The Federal Government will accept the Hayne royal commission recommendation to include the handling and settlement of insurance claims under the definition of financial service.

“The Government acknowledges that inappropriate claims handling practices can cause significant consumer detriment, as highlighted in the hearings,” Assistant Treasurer Stuart Robert told the Financial Services Council (FSC) Life Insurance Conference.

A Treasury consultation paper on removing the claims handling exemption for general and life insurance was put on hold last year due to an overlap with the remit of the royal commission. Commission Counsel Assisting Rowena Orr raised the issue multiple times as cases of poor claims handling emerged.

The paper now advises making changes to ensure claims handling is not caught in rules related to advising or dealing. The exemption was in place so discussions about claims could be held with policyholders without triggering financial advice requirements.

The exemption limits the corporate regulator’s power to act on claims problems.

The FSC was opposed to the claims inclusion, with CEO Sally Loane previously saying the exemption helps claims staff assist policyholders.

“If they strayed into an area that could be perceived as personal advice, they would not be able to give that advice,” she said.

“They shouldn’t be in the same category as a financial adviser.”

The Insurance Council of Australia supports the recommendation in principle, while calling for consultation to avoid unintended impacts.

The Government is also backing calls from the Australian Financial Complaints Authority for the Life Insurance Code of Practice to be legally binding and enforceable.

“We expect the FSC will take the important steps to seek the Australian Securities and Investments Commission’s (ASIC) approval of the code,” Mr Robert said. “In due course, we expect the FSC will work co-operatively with ASIC to have the terms that govern the contract made between the insurer and the policyholder designated as ‘enforceable code provisions’.”