Proposals to make claims handling subject to laws requiring financial services to be delivered efficiently, honestly and fairly have been released as the Government continues its response to the Hayne royal commission.

A Treasury consultation paper proposes a two-pronged approach that would remove the exemption of claims handling from the Corporations Act financial service definition, while aiming to ensure it is not caught up in rules related to advising or dealing.

The current exemption limits action the Australian Securities and Investments Commission (ASIC) can take over claim problems.

But now “regulation of insurance claims handling as a financial service under the Corporations Act will allow ASIC to enforce a higher standard of behaviour in the industry and ensure consumers can expect the same standard from insurers handling claims as they can from all financial service providers,” Treasurer Josh Frydenberg said today.

The royal commission’s final report says Youi and Suncorp case studies involving home insurance claims after natural disasters and severe weather demonstrate the need to remove the exemption.

“If it were to be said that it would place an extra burden of cost on one or more insurers or on the industry generally, the argument would itself be the most powerful demonstration of the need to impose the obligation,” Commissioner Hayne said.

Numerous submissions to the inquiry supported the change, with the Insurance Council of Australia (ICA) saying it backed the recommendation in principle, while calling for consultation to prevent unintended impacts.

ICA understands the exception was originally put in place so discussions could be had with policyholders at claims time without triggering financial advice requirements, while also ensuring parties such as smash repairers weren’t caught up in the rules.

Treasury says its proposal will probably include service providers such as investigators, loss adjusters and assessors, collection agents, claims management services and “other persons that ASIC declares are included”.

It asks for comment on whether the changes should apply to all insurance claims or only services provided to retail clients.

Mr Frydenberg says the consultation will identify the best way forward.

He says its approach is superior to a “defective” bill introduced by the Australian Labor Party last month. Labor has pushed for reform as a matter of urgency, with claims rolling in following the Townsville floods.

But Parliament has adjourned until a budget sitting in early April, ahead of an expected May election, likely delaying any legislative changes until at least later in the year.

Submissions on the consultation paper are due by March 29. Details are available here.