In the latest penalty obtained by the Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko, Medical Assurance Society New Zealand Limited (MAS) must pay $2.1 million for failing to correctly apply policy discounts, inflation adjustments, and benefit payments to some of its entitled customers between 2014 and 2019.

Background

Financial Markets Authority (FMA) brought the proceedings against MAS to ensure financial institutions have robust systems and to prevent overcharging to customer entitlements. However, through self-reporting, admittance of fault and remediating breaches to FMA, discounts to reduce the penalty will be considered by the courts.

MAS self-reported breaches of the fair dealing provisions in section 22 of the FMCA between May 2019 and July 2022. MAS admitted that it:

• Did not apply the multi-policy discount, or incorrectly applied a lower rate of the discount to premiums owed by some eligible customers. This affected approximately 8,864 customers with $3.3 million in overcharged premiums.
• Applied incorrect inflation adjustments of 3% rather than adjustment rates stated in customers’ policies. This affected approximately 6,267 customers with $1.7 million in overcharged premiums.
• Made various errors when manually calculating customers’ benefit payments. This affected 104 customers with $1 million in underpayments.
• Failed to apply the correct no claims bonus grade to premiums owed by some eligible customers. This affected approximately 1,235 customers with $570,000 in overcharged premiums.

The breaches primarily occurred between 2014 and 2022, although the incorrect inflation adjustment breach had been ongoing from 2009 to 2017. MAS had known about the multi-policy breach since 2014, and had investigated in 2015, but no remediation had been paid to customers. It was identified again in 2019 and reported to the FMA in August 2021.

Once the breaches were identified in 2019, MAS undertook a customer remediation programme which repaid affected customers $6,115,271. The FMA filed enforcement proceedings alleging MAS made false and/or misleading representations in connection with the supply of insurance. MAS admitted liability and the parties agreed a recommended penalty of $2.1 million, which was referred to the High Court for approval.

Setting the penalty

Justice Churchman adopted the well accepted three-stage framework to setting a pecuniary penalty under the FMCA:

1. the court must first determine the maximum penalty;
2. the court then sets a starting point having regard to relevant statutory criteria; and
3. the court will adjust the starting point to reach a final penalty by applying a discount based on relevant personal mitigating circumstances.

The parties had agreed an appropriate starting point of $3 million, which was below previous starting points of $5.5 million and $6 million in other recent cases. Justice Churchman agreed a starting point of $3 million was appropriate given the following factors:

• The nature and extent of MAS’s breaches were significant, especially the failure to remediate errors identified in 2015, the timespan for the breaches, the proportion of its customer base affected, and the lack of checking or auditing of manual processes.
• Although only a small number of customers were affected by the underpayment issue, it came at a time of real need or vulnerability for them which resulted in direct financial harm (the average underpayment was $10,067.88) and possibly emotional harm.
• MAS had failed to invest in compliance systems and the FMA described its compliance culture as “highly troubling”. The inaction in escalating or fixing some of the issues meant MAS fell well short of the standards expected of it.
• A penalty ought to deter other market participants from acting in a similar manner but must not be set so high that it puts off self-reporting and remediation.
• MAS is a smaller insurer than others in the market and deterrence would still be met by imposing a smaller penalty than other larger and more profitable market participants might receive.
• MAS had compensated affected customers in full and put in place systems and processes to ensure remediation occurs in the case of any future FMCA breaches.
• Although the multi-claim bonus issue overcharged some customers, the errors also meant other customers were undercharged approximately $5.0 million to $5.5 million.

From the $3 million starting point, the total penalty was adjusted downwards by 30% to $2.1 million on the basis of:

• A discount of 25% to recognise MAS’s admissions and full co-operation with the FMA’s investigation since 2019. Any larger discount is reserved for cases where the wrongful party provides a significantly enhanced degree of co-operation.
• A further 5% discount to acknowledge the self-reporting and the fact it was MAS’s first contravention of the FMCA.

Our view

As with most things, prevention is the best cure. The new financial conduct regulatory regime for banks and insurers should ensure more effective processes, policies and systems to stop the breaches which occurred in MAS from happening in the first place. You can read more about the Financial Markets (Conduct of Institutions) Amendment Act 2022 (COFI Act) here.

Nevertheless, historic and ongoing breaches are still likely to arise. The MAS penalty decision is the latest example to financial institutions that a pecuniary penalty is likely in such cases, and the extent of such a penalty will be influenced by a range of factors. Self-reporting, early admissions, co-operation with the FMA, and customer remediation are all sure-fire ways to keep a penalty as low as possible.

Special thanks to Madina Miyakhel for her assistance in writing this article.