On 26 June 2013 the Government published the consultation conclusions on its key legislative proposals for the establishment of an independent Insurance Authority (IIA).  The establishment of the IIA and the provision for a new statutory licensing regime for insurance intermediaries are described by the Government as “the most significant reform initiative for the insurance industry since the passage of the Insurance Companies Ordinance in 1983″. The proposals aim to modernise the regulatory infrastructure of the insurance industry and to bring it into line with other financial regulatory regimes in Hong Kong and with international practice.   The key proposals cover amongst other areas the functions, governance and regulatory powers of the IIA, a new licensing regime for insurance intermediaries and regulatory arrangements for banks’ insurance activities.  The Government plans to finalise and introduce a Bill amending the Insurance Companies Ordinance (ICO) into the Legislative Council by the end of 2013 with a view to introducing the new regime in 2015. The following is a summary of the key proposals as they stand after the consultation:

  • The establishment of the IIA: the new IIA is to replace the existing Office of the Commissioner of Insurance (OCI), a government department headed by the Insurance Authority (IA). The governing board of the IIA is to be appointed by the Chief Executive, with at least two directors having knowledge and experience in the insurance industry and with no Government representative. There are to be two Industry Advisory Commissions (IOCs), one on life insurance and the other on non-life insurance to advise the governing board.
  • The licensing of insurance intermediaries: insurance intermediaries (ie, insurance agents and insurance brokers) will need to obtain a license from the IIA to carry out “regulated activities”. Similar eligibility criteria as currently apply under the existing registration regime administered by the self-regulatory organisations (SROs) will apply. Persons providing advice “wholly incidental” to their usual activities (eg, lawyers and accountants) or “solely providing back office administration” are to be exempted. Both insurance agents and insurance brokers will need to renew their licenses every three years.
  • Conduct requirements on insurance intermediaries: statutory conduct requirements on insurance intermediaries are to include the obligation to act in the best interests of the (potential) policyholder, which means that an insurance agent must prioritise the (potential) policyholder’s interest over the interest of the appointing insurer in case of a conflict. Any contract term contained in the agreement between the insurer and the agent which contravenes the “best interests” duty will be unenforceable.
  • The IIA’s regulatory powers: the IIA is to have inspection and investigation powers in relation to insurers and insurance intermediaries similar to those provided to other financial regulators, such as the Securities and Finance Commission (SFC) and the Mandatory Provident Fund Schemes Authority. The IIA is to be given increased powers to impose sanctions in the case of misconduct such as the revocation or suspension of a licence (in the case of intermediaries) or an authorisation (in the case of insurers) or the imposition of a fine of up to HKD10,000,000. An Insurance Appeals Tribunal (IAT) is to be established to deal with appeals against regulatory decisions of the IIA (and the HKMA – see below).
  • Appointment of Responsible Officers (ROs): each licensed insurance broker company or licensed insurance agency or authorised insurance company will need to appoint an RO who will be obliged to use their “best endeavours” to ensure that proper controls and procedures are in place for securing compliance by the company as well as its tied agents and employees with the conduct requirements. The CEO of an authorised insurer will be deemed to be the RO, although there is to be a provision allowing the appointment of a second RO subject to the IIA’s approval.
  • Regulatory arrangements for banks’ insurance activities: the IIA may, subject to the Chief Executive’s approval, delegate its powers of inspection and investigation to the Hong Kong Monitory Authority (HKMA) for the purpose of regulating banks’ insurance activities. However, the IIA will remain the lead regulator and will be responsible for setting regulatory standards and determining all disciplinary sanctions.
  • Transitional arrangements: Insurance intermediaries validly registered with the SROs will be deemed to be licensed for three years from commencement of the new licencing regime, and will need to apply for a new licence before expiry of the three years. The IIA may vary, suspend or revoke the deemed licence if it becomes aware of any deficiency in the registration on which the deemed licence is based. Any complaints and disciplinary cases that are pending before the SROs at the time of the commencement of the new regime will be taken up by the IIA applying the conduct standards and available sanctions prevailing at the time the misconduct occurred, although the IIA will be able to exercise its new investigative powers.

If carried through, these reforms, and in particular the proposed change from an industry which is largely self-regulating to one which is overseen by a regulator with similar powers to the SFC, will likely revolutionise the insurance industry, and in particular the insurance broking industry, in Hong Kong.