A Treasury consultation paper proposes a two-pronged approach to making claims handling subject to Corporations Act requirements for financial services to be delivered efficiently, honestly and fairly.

It proposes removing the exemption of claims handling from the financial service definition, while making changes to ensure it is not caught in rules related to advising or dealing.

The Hayne royal commission recommended removing the exemption, which limits the Australian Securities and Investments Commission’s (ASIC) power to act on claims problems.

“The Government acknowledges there are industry concerns with the removal of the exemption leading to a number of unintended consequences,” Treasury says.

“Responses to the consultation paper will assist in identifying these issues so the royal commission’s recommendation can be implemented without increasingly regulatory complexity, while ensuring insurers are subject to appropriate obligations.”

Numerous submissions to the royal commission supported the change, with the Insurance Council of Australia (ICA) saying it backs the recommendation in principle, while calling for consultation to prevent unintended impacts.

ICA understands the exception was put in place so discussions could take place with policyholders at claims time without triggering financial advice requirements, while also ensuring parties such as smash repairers were not caught in the rules.

Treasury says its proposal will probably include service providers such as investigators, loss adjusters and assessors, collection agents, claims management services and “other persons that ASIC declares are included”.

It asks for comment on whether the changes should apply to all insurance claims or only services provided to retail clients. Submissions are due by March 29. Details are available here.