Consumer groups have called out the consumer watchdog for “dragging its heels” and “watering down” much-needed reforms to help prevent ‘junk’ add-on car insurance products being sold to motorists.

ASIC’s reforms, which have been in the pipeline since 2017, would de-incentivise dealerships from peddling insurance products that offer little cover for policyholders.

However in a joint submission to the watchdog, the Consumer Action Law Centre, the Financial Rights Legal Centre and WEstjustice says ASIC’s latest delays are “concerning”.

After proposing its draft intervention order in October 2019, ASIC is now considering adding a three-month transition period and retaining six-month delays on other measures once the order takes effect.

It’s a move the collective say would keep the incentive for dealers to “rip-off” motorists.

“The incentives for dealers to prop up revenue by flogging junk products remain strong,” the submission reads.

Drivers pressured into buying unnecessary insurance

Codie Hollis felt like any other 21-year-old would sitting in the office of a car yard, itching to purchase his first-ever car: nervous and exhausted.

The Newcastle man hoped to purchase his $35,000 car through a dealer in 2015, and then approach his bank to organise a personal loan.

However, after hours of test drives, talks and contracts, he was pressured to reconsider and finance his car through the dealership.

And that’s when discussions about insurance commenced.

“Things started off well as the salesperson offered me comprehensive insurance, which I needed, but then the conversation shifted to these other add-on products, which I had no idea about,” Mr Hollis told The New Daily. 

“I was told that I should purchase them considering my age, and was told if I didn’t and my car was written off, my family would have to fork out to help cover those costs.

“And I didn’t want to place that burden on them.”

Add-on products are usually sold through insurance salespeople who work on-site at car dealerships. Photo: Getty

The three products, which included tyre and rim Insurance and motor equity insurance, were itemised on his loan document and added $9300 to the upfront costs.

The interest eventually accrued over the five years since pushed those extra costs to around $15,000, he said.

“But I didn’t think to cancel them because I was given the impression that the extended warranty I had purchased would get cancelled if I cancelled those policies,” Mr Hollis said.

After failing to negotiate a full refund directly with his insurer earlier this year, Mr Hollis escalated his complaint to the Australian Financial Complaints Authority and retrieved the amount (without interest).

“Looking back, they definitely capitalised on me being young and then bombarding me with all this information,” Mr Hollis said.

Salespeople capitalise on misinformed drivers

The sale of these products, described by consumer advocacy groups as ‘junk’ or ‘car yard’ insurance products, have sparked a crackdown by consumer watchdog ASIC in the wake of the banking royal commission.

On average, motorists are slugged $3210 for consumer credit insurance, $1700 for guaranteed asset protection (GAP) Insurance and $1950 for warranties, according to consumer data from demandarefund.com.au.

Former ASIC acting chairman Peter Kell wrote two years ago that add-on products were largely “failing consumers” as few policyholders were able to retrieve a refund for their claims.

And last year, ASIC worked doggedly to recoup refunds for customers stung by the costs of these insurance products, securing more than $130 million for over 245,000 affected drivers.

Motorists can end up thousands of dollars out of pocket by purchasing products that have little scope to cover them. Photo: Getty

Consumer Action Law Centre (CALC) policy officer Tom Abourizk told The New Daily dealers have capitalised on a lack of regulation “for decades” and pushed these products on misinformed customers unabated.

Dealers can earn upwards of a 65 per cent commission by selling these premiums on behalf of an insurer.

Mr Abourizk said they often make use of point of sale exemptions, which allows them to sell these kinds of financial services products without a licence – a usual requirement of major banks and lenders.

“The process of getting towards actual intervention has been in real baby steps over the years, and there have been some necessary delays as well as powers and legislation has caught up,” Mr Abourizk said.

But CALC claims the watchdog has “watered down” its proposed reforms to the sector since its draft intervention order was released.

“ASIC’s model would certainly make a difference, but there are certain loopholes that could be exploited,” Mr Abourizk said.

“One of the classic sales methods we see is consumers being referred to a warranty or insurance salesperson after putting a deposit down, which is something we’re worried might not be caught.”

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Mr Abourizk said the impact of add-on products would be felt hardest by low-income households, with most sales occurring when motorists also intend to take out a loan.

“It is disappointing to see ASIC still dragging its heels when this has been known conduct for so long, and especially after securing the kinds of compensation since the royal commission,” Mr Abourizk said.

“It still hasn’t stopped despite a lot of public communication by ASIC in the area. They say a lot of insurers have pulled out of the market but others have taken their place in the same context.”

An ASIC spokesperson told The New Daily that although the deadline for consultations on the reforms has been extended due to the “impact of COVID-19”, the watchdog is taking other courses of action in the interim.

“ASIC has [driven] voluntary changes by insurers and warranty providers to improve the design and sales of these products,” the spokesperson said.

“Before making a product intervention order, ASIC must consult those who are reasonably likely to be affected by the order.”