The Federal Government has proposed an enforced four-day pause in the add-on insurance sales process as part of sweeping reforms to prevent consumers buying products they don’t need in high-pressure situations.

Treasury has taken the extra step of releasing a consultation paper on planned changes, ahead of circulating draft legislation, given no similar jurisdiction to Australia has an industry-wide deferred sales model for add-on cover.

The market is also diverse and complex, including at least 28 distinct product lines, and extends “well beyond” the financial sector to include areas such as travel agents, airlines and mobile phone retailers.

“The Government recognises the diversity of add-on insurance products available and acknowledges that different products cause varying degrees of consumer harm,” the Treasury paper says.

The Hayne royal commission recommended an industry-wide deferred sales model after hearing evidence of shoddy practices, while the Australian Securities and Investments Commission (ASIC) has consulted on reforms for products sold via car yards and has examined consumer credit insurance.

Proposals in the Treasury paper would capture all add-on insurance products by default, minimising exemptions, and would address the issue through a three-tier model.

Under the default second tier, intermediaries or insurers would only be able to contact the consumer by writing four days after the underlying product sale, and only once.

Consumers would have the option of shortening the pause to one day to ensure they are not inconvenienced and to limit underinsurance.

“An appropriate deferral length should be long enough to allow the ‘halo effect’ of purchasing the primary product or financing agreement to wear off, so the consumer is able to dispassionately assess their need for insurance,” Treasury says.

The model’s first tier would see ASIC use new product intervention powers for “the most egregious add-on” products that cause detriment, while products in the third tier could be given case-by-case exemptions to the four-day rule.

“This will protect consumers where the benefits of being able to purchase add-on insurance immediately outweigh the benefits of deferring the purchase,” the paper says.

Products could gain an exemption where they are historically good value for money and well understood by consumers, there’s strong competition and a high risk of underinsurance.

Add-on insurance sold in a standalone market would remain outside the scope of the model and it would only apply where cover is offered or sold at the same time as the main purchased item.

“For example, pet insurance would only be subject to the deferred sales model in circumstances where it is offered at the same time or in conjunction with the purchase of the pet that it covers, or services provided in relation to the pet,” it says.

The Government plans to introduce legislation by June next year and has indicated there will be a transition period.

Submissions on the consultation paper, available here, are due by September 30.