The Government has recently completed a three-month public consultation on the legislative proposals for the establishment of the Independent Insurance Authority (IIA). Subject to the views of the Legislative Council and the public, the IIA is expected to come into operation in the year 2015.
In this article, we highlight the proposed key legislative amendments to the Insurance Companies Ordinance (ICO) for the establishment of the IIA:
The Independence of the IIA
Under the legislative proposals, the IIA will be set up as a body corporate to take over the role of the existing government department (Office of the Commissioner of Insurance) and regulate the conduct of insurance intermediaries through a new statutory licensing regime. At present, insurance intermediaries are regulated under a self-regulatory regime administered by three Self-Regulatory Organisations. The proposed changes will bring in line with international practice that financial service regulators should be financially and operationally independent of the government, and modernize the regulatory infrastructure to strengthen protection of policyholders.
The IIA shall have a chairman and a chief executive officer. The respective responsibilities of these two new positions, however, have not been clearly defined. The governing board of the IIA would consist of at least six directors appointed by the Chief Executive from a cross-section of community, including a maximum of two members with knowledge of the insurance industry. No representative from the Government will be appointed to the board. Further, two statutory Industry Advisory Committees will be established, one on life insurance and the other on non-life insurance, to advise the governing board on issues relating to the insurance industry. Whilst keeping the autonomy of the IIA may be paramount, the proposed board composition has raised concerns that there is insufficient industry representation to properly manage the IIA.
The IIA will be self-financed with income streams from the following sources:
- Licence fees from insurers: a fixed licence fee of HK$300,000 for insurers and HK$30,000 for captive insurers, and a variable licence fee of 0.0039% based on individual liabilities
- Licence fees from insurance intermediaries: a fixed licence fee to be determined in the legislation after the expiry of the first five-year waiver period
- User fees for providing specific service such as processing application for authorization or de-authorization of insurers, change of particulars of insurers and transfer of business of insurers
- A levy of 0.1% on insurance premiums for all insurance policies, subject to certain caps and exemptions
The new fee basis will inevitably increase the costs of business for insurers and insurance intermediaries. It has also been suggested that the variable licence fee payable by insurers should be based on regulatory risk, rather than individual liabilities.
Statutory licensing regime for insurance intermediaries
The ICO will be amended to introduce a licensing regime to replace the existing self-regulatory regime. A person is required to obtain a licence with the IIA in order to carry on insurance intermediary activities (i.e. regulated activities) in the course of that person's business, or employment, or for reward. From the drafting of this provision, it is unclear whether the Government intends to exclude gratuitous advice by insurance intermediaries which may lead to subsequent procurement of insurance contracts. Further, the proposals also exempt professionals and trust companies including accountants, lawyers and actuaries giving regulated advice wholly incidental to their professional practice or discharge of their duties from the licensing requirement.
The proposed eligibility criteria for obtaining a licence will be similar to those of the existing regime. That is, the applicant must fulfil the 'fit and proper' requirements, pass the qualifying examinations, and be appointed by at least one authorized insurer or engaged by a licensed insurance agency or a licensed insurance broker company, as the case may be. Further, it is proposed that each authorised insurer or licensee is required to appoint a responsible officer for implementing internal controls and procedures for the purpose of complying with conduct requirements.
New conduct requirements of licensees
Under the proposed regime, the ICO will set out the broad principles of conduct requirements to be observed by insurance intermediaries. The broad principles, to a large extent, are modelled from the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. They require insurer intermediaries to, amongst others:
- Act honestly and fairly in the best interests of the policyholder or potential policyholder and with integrity
- Exercise a level of care, skill and diligence reasonably expected of them
- Make such disclosure of information as is necessary for the policyholder or potential policyholder to be sufficiently informed for the purpose of making any material decision
- Use best endeavours to avoid a conflict between the interests of the licensee and the interests of the policyholder or potential policyholder and, in the case of such a conflict, must disclose the conflict to the policyholder or potential policyholder
Breaches of the conduct requirements will be subject to disciplinary sanctions by the IIA, including reprimand, pecuniary penalty, suspension or revocation of licence.
The industry has expressed concerns that the new conduct requirements may interfere with an agent's common law duty to act in the best interests of, and with due skill, care and diligence towards the insurer. In particular, it is unclear whether an insurance agent is required to advise a potential policyholder in relation to the existence and terms of policies offered by other insurers in the market, and disclose confidential information such as commission rates, discounts and claims handling policies. It has also been suggested that breaches of the new conduct requirements may give rise to a claim for damages against insurance agents and insurers in tort and/or contract. In view of the potential liability faced by insurance agents and insurers, it may be appropriate to set out the new conduct requirements in a more specific manner, rather than leaving the ambiguity to be resolved in subsidiary legislation and guidelines issued by the IIA.
Investigative and disciplinary powers
The IIA will be vested with powers to initiate inspection and investigation, apply for a warrant, impose disciplinary sanctions against insurers and licensees, and prosecute offences summarily. These powers are similar to those of the Securities and Futures Commission although no reasons have been given in the consultation paper as to why such powers are necessary for the insurance industry.
Under the legislative proposals, the IIA will be empowered to exercise disciplinary power in any proven cases of misconduct and breach of the fit and proper requirements. Further, the IIA may suspend a licensee/responsible officer from carrying on a regulated activity for a specified period before a disciplinary decision is made. Where there is such a suspension, it is proposed that the IIA may publish material facts relating to the case. It is an ongoing concern from the industry that the publication of material facts prior to the conclusion of the investigation may be unfair given the damage it may cause to the business of an insurer or its agent. A better alternative is to publish merely the fact of the suspension.
A Disciplinary Committee will also be established to assist the IIA in determining disciplinary sanctions. To ensure proper checks and balances, any disciplinary decision made by the IIA will be subject to review by the Insurance Appeals Tribunal.
Under the legislative proposals, the IIA is the primary and lead regulator for all insurance intermediaries including banks. Nevertheless, the IIA and Hong Kong Monetary Authority (HKMA) will work closely on regulation in bancassurance. Further, it is proposed that the IIA can delegate to the HKMA specified functions such as investigation, inspection and suspension powers.
There are concerns from the industry that bank intermediaries being subject to both HKMA and the IIA may lead to discrepancy and unpredictability in enforcement as the two regulators may have different views and approach on insurance related issues. In any event, the IIA should retain its autonomy in its exercise of power and ensure there is consistency in the exercise of powers as between bank intermediaries and insurance intermediaries.
As transitional arrangements, existing insurance intermediaries will be deemed as licensees under the new regime for three years from the commencement of the Amendment Bill. License fees payable by insurance intermediaries will also be waived during the first five years of establishment.
The establishment of an IIA in Hong Kong will facilitate the effective implementation of international regulatory standards and the stable development of the insurance industry. In view of the enhanced investigative and supervisory powers given to the IIA, the insurance intermediaries will be subject to greater scrutiny. It is advisable that insurance intermediaries review their internal controls and risk management policies to ensure compliance with the new regulatory requirements. In general, the majority of the public supports the set up of the IIA despite the fact that there are still ambiguities and issues to be clarified. It is hoped that after the consultation exercise, the Government can further clarify the gaps in the legislative proposals to suit the need of the insurance industry and provide better protection to insurance policyholders.
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