Commonwealth Bank will stop selling two consumer credit insurance products that were provided to customers who may have been ineligible to claim, and has set aside $16 million for refunds.

The decision, which applies to its Credit Card Plus (CCP) and Personal Loan Protection (PLP) products, follows a review of the bank’s consumer credit insurance offering.

The bank says it is working with the Australian Securities and Investments Commission (ASIC) on refunds for people who may have been unable to receive all the employment-related benefits.

“While it is fundamental to the nature of insurance products that many customers who have them will not claim on them, and indeed they hope they won’t, we need to ensure they are at least properly eligible to do so,” Retail Banking Services Group Executive Matt Comyn said.

Commonwealth Bank expects to provide refunds to about 140,000 customers of PLP and Home Loan Protection products, following a similar refund program started last year for some CCP customers.

The bank is working with AIA, which acquired the CommInsure life business, to deliver a new product range that it says will build on recent improvements to design and sales processes developed by ASIC and the industry.

The royal commission into financial services misconduct will examine add-on insurance during its first round of hearings running from tomorrow to March 23, with Commonwealth Bank products related to home and personal loans and credit cards listed as a case study.

The Consumer Action Law Centre and Financial Counselling Australia say sales of “junk” consumer credit cover by banks and insurers should stop immediately.

“It’s good to see Commonwealth Bank take this action with a refund program attached,” law centre CEO Gerard Brody said.

“Our organisations have seen the impact of these junk products first hand. Whether it’s a couple of hundred dollars or a couple of thousand dollars, this money should have been going on food, bills and education, not being pinched by banks and insurance companies.”