A4 Miscellaneous Financial Facility Statement

1. Background
   1. Mutuals Matter Pty Ltd (MM) was incorporated in Australia in September 2023 and is based in Melbourne. It will not provide financial services until it is licensed to do so. It may provide administrative and clerical services prior to the licence being issued.
   1. MM sole shareholder is JLN Corporate Services Pty Ltd (JLN) and it has nominated Jodie Nicholls (MD) as the shareholder director.
   1. Until recently the MD was the CEO/ Managing Director and responsible manager for Regis Mutual Management Pty Ltd an AFS Licensee which promotes and managers mutuals in Australia.
   1. The MD is a responsible manager for Unimutual Ltd and Employsure Mutual Ltd which are both mutuals providing discretionary risk products to members.
   1. The other RM is Rob Ellis whose experience in the areas of broking, general insurance and risk mutuals is extensive.
   1. The promotion and management of discretionary risk mutuals is a specialised field where MM’s RMs have specific expertise based on their involvement with the other mutuals which have been established in Australia over the last 25 years.
2. Description of Business 
   1. MM has been formed to:
      1. Provide financial services on behalf of mutuals with AFS licences with authorisations as product issuers. These services will include:
         1. Financial product advice to members of the mutual concerning its financial product and a comparison with general insurance;
         1. Arranging for members of the mutual to acquire a financial product from the mutual; and
         1. Arranging for the issue of the mutual’s financial products once the mutual’s Board has, in its absolute discretion approved the member’s membership and discretionary protections. When issuing such products, it will operate under a binder as the agent of the product issuer;
         1. Provide assistance to the mutuals in sourcing reinsurance as well as assisting the members source general insurance for liability risks specific to their needs.;
         1. Assist mutuals in the investigation and management of claims from members and also assisting the mutuals and members making claims under their general insurance policies for areas of risk not covered by the mutual’s discretionary risk or which is above or below the mutual’s discretionary retention.
      1. provide claims management and non-financial technical services.
   1. Further details of the business are provided in detail in the A5 Business Description proof.

• While the provision of financial services requiring a general insurance authorisation is an important aspect of the financial services provided by MM the bulk of its services related to the provision of financial services is specific to miscellaneous risk products.

Miscellaneous mutual risk products (retail and wholesale clients)

• MM will promote the use of mutuals issuing discretionary risk cover as an alternative means of managing financial risk. MM’s core business will include the promotion of mutuals to associations and organisations where members share common risks.
  • If the concept of a mutual is successfully promoted by MM, then the mutual, as the product issuer will apply for an AFS licensee as a product issuer.  The management of the mutual may be provided by MM acting as an authorised licensee pursuant to an outsourcing agreement or as an AFS licensee operating under an intermediary authorisation from an unlicensed product issuer.
  • In the period before an organisation commits to forming a mutual, MM will provide general financial product advice comparing the benefits of discretionary risk products against general insurance policies. MM will also be involved in arranging for the members of the association to acquire a financial product being a miscellaneous mutual risk product.
  • Membership of the mutuals established by MM will provide members with the ability to manage the financial risks associated with their business or personal activities. The entity providing the miscellaneous mutual products to its members will always be a body corporate and will not be a managed investment scheme.

What facilities will MM promote?

• MM wishes to provide financial services as well as technical and management services to potential and actual issuers of miscellaneous financial risk products and to the acquirers of those products.  The model which will be used by MM when it is providing financial product advice will be one where:
  • The product issuer will always be a body corporate namely the mutual.
  • Protections are offered to members under a contract or rules setting out the basis of participation. These are set out in the Product Disclosure Statement which includes the Constitution of the mutual and the Rules relevant to membership.
  • The mutual will provide discretionary benefits to members. The discretion will be exercised by the board of the mutual and be referenced to the terms and conditions of the protections.
  • Participants will pay a contribution to the mutual for the protections.
  • The members of the mutual may be wholesale or retail depending on the rules of the relevant mutual.
  • The body corporate may or may not insure itself for its liability to members for claims paid in accordance with the discretionary benefits.
  • The protections offered by the mutual will provide members with the ability to manage the financial risks associated with their business or domestic activities. 
  • This facility will seek to reduce the cost of the financial risks affecting the business operations and/or domestic activities of the members, as an affordable alternative to traditional insurance for members, or to supplement traditional insurance. 
  • The products issued in relation to the facility are acquired by a member to manage financial risk.  However, they will not be insurance because the provision of protection is based solely on a discretion.  Accordingly, the product will not be an insurance contract and will fall within the scope of a miscellaneous financial facility – miscellaneous risk product. 
• Are discretionary mutual products a financial product?
  • The provision of financial services and financial products is regulated by the Corporations Act, 2001 (Cth) (Act) and Chapter 7 of that Act.
  • Section 736A defines a financial product as a facility or arrangement through which, or through the acquisition of which a person does one or more of the following;
  • Makes a financial investment;
  • Manages a financial risk; or
  • Makes noncash payments.
  • For the purposes of Chapter 7 a person manages financial risk if they manage the financial consequences to them of circumstances happening.
  • Providing a facility or arrangement by which the members of a mutual manage the financial consequences of risk to them of certain specified risks occurring falls within the definition of a financial risk product for the purposes of the Act.

Why is a discretionary risk transfer product not an insurance product?

• The financial product is not a contract of insurance as the membership of a mutual offering discretionary protections does not provide a right to indemnity for any claim for loss or liability. The financial product gives the member the right to have a claim for loss considered by the mutual and if accepted, benefits paid. The right to have a claim for benefits considered are at the discretion of the mutual.
  • The definition of a financial product for the purposes of Chapter 7 in Section 764A (1) specifically includes a “contract of insurance that is not a life policy” as well as a “life insurance policy”.
  • The courts have adopted a narrow approach in determining what is a ‘benefit’ for the purposes of determining whether a contract is one of insurance.
  • The courts have determined that the mere right to have an application for indemnity considered does not satisfy the requirements of being a contract of insurance[1].  
  • In Medical Defence Union v Dept of Trade (MDU Case), Megarry VC held[2] that:

“When a person insures…he is contracting for the certainty of payment in specified events, and not the merely for the certainty of proper consideration being given to his claim that a discretion to make payment in those events should be exercised in his favour.  The certainty must be direct, and not at one remove.”

• At 92-3 Megarry V-C observed:

“As I have indicated, the short point is whether, in the first of the three elements of insurance, it suffices that on the occurrence of the event the assured becomes entitled to ‘some benefit,’ or whether this does not suffice unless it amounts to ‘money or money’s worth’. The right to have a request relating to proceedings or an indemnity properly considered by the union is plainly a benefit, but equally plainly it is not money or moneys worth.”

• At 97 he stated:

What I do decide is that ‘benefit’ is far too wide an expression, and I reject it. In particular, I reject the contention that the right to have an application properly considered suffices for a contract of insurance.”

• In the recent decision of Barclay MIS Group of Companies Pty Ltd v ASIC[3] Dowsett J had to consider whether certain services provided by Barclay and certain proposed plans were contracts of insurance at common law. 
  • In his decision, Dowsett J confirmed the principle that a discretionary contract is unlikely to be a contract of insurance.  Following the observations of the court in the MDU Case, Dowsett J determined that the discretionary nature of the obligations placed on Barclay under a proposed plan meant the plan was not a contract of insurance.
  • In the model of a discretionary mutual promoted and managed by MM the Board of the mutual exercises the following absolute discretions in relation to its members:
  • The discretion to admit a person to membership; and
  • The discretion to consider a claim for assistance if the member lodges one; and
  • The discretion to decide how much up to a specified dollar value the member is to receive if a claim is accepted.
  • The mutual does not enter into contracts of insurance with its members for a specified risk nor is there any contractual obligation that the mutual must indemnify its members. The Board of the mutual always has the absolute discretion to provide financial assistance to its members.
  • The discretionary protection provided by the mutuals promoted and managed by MM does not provide a financial product that is a contract of insurance because there is no contractual right for one party to indemnify the other. The discretionary protection only entitles the member of the mutual to request the mutual’s Board to consider the member’s request for assistance. The Board is under no contractual obligation to accept the member’s request nor does the member have a contractual right to indemnity. The Board’s exercise of its discretion is absolute.
  • The financial product provided by the mutuals promoted by MM issue financial products in the form of a facility for the management of risk which is not an insurance product. For the purposes of an AFS licence this requires an authorisation to provide financial services for miscellaneous risk products.

Mutuals offering discretionary cover are not managed investment schemes

• The Act defines a managed investment scheme as a scheme where:
  • People contribute money or money’s worth as consideration to acquire rights to benefits produced by the scheme; and
  • The contributions are pooled or used in a common enterprise to produce financial benefits for the members who hold interests in the scheme; and
  • The members do not have day to day control over the operation of the scheme.
  • The mutuals promoted and managed by MM are not managed investment schemes because Section 9 of the Act excludes a body corporate from the definition. MM only uses a model for mutuals that are incorporated and as such are excluded from the definition of a managed investment scheme.
  • MM does not promote mutuals that use a trust structure nor will the mutuals it assists or establishes use a trust structure. The mutuals will be body corporates owned by the members and operated on a one member one vote basis.
• Why is the miscellaneous risk facility authorisation required?
  • The financial product promoted by MM is a facility through which or through the acquisition of which a person (members of the mutual) manages financial risk within the meaning of Section 763(c)(a).
  • A member of a mutual offering discretionary cover manages the financial consequences to themselves of loss from liability that may arise when the circumstances in their membership package happens.
  • The financial product issued by the mutual is not a contract of insurance as the discretionary cover issued by the mutual does not provide a right to indemnity for any claim for loss or liability.
  • The financial product gives the member the right to have a claim for loss considered by the mutual, and if that claim is accepted, benefits are paid.
  • The member nominates in their membership enrolment the specific areas of financial risk that they wish to manage through membership in the mutual. The right to have a claim for benefits considered are at the discretion of the mutual, who will exercise that discretion within the rules of the mutual.
  • The courts have decided the issue of discretionary cover in the past and determined that members do not have an insurance contract by virtue of the discretionary element in the benefits. Accordingly, the financial product does not fall within the definition of an insurance product.
  • Sparke Helmore (SH) is MM’s legal advisor and the Special Counsel assisting MM acted for the first AFS licence authorisation for miscellaneous mutual risk issued by ASIC. Since that time, she has acted for many other issuers of miscellaneous mutual risk products and obtained AFS licences for these entities. SH have advised MM that the financial products and services MM wishes to provide require authorisation for miscellaneous risk.
• Conclusion
  • For the reasons outlined above MM seeks authorisation to provide financial product advice on and to deal in a miscellaneous financial risk product.
  • MM also requires the general insurance authorisation to provide related financial services to its client mutuals and the members of the mutuals.

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[1] Medical Defence Union Ltd v Department of Trade [1980] 1 Ch 82.

[2] At 95.

[3] [2002] FCA 1606; BC200207932.