The financial regulator is threatening action against lenders - including the major banks - over the sale of add-on loan and credit card insurance that "has consistently failed consumers".
An Australian Securities and Investments Commission report released on Thursday concluded that consumer credit insurance, which is often added on when a person takes out a loan or gets a credit card, represented "extremely poor value for money" and was regularly mis-sold.
ASIC said the way in which people were sold the insurance caused harm as "telephone sales staff used high-pressure selling and other unfair sales practices" and customers were advised to buy unsuitable policies.
Advocacy group Consumer Action welcomed ASIC's report, saying it "confirms that consumer credit insurance... is junk".
"Put simply, add-on insurance is a very lucrative business for banks and other lenders but results in more harm than good for their customers," Consumer Action CEO Gerard Brody said.
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ASIC said that for every dollar paid in premiums on credit card insurance, customers on average received only 11 cents in claims.
"We are deeply troubled by the findings in our report, and the stories they tell of unfair practices occurring within Australia's largest and most well-known financial institutions," ASIC Commissioner Sean Hughes said.
"Lenders and insurers have had more than enough time to improve sales practices and provide better value for consumers."
The regulator warned lenders to clean up their act or face civil penalties over junk insurance, which was a focus of last year's financial services royal commission and has led to refunds from the likes of Commonwealth Bank, QBE and Suncorp.
