SYDNEY (Reuters) - Some of the largest insurers in Australia, including the local units of multinationals, may have broken laws - some of which carry criminal penalties - a government-backed inquiry into financial sector conduct heard on Friday.

Rounding up 10 days of public hearings, lawyers assisting the Royal Commission detailed alleged misconduct at Commonwealth Bank of Australia CBA.AX and AMP Ltd AMP.AX, as well as subsidiaries of Japan's Dai-ichi Life Holdings Inc 8750.T and Germany's Allianz SE ALVG.DE, plus six other insurers.

The inquiry also heard general insurers breached self-imposed regulations on over 31,000 occasions without penalty, casting doubt on the industry’s ability to regulate itself.

The revelations are the latest in a year-long inquiry into the financial sector set up after a series of scandals at major banks. Now in its penultimate round of fortnightly hearings, the inquiry has heard instances of fraud and deception, and led to executive resignations.

The inquiry can recommend regulations and prosecutions, and is due to make an initial report by the end of September.

At the current round of hearings focusing on insurers, AMP Ltd AMP.AX conceded its systems had deducted life insurance premiums from the pension fund accounts of deceased customers.

In doing so, AMP may have breached pension, insurance and corporation legislation, and by not reporting the problem to regulators, may also have breached laws carrying criminal penalties, the inquiry heard.

All firms named at the hearings have the right to respond to the Commission preliminary findings by Oct. 1.

“AMP strenuously rejects the assertion that it committed a criminal breach of its breach reporting obligations,” a spokeswoman told Reuters.

The former judge leading the inquiry, Kenneth Hayne, said it was clear the insurer was not entitled to that money.

“Whether or not it’s a breach of those provisions, it’s more basic than that, isn’t it...?” Hayne said at the hearing. “By what right is it deducted?”

MISLEADING AND DECEPTIVE

The inquiry heard Commonwealth Bank of Australia CBA.AX may have broken the law with advertising deemed misleading and deceptive, because it relied on outdated technical definitions to avoid payouts for trauma policies covering heart attacks.

As an example, the inquiry reviewed a payout rejection by CBA based on outdated criterion under which the customer’s heart attack was not considered severe enough.

Insurers in Australia are excluded from laws requiring fair contracts and dictating the responsibility to handle policy claims honestly and efficiently. They are however required to act in good faith and must otherwise obey company, insurance and contract laws.

Last week, the inquiry heard Dai-ichi unit TAL Life Ltd hired a private investigator who covertly filmed a mentally ill woman in a bid to find evidence to avoid paying her claim.

“It’s open to find that TAL systemically breached its duty of good faith when communicating with policyholders,” said Rowena Orr, a lawyer assisting the inquiry.

At another hearing, the inquiry was told of Allianz’s local unit commissioning an independent review of its culture, but dismissing the outcome because it did not like the findings.

Allianz may also have breached sections of the Corporations Act and prudential laws under the responsibility of the Australian Prudential Regulation Authority, Orr said.

The inquiry also heard of insurers paying extremely high commissions to third parties to sell unsuitable add-on insurance products that were often worthless.

General insurers are excluded from regulations prohibiting the payment of commission to third parties for selling their policies, even in instances of conflicts of interest.

Media representatives from CBA, TAL and Allianz did not immediately respond to Reuters emails seeking comment.