There is no way an instructor should be making any medical assessment of a student other than their ability to function in the duties presented to them, ie 'sir you have no arms and the plane is not equipped for your abilities'. They are not qualified in anyway to make accurate medical diagnoses or even conduct a physical or mental assessment other than the obvious and can be prejudiced in findings based on personal experience rather than objective analyses. Once somebody is highlighted as suspect by someone that is not qualified what then happens? will they have to proceed through countless hoops to prove fitness, when they have already been through a medical examination for that exact purpose.
I've seen enough instructors that have ruined students dreams through incompetence in teaching and blaming the student for being lazy and lacking motivation and other issues. You then want to arm these individuals with the ability to tarnish somebodies medical history without any professional qualifications.
Does a driving instructor have to assess mental fitness?
Seriously the government needs to take its focus from weeding out the problem individuals and deal with whats causing the issues in the first place, but that's an unpleasant discussion they don't want to deal with.