The National Insurance Brokers Association (NIBA) and the Insurance Council of Australia (ICA) are calling for clarification on new claims-handling legislation due to concerns about how it will be applied in practice.

NIBA says it has been advised the legislation is not intended to catch brokers when they are providing claims-handling and settling services for policyholders, but would apply when they are providing services for insurers.

But the draft legislation as it is currently worded suggests broker services would be covered in both scenarios.

“This would be contrary to the intent as explained to NIBA by Treasury and is a significant issue of concern if it is the intent,” NIBA says.

The legislation, introduced following Hayne royal commission recommendations, will make claims-handling a financial service, and therefore subject to obligations to act efficiently, honestly and fairly.

Certain claims service providers acting for insurers will also need an Australian Financial Services Licence or will need to act as a representative of a licensee.

ICA says compliance rules could undermine commitments to use local tradespeople to ramp up assistance after catastrophes – such as this summer’s bushfires – if they are caught up in the obligations.

“Satisfying the compliance requirements in the Corporations Act governing financial services may be beyond those small-scale operations,” it says. “This could potentially cause a shift to reliance on larger service providers from outside the disaster area.”

ICA and consumer groups say the legislation should require currently unregulated insurance claims advocates to hold licences.

“It is difficult to justify the exclusion of claims advocates from the new regulatory framework,” ICA says. “They have a substantial impact on consumer outcomes on par with other actors in the claims management process. All other such actors will be regulated as a result of the proposed legislation.”

A joint submission from the Consumer Action Law Centre (CALC), the Financial Rights Legal Centre and Choice also says the legislation should be extended to claims advisers, which typically charge a percentage of homeowner cash settlements in return for helping with claims.

The submission says a cash payment may not be in a person’s best interests, while a percentage rate offers an incentive to inflate or drag out claims to boost fees.