Introduction

The Insurance Companies (Amendment) Bill 2014 proposes to amend the existing Insurance Companies Ordinance and establish the Independent Insurance Authority (IIA). On April 25 2014 the bill was published in the Official Gazette (for further details please see "Establishment of the Independent Insurance Authority: the way forward"). The Bills Committee for the bill was formed on May 27 2014. Since then, the Bills Committee has met 18 times and is expected to convene a number of times further before the summer recess of the Legislative Council. The passage of the bill and the establishment of the IIA are expected to take place sometime in 2015.

Ensuring that the watchdog has teeth

The major proposals in the bill include certain administrative and restructuring changes to the framework and regulation of the insurance industry in Hong Kong. These range from the licensing of insurance intermediaries and transitional arrangements to the proposed funding structure of the IIA's new regime. In focusing on the wide array of powers and offences created by the bill, be assured: the IIA means business – the business of better protection for policyholders, robust regulation of insurers and insurance intermediaries, and severe consequences for those that are non-compliant or in flagrant breach of the proposed law.

Below are some examples of how the bill establishes the IIA in its enforcement role as the regulatory watchdog of insurers and insurance intermediaries in Hong Kong:

  • Conduct regulation – conduct regulation aims to ensure that insurance intermediaries act professionally, fairly and honestly, and that the licensees are fit and proper persons to provide insurance products to the public. Further, it has been proposed that all licensed insurance intermediaries be required to act "in the best interest of the policyholders" by "exercising a level of care, skill and diligence that may reasonably be expected of a prudent person who is carrying on the regulated activity". Insurance intermediaries will be required to disclose any conflicts of interests between the insurer and the policyholder, and any term in an agreement between the insurer and the insurance intermediary which contravenes the statutory duty to act in the "best interests" of the policyholder will be unenforceable.
  • Appointment of responsible officers – it is proposed that a licensed insurance agency or a licensed broker company be required to appoint at least one responsible officer whose role is to ensure that internal control systems and procedures are in place to promote compliance with conduct requirements within a body corporate. The appointment of a responsible officer is subject to the IIA's vetting and approval.
  • Regulatory powers of the IIA – similar to other financial regulators in Hong Kong, the IIA will be vested with appropriate powers of inspection, investigation and imposing disciplinary penalties, including reprimands, fines and suspension or revocation of licences of insurance intermediaries or authorisation of insurers. Should there be reasonable cause, IIA investigators may also apply to obtain a magistrate's warrant to enter premises to search for, seize and remove records or documents of a person which he or she is obliged to produce under the bill.
  • Disciplinary penalties – when the bill becomes law, the IIA will have a wide array of powers in regulating and enforcing the provisions of the ordinance. Set out below are the proposed figures for penalties, but these may be subject to further changes and amendments by the Legislative Council and will come into force only when the bill becomes law:
    • Appointing/not removing individuals of authorised insurers in compliance with IIA – when appointing controllers, directors or key persons in control functions of authorised insurers, prior approval must be obtained from the IIA. Conversely, the IIA will be empowered to revoke approval of the appointment if the IIA is satisfied that the individual is no longer a fit and proper person. It is proposed that breach of these future offences could result in a fine of up to HK$200,000 and in some cases up to two years' imprisonment.
    • Offences in relation to inspections and investigations – from failing to comply with IIA inspections or investigations to intentionally giving false or misleading information or producing false or misleading documents to the IIA, the proposed penalties for these kinds of offences could range from a fine of HK$200,000 to HK$1 million or imprisonment for six months on summary conviction and seven years on conviction on indictment, depending on the severity of the crime.
    • Destruction of records and documents – it is proposed that an individual who destroys, falsifies, conceals or otherwise disposes of, or causes or permits the above, with the intent of obstructing the IIA's investigation could be liable to a fine of up to HK$1 million and to imprisonment for up to two years.
    • Order to pay costs of investigation – if a person is convicted by the court as a result of an investigation by the IIA, the court may order that person to pay the whole or part of the cost and expenses of the investigation to the IIA.
    • Disciplinary actions against licensed insurance intermediaries and responsible officers – the bill provides a wide definition of the term 'misconduct'. It could be as straightforward as a contravention of a provision in the bill or as wide as an act or omission relating to the carrying on of any regulated activity which, in the IIA's opinion, is or is likely to be prejudicial to the interests of policyholders, potential policy holders or the public interest. If a licensed holder is found by the IIA to have engaged in misconduct, not only could the IIA revoke and prohibit that person from applying for a license, but it could also order that person to pay a pecuniary penalty of up to HK$10 million or three times the amount of the profit gained or loss avoided by the individual as a result of the misconduct.
  • Appeals of regulatory decisions – with the enforcement of the proposed bill by the IIA, its regulatory decisions will be subject to review and will be appealable to an independent quasi-judicial body, the statutory Insurance Appeals Tribunal (IAT). The IIA's regulatory decisions include licensing, authorisation and disciplinary decisions. The IAT may confirm, vary or set aside any such decisions of the IIA.

Comment

On closer scrutiny of the Insurance Companies (Amendment) Bill, it is evident that the IIA will be empowered to adopt a robust watchdog role similar to that of the financial industry's Securities and Futures Commission and the banking industry's Hong Kong Monetary Authority. The bill seeks to arm the IIA with all of the investigatory, disciplinary and sentencing power to shape up the insurance industry in the interests of policyholders and the public at large. Consequently, as it appears that the IIA means business, it would be prudent for insurers and their intermediaries to plan accordingly so that it is business as usual for them, in compliance with the new regulatory regime.

For further information on this topic please contact Kevin Bowers at Howse Williams Bowers by telephone (+852 2803 3648) or email (kevin.bowers@hwbhk.com). The Howse Williams Bowers website can be accessed at www.hwbhk.com.

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