but the letters contained the incorrect date.
b) Cover Cessation: AIA wrongly ceased cover for certain customers while their policies remained in force, which resulted in some customers, whose claims had been accepted, being underpaid on those claims. Customers were informed by cover cessation letters.
- Inflation Adjustments: AIA applied incorrect inflation adjustments to premiums. Many AIA customers choose to have their sum-assured adjusted in line with inflation, with premiums increased accordingly. Policy anniversary letters were sent to customers where the inflation adjustment had been incorrectly applied, and, as a consequence, some customers were charged excess premiums.
AIA self-reported the breaches to the FMA, when asked to provide information as part of the joint FMA/Reserve Bank of New Zealand conduct and culture review of life insurers in 2018. The court noted AIA has fully investigated and successfully remediated all of the problems.