The Office of the Commissioner of Insurance (OCI) has issued a further consultation paper that sets out the draft legislative amendments for the establishment of Hong Kong’s proposed Independent Insurance Authority (IIA).  The paper also announces a 3-month public consultation period, which will conclude on 26 January 2013.

The proposals regarding the IIA were first announced in July 2010 and revised in June 2011.  The OCI’s latest paper (dated 26 October 2012) sets out new details and some notable changes to the proposed regime.  It also includes the draft amendments to the Insurance Companies Ordinance (Cap. 45) (ICO).

We set out below a summary of the current proposals and the important developments that were announced in the OCI’s latest paper.

Please see our previous articles, “Hong Kong’s proposed Independent Insurance Authority – revised proposals and detailed plan announced” of October 2011, and “Proposal for Independent Insurance Authority remains controversial” of March 2011, for more information on how the proposals have developed.

Overview of the IIA

The IIA will assume the role of primary regulator of the insurance industry, with supervision of insurers, insurance intermediaries and the insurance activities of banks.  It will replace the existing OCI and assume the powers of the self-regulatory bodies for insurance intermediaries (the Insurance Agents Registration Board, the Hong Kong Confederation of Insurers and the Professional Insurance Brokers Association).  These changes are in response to various concerns regarding the current system, including the fact that the industry remains regulated by a government department and is subject to significant self-regulation.

The insurance activities of banks are also to be regulated solely by the IIA, instead of both the IIA and the Hong Kong Monetary Authority (HKMA) (as originally proposed).  This reflected the banking industry’s concerns regarding the possibility of two regulators having dual supervision of its activities.  The HKMA’s role will now be limited to certain specified functions.  It will be given access to any information regarding the bank’s insurance business and will actively participate in any disciplinary proceedings.  Both regulators will also cooperate on a joint “mystery shopper” programme.

The IIA will have sole responsibility for regulatory investigations and disciplinary measures.  Its powers are based on those of the Securities and Futures Commission (SFC) and the HKMA, which regulate the securities and banking sectors respectively.  This raises the question of whether the IIA will adopt the active approach to regulatory investigations and enforcement as these other regulators.  To date, the insurance industry has largely avoided the contentious investigations that are often initiated by the SFC and HKMA.  It will no doubt hope that the status quo will be maintained and the IIA does not increase the focus on regulatory compliance.

The IIA’s decisions can be appealed to an independent Insurance Appeals Tribunal.  The Tribunal will consist of experienced market practitioners and be chaired by a person who is eligible for appointment as a High Court Judge. 

To ensure that the IIA remains in touch with the industry, two statutory Insurance Advisory Committees will be established.  One Committee will advise on the general insurance and the other on life insurance.

The IIA will be funded by licence fees payable by all insurers and intermediaries and a levy of 0.1% on all insurance premiums (excluding those payable for reinsurance).  However, to reduce the burden on small insurance intermediaries, licence fees will be waived for all intermediaries for the first five years of the new regime.  This is part of a range of transitional arrangements to mitigate the impact of the IIA’s establishment.

New developments

The OCI’s latest paper and draft amendments to the ICO reveal a number of significant developments.  In summary, the key details include:

Function & Structure

  • The IIA will now be established as a body corporate rather than an independent statutory authority.  The IIA’s Board will be appointed by Hong Kong’s Chief Executive but the Board will not include an official representative of the Government. 

Regulation of Intermediaries

  • The IIA will regulate the conduct of insurance intermediaries through a licensing regime.  Any person or company conducting a regulated activity will require a licence.
  • Importantly, “regulated activity” has been broadly defined to the negotiation or arrangement of insurance or the invitation / inducement to enter into or make a material decision regarding insurance.  It applies whenever such activities are carried on in Hong Kong and outside Hong Kong if targeted at existing or potential Hong Kong policy holders.  As a result, offshore intermediaries may be caught by the new licensing regime if they deal with Hong Kong clients. 
  • An exemption has been provided for advice wholly incidental to discharge of professional duties (e.g. by lawyers, accountants etc).
  • There will be five types of licences issued to intermediaries.  These include licences for broking companies ; a broker’s technical representatives; insurance agencies (companies or partnerships), individual insurance agents (sole proprietors); and an agent’s technical representatives.
  • All licence holders must satisfy “fit and proper” criteria.  In addition, brokers will only be eligible for a licence if they hold sufficient capital assets, professional indemnity insurance and keep proper books and accounts.

Appointment of Responsible Officers (RO)

  • The new regime will require licensed intermediaries and authorised insurers to appoint a RO.  The Chief Executive Officer of an authorised insurer will automatically become the RO.   The appointment of any RO is subject to the IIA’s approval.

Statutory conduct requirements

  • The ICO already imposes certain requirements on insurers (eg – capital adequacy, solvency margin etc.).  The draft amendments to the ICO now set out conduct requirements for licensed intermediaries.  These mirror the common law duties imposed on agents and brokers.  For example, they require a licensee to act honestly and fairly; exercise reasonable care and diligence; and disclose necessary information to clients.
  • Conduct requirements will also apply to ROs.  These include the obligation to establish proper controls and procedures to ensure compliance with any regulations.  An intermediary / insurer must provide its RO with sufficient resources and authority to enable them to satisfy the requirements.  In turn, the RO must use its best endeavours to do so.
  • The IIA’s enforcement powers for these statutory conduct requirements are similar to those granted to other Hong Kong’s regulators.  For instance, the IIA will have the power to inspect business premises, make enquires and have access to records/documents, apply for court orders to compel compliance, impose disciplinary sanctions (including reprimands, fines and the suspension or revocation of any licence) and prosecute offences summarily.
  • In addition, the IIA will be able to temporarily suspend an insurer or intermediary from carrying on a particular activity prior to any decision regarding disciplinary sanctions.

Delegation to the HKMA

  • Subject to the approval of Hong Kong’s Chief Executive, the IIA may delegate any of its powers of inspection, investigation or suspension regarding authorised financial institutions to the HKMA.  The Chief Executive may impose conditions on any such delegation.  The HKMA must also consult with the IIA before exercising the delegated suspension power.
  • Notably, the IIA is not restricted from using any power delegated to the HKMA.  This creates the possibility that both regulators may exercise powers against an authorised institution simultaneously.

Next steps

There are likely to be further changes to the regime after the current round of consultation ends on 26 January 2013.  At this stage, the bill to amend the ICO is expected to be introduced into the Legislative Council in 2013.  The IIA is likely to be established in 2015..