ASIC's power to issue stop orders

DDO is like karaoke: it is something that everyone probably does not do quite as well as they think. This should give pause for thought for general insurers with ASIC enforcement of the regime underway. In this article, we explore ASIC's powers to make a stop order and the potential implications for insurers and customers alike.

Section 994J of the Corporations Act 2001 (Cth) gives ASIC the power to issue both interim and permanent stop orders.

For permanent stop orders, ASIC is required to first hold a hearing and allow a reasonable opportunity for submissions to be made before the order can take effect.

If ASIC considers any delay in making a permanent order would be prejudicial to the public interest, an interim order can be made with effect for up to 21 days without first holding a hearing. It is not hard to imagine how delay could be prejudicial given ASIC would presumably not contemplate making a stop order in the first place unless it was concerned about the continued sale of the product.

Regardless of the type of stop order, the likely practical outcome is that the product has to be pulled from the market until ASIC's concerns are addressed.

No insurance stop orders… yet!

To date, ASIC has used the stop order power on more than 20 occasions. In all instances it has first made an interim order, some of these have been made permanent.

So far, ASIC has only issued stop orders for investment and credit products. To date, none have been issued for insurance products. However, ASIC has made it clear that DDO implementation is a priority for the Regulator this year and it is no secret that general insurance is on their list.

But general insurance, and in particular, annually renewing general insurance (which most personal lines are), presents unique challenges when you consider the implications of a stop order, whether permanent or interim.

Timing challenges for renewals

The main issue would be timing. At the time the stop order is made, there are two key stages of the renewal cycle which would adversely affect customers.

For those customers who had already received their renewal notice (but had not yet renewed it), the insurer would need to decide whether to tell them about the stop order and that the insurer may not be able to renew their insurance after all if the stop order is not revoked before the renewal date. For some customers, it may be too late to even do this if there simply is no time to issue the non-renewal notice, particularly those still using physical post as their communication method of choice. Would it be misleading and deceptive conduct or a breach of the efficiency, honesty and fairness obligation or duty of utmost good faith to fail to tell customers about the stop order, when the insurer is not in a position to know with any certainty whether the stop order will be revoked in time and therefore whether renewal will be possible?

For customers who are due to receive their renewal notice shortly, the insurer would need to decide whether to issue a non-renewal notice instead, or to tell customers about the effects of the stop order and the possibility or likelihood that the insurer will not be able to renew the policy. Again, it may simply be too late and impractical to change renewal notices in time to achieve this having regard to system constraints and mail house processes. Strictly speaking, section 58 of the Insurance Contracts Act 1984 (Cth) only requires insurers to inform the insured whether they are prepared to negotiate to renew or extend the cover and insurers can comply with the section without actually committing to renew. The reality is that insurers generally state that renewal will automatically occur on the renewal date rather than being prepared to negotiate.

Does DDO clash with the Insurance Contracts Act?

On the topic of section 58, the question also arises in relation to customers at both stages of the renewal cycle, but particularly those that have already received a renewal notice before the stop order, as to what effect section 58 would have in circumstances where a stop order is issued.

If an insurer has to issue a communication to customers correcting or retracting renewal notices that have already been issued and cannot give another 14 days' notice, this would seem to mean that the insurer has failed to comply with the requirement to provide a renewal notice in accordance with subsection 58(2) and therefore statutory cover will come into force under subsection 58(3). This would be an odd outcome given the statutory cover that would come into force would provide the same cover as the product to which the stop order applies. This problematic outcome may be compounded even further by virtue of the fact that section 60 allows the insurer to cancel the statutory cover at any time when it issues a replacement policy or on 14 business days' notice. So customers may experience a short-lived extension which would need to be followed by potentially confusing communications until the product was back on track.

Like so many aspects of the financial services regime, the practical implications of a DDO stop order and the unintended conflict with other statutes is yet another example of general insurance being a square peg in the round hole of uniform regulation across the financial services industries.

How can ASIC help?

Of course, ASIC could take steps to manage these issues. Subsection 994J(2) provides that ASIC may prohibit specified conduct in relation to retail clients regarding the financial product while the order is in force. The Act does not prescribe any parameters in relation to the scope of the specified conduct and it would be open to ASIC to limit the stop order to new business sales (excluding renewals) where the alleged offending aspect of the product or its distribution was not material to renewal. Where the concern did relate to renewals, ASIC could permit renewals to continue for a period while its concerns are addressed.

What can general insurers do?

Prevention is always better than cure and the best outcome for general insurers would be never having to face the prospect of a DDO stop order in the first place. It is only a matter of time before ASIC starts quizzing insurers' TMDs and testing the adequacy of the underlying product governance arrangements. With looming enforcement and clear signals from ASIC that it thinks the industry has more work to do, the most prudent step would be to dust off the Target Market Determinations and product governance arrangements and give them a cold-towel review without the distraction of the other reforms which commenced at the same time as the DDO regime in 2021.