Federal Treasury will allow discretionary mutual funds (DMFs) and unauthorised foreign insurers (UFIs) to continue to operate in Australia without adhering to local prudential requirements, as long as they operate from countries with comparable regulation.

The decision hasn’t gone down well with the industry, which is concerned that the Potts Report into the use of DMFs and UFIs only scratches the surface and will not provide real protection for consumers.

UFIs operating in various countries often offer much cheaper and easily attainable insurance but are not subject to Australian regulation. So if an insurer collapses or refuses to pay a claim, local consumers will get no protection other than what may exist in the country of origin.

The Insurance Council of Australia (ICA) has reservations about the report, which was commissioned by Treasury in response to HIH Royal Commission recommendations and was carried out by Gary Potts, a former Treasury executive director.

ICA says the report, which was released in abridged form more than four months behind schedule, may not benefit consumers and the local industry. And Deputy CEO Dallas Booth isn’t convinced Treasury has captured the intent of the royal commission recommendations.

He says the industry wants a level playing field for Australian licensed insurers and UFIs, as well as safeguards for consumers.

“These proposals have done nothing to make a more level playing field for insurers authorised in Australia, which are not only subject to strict prudential requirements and associated capital costs, but – as the report acknowledges – are also often at a competitive disadvantage because of Australian taxes on insurance,” he said.

“While corporations and other sophisticated buyers of insurance are likely to know the dangers of buying offshore, the HIH experience has dramatically shown that third parties – for example, ordinary people who make an injury claim on a company’s liability policy – are left vulnerable.”

The Federal Government will implement the Potts recommendations, although Treasurer Peter Costello refused to release the entire report because of the “commercial sensitivity” of some material.

National Insurance Brokers Association CEO Noel Pettersen says he is keen for the Treasury to explain “gaps in the recommendations”.

“It is extremely unusual for only a brief summary of the report to be issued,” he said. “As a result, there is no detail and it is likely to create considerable confusion and uncertainty in the market.

“Questions as to when it starts and what happens to existing insurance with UFIs and mutuals still remain to be answered.”