Appeal Court Addresses Conditional Selling

A FSB media release on 9 October highlights far-reaching implications for finance and loan providers who coerce clients to make use of in-house brokerages.

A recent judgement by the Supreme Court of Appeal ruled against SA Taxi Securitisation Pty Ltd (SA Taxi), which was deemed to have obliged taxi owners who financed vehicles through SA Taxi to use specific brokers when purchasing insurance.

Jonathan Dixon, Deputy Executive Officer: Insurance at the FSB, says the ruling by the court supports the regulator’s approach to seek to ensure freedom of choice for all consumers when choosing financial services products. “We are pleased with this ruling. The FSB first investigated this matter in June 2010 as we were concerned that the lack of choice being provided to taxi owners hampered their own interests.”

The taxi owners who brought the case claimed that SA Taxi forced them to use brokers from SA Taxi Finance Holdings (Taxi Finance) when purchasing insurance, which deprived them of the right to choose their own brokers and find competitive rates. At the end of 2013 the FSB brokered a voluntarily agreement from SA Taxi to allow for freedom of insurance provider and broker.

The court ruled that SA Taxi refused to agree to the substitution of taxi risk by the taxi owner’s broker, maintaining that as the cessionary of the respective insurance policies, it had the right to appoint a broker of its choice, to manage the policy for the duration of the finance agreements.

The taxi owners had signed an insurance policy for a duration of two years; yet were tied into ceding the choice of insurance broker to SA Taxi for the full duration of the financial agreement of 60 months. The ruling found that the parties never intended to cede the right to appoint a broker to manage the policy for its duration.

“The FSB is focused on ensuring that all financial intermediary services are appropriate, affordable and fair. This is the main principle behind the upcoming Retail Distribution Review (RDR) regulation that aims to ensure insurance distribution models are aligned to Treating Customers Fairly (TCF) outcomes,” says Dixon.

“We are very pleased that this case has now been resolved and that taxi owners who choose to finance their vehicles through SA Taxi will in the future now be able to choose which insurance broker they use, giving them the right to source the most appropriate deal for their needs,” concludes Dixon.

Finance companies and banks, in particular, will need to study this judgment and review its practices to ensure that it is in line with what is required.

I am not sure if the term “conditional selling” is still used today, despite being outlawed years ago. I recall a time when the practice was rife, particularly in banks. A client who applied for a bond or loan was verbally coerced into effecting life and/or short-term cover by more than strongly suggesting that a positive decision in this regard could play a significant role in the success, or not ,of the finance application.

In other instances, the application forms were simply included in the paperwork, and the first thing clients knew about this was when they received policy documents from the insurers.

I personally experienced this malpractice where short-term cover was implemented retroactively for the year before I had purchased my first house, as well as for the year ahead. The fact that I did not own the house for which I was a paying an arrear premium made little difference to the bank.

It is very important that the judgment in the Supreme Court is relayed in very clear terms to the public to enable them to fend for themselves when faced with this kind of coercion which is certainly inconsistent with the fair treatment of clients, if not the constitution.

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