On 3 September 2019, the Insurance Authority (the “IA”) released conclusions on its consultations on the draft Code of Conduct for Licensed Insurance Agents (the “Agents’ Code”) and the draft Code of Conduct for Licensed Insurance Brokers (the “Brokers’ Code” and together with the Agents’ Code, the “Codes”).
On 3 September 2019, the Insurance Authority (the “IAâ€) released conclusions
on its consultations on the draft Code of Conduct for Licensed Insurance
Agents (the “Agents’ Codeâ€) and the draft Code of Conduct for Licensed
Insurance Brokers (the “Brokers’ Code†and together with the Agents’ Code,
the “Codesâ€).
Our client alert on the April 2019 consultations is included in the Annex below.
The final Codes do not depart materially from the drafts, however the IA has
made some amendments to the Codes and provided further clarity on several
points.
The key amendments and IA comments to take note of are:
GP 1 Honesty and Integrity
• The duty of utmost good faith has been removed from the Brokers’ Code,
which now states that a Licensed Insurance Broker when carrying on
regulated activities should always act with good faith towards its client.
(The Brokers’ Code only)
• The provisions on the offering of an advantage have been aligned with the
Prevention of Bribery Ordinance (the “PBOâ€) and clarify that, in carrying
out regulated activities, insurance intermediaries are expected to give
particular consideration to the PBO in certain situations.
GP 4 Competence to Advise
The Codes now include an explanation that the requisite skills or knowledge
that licensed technical representatives are expected to have will depend on the
particular situation and factors to be considered include the complexity of the
insurance product or transaction, whether the insurance product is of a
specialist nature, the level of the person’s experience and the relevance of the
person’s qualifications.
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GP 5 Disclosure of Information
• Premium rebates – The IA has clarified that, although it is not stated in
the Codes, restrictions on premium rebates continue to apply in relation to
long-term products and medical insurance products.
• Breach of duty of utmost good faith – The IA has revised the Agents’
Code so that Licensed Insurance Agents will be required to explain the
consequences of a breach of the duty of “utmost good faith†(rather than
ensure the client’s understanding). Guidance on how such explanation
should be given has also been included. (The Agents’ Code only)
• Client agreements – The Brokers’ Code has been amended to clarify that
a client agreement must be in writing, but the form of agreement is flexible
and client agreements do not have to be signed (e.g. brokers’ terms of
business can be e-mailed to a client, with the client confirming his
agreement by e-mail or by conduct). (The Brokers’ Code only)
GP6 Suitability of Advice
The suitability assessment must be carried out where regulated advice is given
and the relevant requirement has been amended to be “outcome-focusedâ€, i.e.
insurance intermediaries are required to take into account the client’s
“circumstances†(which is now a defined term in the Codes) and the relevant
Standard and Practice is applicable to every situation in which regulated advice
is provided.
GP7 Conflicts of Interest
The Codes have been supplemented to require that licensed insurance
intermediaries must disclose any conflicts of interest (where such conflict
cannot be avoided) and at all times act fairly in relation to the client. These
provisions are similar to requirements contained in the Code of Conduct for
Persons Licensed by or Registered with the Securities and Futures
Commission.
GP8 Client Assets
The IA has introduced a new requirement in the Agents’ Code which will require
licensed insurance agents to maintain proper records of premium received
when authorised to receive premium payments by an appointing insurer or
appointing agency. (The Agents’ Code only)
Corporate Governance and Controls and Procedures
The sections on corporate governance and controls and procedures, which
were in Parts D of the draft Codes, are now in Parts C of the final Codes.
• Baseline standards and practices – The IA has clarified that the relevant
sections of the Codes set the baseline standards and practices for
corporate governance which all licensed insurance agencies/broker
companies should meet and that such requirements in the Agents’ Code
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and the Brokers’ Code are different because of the different roles which
licensed insurance agencies and licensed insurance broker companies
perform.
• Incident reporting – The IA has amended the reporting incidents
requirement to specify types of incidents which must be reported and set
out the considerations of what constitutes a “material†incident (e.g. if the
incident adversely impacts or is likely to adversely impact the
agency’s/broker’s ability to carry on regulated activities).
• Removal of “fit and proper†requirement for certain broker company
employees – The IA has removed the requirement in the Brokers’ Code
that persons who are recruited, employed by or associated with or act for
the broker company must be “fit and properâ€. The IA has amended the
relevant provision to require a licensed broker company to ensure such
persons have “the integrity and competence to discharge their duties and
responsibilitiesâ€. (The Brokers’ Code only)
• Definition of “senior management†– The Codes now include a definition
of “senior management†and note that (i) the exact composition of senior
management will depend on the size of the agency/broker company; (ii)
whether a person is part of senior management depends on that person’s
actual functions and duties (as opposed to position and title); and (iii)
certain persons are likely to be considered part of the senior management
(e.g. in large agencies/broker companies, persons responsible for
oversight of a business line or function).
• Product due diligence by brokers – The IA has clarified that by “due
diligenceâ€, it means that it expects Licensed Insurance Brokers to
understand the insurance contracts they are arranging and the differences
between different insurance products, so that they know which one is best
to address a client’s circumstances. (The Brokers’ Code only)
Product Specific Requirements
The IA clarified that the General Principals are intended to have universal
application and the Codes are not intended to be a full list of laws which apply
to licensed insurance intermediaries. In addition to the Codes, insurance
intermediaries are expected to comply with guidance issued by the IA that are
focused on particular classes of business and types of insurance products.
Technology Neutral
The IA clarified that the Codes are intended to be technology neutral and it has
made several amendments to reflect this.
Referral Business
The consultation conclusions emphasise that referrals may involve the carrying
on of regulated activities. The IA has noted that the entire issue of referrals
requires further consideration and has indicated that it will monitor the issue
and consider taking further regulatory steps after it has taken on the regulation
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of insurance intermediaries. We will monitor these developments and provide
further updates.
Next steps
The Codes will come into operation upon commencement of the new regulatory
regime for insurance intermediaries on 23 September 2019. However, the IA
has indicated that it will adopt an attitude of flexibility in considering whether
the Codes have been observed during the first few months of their operation.
Full compliance with the provisions of the Codes is expected by 1 January 2020.
All insurance intermediaries who are validly registered with one of the self-
regulatory organisations and who will be deemed licensed under the new
regulatory regime should familiarise themselves with the Code that will apply
to them.
Please refer to the Annex below for our note from April on the Codes.
Contacts
For further information
Annabella Fu van Bijnen
Partner
(+852) 2901 5232
Sumit Indwar
Partner
(+852) 2901 5626
Clara Hackney
Managing PSL
(+852) 2901 5611
Kaylene Houng-Lee
Associate
(+852) 2901 5249
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Annex April 2019
Insurance Authority consults on draft codes of conduct for licensed insurance intermediaries
Introduction and Background
On 28 March 2019, the Insurance Authority (the “IAâ€) launched a two-month
public consultation (the “Consultationsâ€) on the draft Code of Conduct for
Licensed Insurance Agents (the “Agents’ Codeâ€) and the draft Code of
Conduct for Licensed Insurance Brokers (the “Brokers’ Code†and together
with the Agents’ Code, the “Codesâ€).
In recognition of the different capacities served by insurance agents (as
representatives of insurers) and insurance brokers (as representatives of policy
holders or potential policy holders), the IA proposes to issue two codes of
conduct.
The Agents’ Code will apply to all licensed individual insurance agents,
licensed insurance agencies and licensed technical representatives
(collectively, “Licensed Insurance Agentsâ€). The Brokers’ Code will apply to
all licensed insurance broker companies and licensed technical
representatives (collectively, “Licensed Insurance Brokersâ€). In addition, the
proposed Codes will also set out the responsibilities of responsible officers and
senior management of the licensed insurance agencies and licensed insurance
broker companies respectively, relating to the carrying on of regulated activities
by the licensed insurance agencies and licensed insurance broker companies.
At present, insurance intermediaries are required to comply with conduct
requirements promulgated by their respective self-regulatory organisations (i.e.
the Insurance Agents Registration Board set up by the Hong Kong Federation
of Insurers, the Hong Kong Confederation of Insurance Brokers and the
Professional Insurance Brokers Association). Under the new statutory regime
for insurance intermediaries, which is expected to come into effect in mid-2019,
the IA will take over the regulatory functions of insurance intermediaries from
the three self-regulatory organisations.
The IA indicated that, in formulating the proposed Codes, it had taken into
account, amongst others, the norms and practices which have emerged from
the day-to-day operation of the insurance market, existing codes and
guidelines which apply to insurance agents and insurance brokers, other codes
and guidelines and guidelines issued by regulatory authorities in Hong Kong
and overseas and prevailing international standards. In addition, the IA
indicated that the proposed Codes are principles-based to allow flexibility for
the insurance market to evolve, adapt and innovate. Additional product specific
requirements will be imposed through other regulatory instruments that apply
in addition to the proposed Codes such as in relation to investment-linked
assurance schemes and mandatory provident fund products.
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The proposed Codes will come into operation on the day on which the new
statutory regime for insurance intermediaries comes into operation.
Codes’ contents
Both proposed Codes are divided into four parts. Parts C and D of the proposed
Codes set out the substantive requirements.
Part A contains the introductory paragraphs and background to the relevant
Code.
Part B sets out the defined terms of the relevant Code.
Part C sets out the general principles, standards and practices.
Part D provides guidance on the corporate governance, controls and
procedures that Licensed Insurance Agents and Licensed Insurance Brokers
should establish and implement.
Schedule 1 sets out standards and practices for referral of business.
Certain of the requirements in the proposed Codes appear to be similar to the
requirements contained in the Code of Conduct for Persons Licensed by or
Registered with the Securities and Futures Commission (for example, the
requirement to enter into a written client agreement and the requirement to
report material incidents to the relevant regulator).
The general principles, standards and practices
The proposed Agents’ Code and the proposed Brokers’ Code set out eight core
general principles under each of which, there is elaboration on the relevant
standards and practices applicable to Licensed Insurance Agents/Brokers. In
some instances, the standards and practices applicable to Licensed Insurance
Agents/Brokers are different in light of the different capacities served by
Licensed Insurance Agents (as representatives of insurers) and Licensed
Insurance Brokers (as representatives of policy holders or potential policy
holders). We have highlighted some of the differences below.
The IA noted in particular that the requirements in the Codes serve as minimum
levels of professional conduct which policy holders and potential policy holders
are entitled to expect when dealing with Licensed Insurance Agents or
Licensed Insurance Brokers.
The eight general principles are as follows:
GP 1. Honesty and Integrity
Licensed Insurance Agents and Licensed Insurance Brokers are required to be
trustworthy and act honestly, ethically and with integrity. In addition, Licensed
Insurance Brokers are also required to act in the utmost good faith. The IA
noted that “utmost good faith†remains a sacrosanct tradition of the insurance
market.
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GP 2. Acting Fairly and in the Clients’ Best Interests/Acting in the Best
Interests of Clients and Treating Clients Fairly
Licensed Insurance Agents should always treat clients fairly and act in their
best interests. The IA noted that a core theme running through the entirety of
the Codes is that of “treating clients fairlyâ€. The IA noted in particular that as
Licensed Insurance Brokers serve as the representatives of their clients, it is
the clients who should always be at the forefront of a Licensed Insurance
Broker’s considerations.
GP 3. Exercising Care, Skill and Diligence
A Licensed Insurance Agent/Broker should act with due care, skill and diligence.
The additional standards in the Brokers’ Code include:
(a) where a client terminates its appointment of a licensed insurance
broker company, the broker company should, amongst others, provide
all reasonable cooperation to bring the appointment to an end in an
orderly manner; and
(b) unless stated otherwise in the client agreement, a Licensed Insurance
Broker should (where requested by a client) provide the client with
reasonable assistance with regards to the client’s insurance claims and
exercise reasonable care to discharge all obligations in relation to the
administration, negotiation and settlement of such claims to the extent
that such obligations are within the scope of the Licensed Insurance
Broker’s services stated in the relevant client agreement.
GP 4. Competence to Advise
A Licensed Insurance Agent/Broker should possess appropriate levels of
professional knowledge and experience and only carry on regulated activities
in respect of which the agent has the required competence.
GP 5. Disclosure of Information
A Licensed Insurance Agent/Broker should provide clients with accurate and
adequate information to enable them to make informed decisions. The
additional standards in the Brokers’ Code include:
(a) a Licensed Insurance Broker should not hold itself out as an insurer or
an agent of an insurer in carrying on regulated activities;
(b) where a Licensed Insurance Broker intends to arrange an insurance
policy with an insurer which is not authorised by the IA, the Licensed
Insurance Broker should disclose to the client: (i) the name and
address of the insurer in the jurisdiction where the insurer has issued
the policy and (if different) the jurisdiction where the insurer is
incorporated, (ii) the fact that the insurer is not regulated by the IA and
is subject to different laws and regulations, (iii) the financial standing
of the insurer (e.g. credit rating), and (iv) the governing law of the
insurance policy and the jurisdiction in which disputes under the policy
will be determined. In the case where the client is an individual, the
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Licensed Insurance Broker should also obtain written
acknowledgement from the client of the disclosure of (i) to (iv);
(c) when negotiating or arranging an insurance policy with an insurer on
behalf of a client, a Licensed Insurance Broker should: (i) not make
any false statements or mislead the insurer, (ii) disclose to the insurer
all material information in relation to the insurance policy, and (iii)
disclose all material facts in relation to the prospective insurance policy
of which the Licensed Insurance Broker is aware; and
(d) a Licensed Insurance Broker should enter into a written agreement
with each client before arranging an insurance policy with the client
which contains certain prescribed requirements, and a copy of the
agreement should be provided to the client.
GP 6. Suitability
Before giving regulated advice, a Licensed Insurance Agent/Broker should
properly carry out a suitability assessment of the client’s objectives,
circumstances, needs and priorities.
GP 7. Conflicts of Interest
A Licensed Insurance Agent/Broker should make every effort to avoid conflicts
of interests and when such conflicts cannot be avoided, should manage them
with appropriate disclosure to ensure clients are fairly treated at all times.
The proposed Agents’ Code (and its related standards and practices) seeks to
address the conflicts of interests that will likely arise as a result of a Licensed
Insurance Agent’s role as agent of its insurer principals and relationship with
policy holders. For example, the proposed related standards and practices
state that, to avoid potential conflicts of interest and provide transparency, a
licensed insurance agent should disclose that: (i) it is appointed by its
appointing insurer to promote and advise on the insurance products offered by
the insurer; and (ii) the insurance products it can promote and advise on are
limited to the insurance products offered by its appointing insurer.
Although Licensed Insurance Brokers act for policy holders, they are
sometimes remunerated by insurers by way of commission. General Principle
7 of the proposed Brokers’ Code (and its related standards and practices)
requires a licensed insurance broker company which receives remuneration in
this form to give adequate disclosure in relation to such remuneration to the
client before arranging the relevant insurance policy.
GP 8. Client Assets
A Licensed Insurance Agent/Broker should have sufficient safeguards in place
to protect the assets of clients.
Broadly, Licensed Insurance Agents should only receive payment of premiums
where it is within the scope of their authority as granted by the appointing
insurer or appointing agency. On the other hand, as Licensed Insurance
Brokers receive monies on behalf of clients, the proper handling of such client
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monies is vital; a licensed insurance broker company should have sufficient
controls and security in place to prevent unauthorised access to client assets.
Corporate governance, controls and procedures
Part D of the proposed Codes require licensed insurance agencies and
licensed insurance broker companies to establish and implement
organisational structures and adequate controls to ensure:
(a) that interests of clients are not prejudiced;
(b) that there are clear roles and lines of responsibility; and
(c) accountability of senior management.
In particular, it is proposed that licensed insurance broker companies should
have in place proper controls and procedures to conduct due diligence on
insurers and the nature and key features of insurance products it intends to
provide regulated advice on.
It is also proposed that licensed insurance agencies and licensed insurance
broker companies will be required to report incidents that are material to their
business to the IA as soon as reasonably practicable after they become aware
of such incidents, e.g. a material breach of requirements under the Insurance
Ordinance and any rules, regulations, codes, guidelines, circulars or regulatory
instruments administered or issued by the IA, by the broker company or its
licensed technical representatives.
Additional Standards and Practices for Referral of Business
Schedule 1 of the proposed Codes sets out requirements in respect of referral
of business. It covers two referral arrangements:
(a) where a client is referred to a Licensed Insurance Agent/Broker by
another person (the “Referrerâ€). In such a case the Licensed Insurance
Agent/Broker should ensure that the client is properly informed of a
number of matters such as the Referrer does not represent the
Licensed Insurance Agent/Broker, the Licensed Insurance
Agent/Broker disclaims all liability for any advice given by the Referrer
in relation to the insurance policy, a benefit is to be provided by the
Licensed Insurance Agent/Broker to the Referrer etc; and
(b) where a client is referred by one Licensed Insurance Agent/Broker to
another:
(i) where a Licensed Insurance Agent intends to refer a client to
another Licensed Insurance Agent/Broker with a view to the
latter arranging an insurance policy for the client, the Licensed
Insurance Agent should ensure that it complies with policies,
procedures and other applicable requirements of its appointing
insurer or appointing agency; and
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A39929603/0.2/11 Sep 2019
Authors: Clara Hackney and Kaylene Houng-Lee
This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors.
© Linklaters. All Rights reserved 2019
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(ii) where a licensed insurance broker company intends to refer a
client to another Licensed Insurance Agent/Broker with a view
to the latter arranging an insurance policy for the client, the
broker company should ensure that it obtains prior consent from
the client concerned before making the referral. Where a
licensed technical representative (broker) intends to refer a
client to another Licensed Insurance Agent/Broker with a view
to the latter arranging an insurance policy for the client, the
technical representative should ensure that it complies with
policies, procedures and other applicable requirements of
appointing licensed insurance broker company.
Effect of a breach of the Codes
A failure to comply with the proposed Codes shall not by itself render a Licensed
Insurance Agent or Licensed Insurance Broker liable to any judicial or other
proceedings. However, the IA may take guidance from the Codes in considering
whether:
(a) there has been an act or omission by Licensed Insurance Agents or
Licensed Insurance Brokers which is or is likely to be prejudicial to the
interests of policy holders or potential policy holders or the public
interest;
(b) a Licensed Insurance Agent or Licensed Insurance Broker is fit and
proper to remain licensed; or
(c) a Licensed Insurance Agent or Licensed Insurance Broker has satisfied
the statutory conduct requirements in the Insurance Ordinance.
Next steps and how we can help
Should the Consultations on the Codes be of interest to you, you have until 28
May 2019 to submit feedback to the IA. We have represented many industry
groups and individual clients in responding to regulatory consultations and
assisting them in effectively presenting feedback on them. We would be
delighted to discuss any aspects of the above with you.
