The National Insurance Brokers Association (NIBA) has called for insurance to be withdrawn from new legislation designed to help eradicate the mis-selling of financial products.

A Senate inquiry is under way into provisions of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018.

The legislation aims to force financial services companies to identify clear target markets for products and appropriate distribution channels, and would allow regulators to intervene at an early stage if consumer harm is detected.

Consumer groups believe this will prevent scandals such as the inappropriate sale of add-on insurance through car dealerships.

But in submissions published last week, the Insurance Council of Australia (ICA) and National Insurance Brokers Association (NIBA) outline fears over the impact on general insurance.

NIBA CEO Dallas Booth told insuranceNEWS.com.au this is another example of mainstream general insurance products being caught up in reforms primarily targeted at other sectors.

“I believe this is designed for investment products, but the impact on insurance could be huge,” he said. “We don’t have any clear picture at all about what the target market determinations will look like and how they are going to work.”

In its submission NIBA expresses concern at the Bill’s impact on brokers.

“We are very concerned that a consumer who might see themselves as falling within a target market might conclude the product is suitable and appropriate for their individual needs,” NIBA says.

“We believe this is very dangerous and potentially very misleading in the hands of consumers.

“Only those providing personal advice such as insurance brokers can advise on whether the product meets the consumer’s individual needs and objectives.

“To suggest insurers and their agents are doing more in the target market determination by reason of this Bill may unintentionally reduce the number of consumers seeking personal advice and the protection that comes with it.

“This is not a good result for the community.”

NIBA says insurance should not be included in the Bill until further consultation is carried out in light of the Hayne royal commission and other reviews.

“If this reasonable approach is not accepted, then urgent discussion is needed to fix what are significant flaws in the proposed Bill,” it says.

The ICA submission says its members are “deeply concerned” the Bill will “hinder rather than improve the likelihood that consumers buy insurance suitable for their needs”.

ICA says the Bill’s provisions have not been designed “to mesh easily with the unique characteristics of general insurance products”. It also warns the distribution obligations may mean insurers have to collect underwriting information again at renewal.

“This would fundamentally change the way insurance policies are regulated under the [Insurance Contracts Act] and require extensive systems changes at substantial cost to the industry.

“A large member has estimated the cost of overhauling its renewal processes to require the re-collection of information will [be] $62 million annually. This is on top of the one-off systems changes of approximately $14 million.”

This would result in higher premiums, ICA warns.

Allianz has also made a submission, echoing NIBA’s concern at a lack of clarity on target market determinations.

“Allianz is concerned that in consultation between Treasury, ASIC, consumer groups and industry, no one group could agree on what ‘level’ the target market should be,” the submission says.

“Unless one can properly determine the target market, which is not reasonably possible based on the current Bill, an insurer has no reasonable compliance certainty as to whether its [target market determination] has been correctly made or whether it is appropriate. Significant civil and criminal penalties apply if this is not the case.”

A submission endorsed by several consumer organisations, including Choice, the Consumer Action Law Centre and the Financial Rights Legal Centre, “strongly supports” the reforms.

“We believe [the reforms] would significantly improve consumer outcomes and improve trust and confidence in the financial system,” the submission says.

“The design and distribution obligations should help to achieve a cultural shift within financial companies away from simply ‘selling’ financial products towards designing and distributing suitable products that meet customer needs.

“Further, equipping the Australian Securities and Investments Commission with product intervention powers would allow the regulator to intervene before consumer harm occurs and deter misconduct by financial firms.”

Consumer Action Law Centre Senior Policy Officer Susan Quinn told insuranceNEWS.com.au consumer groups believe the legislation should go even further.

“We would ask that insurers are required to define who the target market is not, as well as who it is,” she said.

“Most of the problems have been around selling products to those who do not understand them or who cannot claim on them.”