The Insurance Council of Australia (ICA) has warned changes to the definition of retail client, floated as part of a financial laws review, could have an adverse impact on small business customers.

The definition issue has been raised by the Australian Law Reform Commission (ALRC) for discussion as part of a project aimed at removing complexity from the financial services legal framework.

ICA says current wordings take account of general insurance products, and simplification changes focussing only on whether a person is an individual or “small business” could lead to a “significant and inappropriate expansion” of the retail definition reach.

“The imposition on business customers, for instance, of retail client protections could be obstructive, for instance if the anti-hawking prohibitions prevented or delayed a discussion about insurance products,” ICA says in a submission.

“Many business customers also use insurance brokers, that have a fiduciary duty to act in those customers' best interests.”

Falling within the retail client definition triggers greater protections, reflected in the introduction of design and distribution obligations, anti-hawking restrictions and other conduct rules, and the need to provide product disclosure statements.

Section 761G (5) of the Corporations Act currently says a general insurance product is acquired as a retail client if the person is an individual or a small business and the product is on a list that includes home, motor, travel and several other products.

ICA says products sold to small businesses also include management liability, professional indemnity, cyber and other commercial classes, which may have multiple variants, and applying “retail client” regulation to the full suite “would have a significant impact on the products, their distribution and associated costs”.

The ALRC will release its next interim report on September 30 as part of a three-year inquiry that will conclude at the end of November 2023.

ICA says overall it supports the reduction of complexity in the regulatory system, while reiterating its call for reviews after reforms are put in place.

Insurers have has also pointed out the advantages of UK arrangements, which include longer consultation periods and regulatory pipelines with a 24-month horizon, signalling changes to come and allowing for better preparation and planning.