Consumer groups say they are “extremely disappointed” with many of the proposals suggested by the Quality of Advice review and have called for a prohibition on life, general and consumer credit insurance commissions and a move away from using disclosure as a way to reduce harm.

Consumer credit insurance continues to have issues and the Australian Competition and Consumer Commission (ACCC) northern Australian insurance market inquiry provides another prominent example highlighting consumer harm caused by a conflicted remuneration model, a submission says.

“Under a fee-for-service model, people will still be able to purchase general insurance through an intermediary,” the groups say. “However, banning commissions will reduce conflicts that drive poor consumer outcomes across the industry.”

Australian Prudential Regulation Authority data shows consumer credit insurance has a claims paid ratio of only 31%, despite significant reforms following the Hayne royal commission around the sale of the products, the submission says.

Consumer groups also point to the ACCC three-year northern Australia inquiry, which recommended a ban on conflicted remuneration for retail products sold through brokers.

The submission from Choice, Consumer Action Law Centre, Financial Counselling Australia, Consumer Credit Legal Service WA and Super Consumers Australia responds to a paper on conflicted remuneration released by the Quality of Advice review at the start of the month.

Reviewer Michelle Levy has proposed that the insurance exemption to the ban on conflicted remuneration continue, but that intermediaries should obtain a client’s informed consent in writing to receive a commission or other benefit.

The consumer groups say aiming to reduce harm by disclosing conflicts is an “ill-conceived approach” that flies in the face of decades of empirical evidence from regulators and academics showing disclosure is ineffective and often harmful.

“The solution to reduce widespread consumer harm caused by conflicted remuneration is to remove conflicts of interest, not disclose them,” it says.

“Disclosing conflicts of interest regularly leads to perverse outcomes, including consumers placing more trust in an adviser, when they should be more sceptical of the advice.”

Disclosure can also backfire by giving advisers a “moral licence” to recommend biased choices to clients, it says, pointing to a publication released by the Australian Securities and Investments Commission and the Dutch Authority for Financial Markets.

Ms Levy, in supporting continuing the insurance exemption to the ban on conflicted remuneration, notes laws such as design and distribution obligations, anti-hawking rules and deferred sales for add-on products have reduced risks, while proposals outlined in her initial proposals paper will also assist consumers.

The proposals will also promote alternative sources of advice - digital advice and more direct advice - and by reducing costs may encourage more advisers to charge fees and more clients to turn to advisers who charge advice fees, Ms Levy’s paper says.

“In these circumstances, requiring a client to give their consent to the provision of a commission or other benefit should have more work to do: they will have alternatives,” she says.