Post-disaster cash settlements could become a thing of the past after a Treasury consultation on removing the claims handling exemption from the financial services definition.

This is one potential scenario for the general insurance industry as Canberra moves to have the handling and settlement of claims made subject to the Corporations Act, as recommended by the Hayne royal commission.

“There will be opportunities for consumer action groups and the Australian Securities and Investments Commission (ASIC) to hold insurers more accountable if they do not change claims handling practices,” law firm The Fold Legal says.

“This could spell the end of current practices such as cash settlements following a natural disaster. A focus on protecting the most vulnerable insurance consumers is likely to prevail to temper the increased compliance and regulatory costs.”

The law firm flags the change in a report on the Hayne proposal, published jointly with Finity Consulting.

It says the transition to claims handling as a regulated financial service will be clearer after Treasury finishes the current consultation and draft legislation is released.

The draft legislation could be released before the federal election this year.

Finity notes the cost and disruption to general insurers “could be a little or a lot” depending on how the law is changed, how ASIC rules and guidance are developed and how they are applied and supervised in practice.

The Treasury consultation closes on Friday.