With the advent of the new insurance intermediaries regime in September this year, one topic generating many questions is how the new regime applies to banks in their perimeter dealings with insurance and insurance products, such as referrals to insurers, insurance required under mortgages and using insurance policies as collateral.
The Insurance Authority (IA) has now issued an explanatory note, which includes a set of FAQs, to provide guidance on the regime’s licensing requirements in relation to the activities banks and bank staff typically carry out.
The explanatory note has been prepared by the IA in consultation with the Hong Kong Monetary Authority, the Hong Kong Association of Banks, the Private Wealth Management Association and the DTC Association.
On 23rd September 2019, a new insurance intermediaries (i.e. insurance agents or insurance brokers) regime took effect which requires any person carrying on a “regulated activity” to be licensed. Regulated activities include;
- negotiating or arranging a contract of insurance;
- inviting or inducing, or attempting to invite or induce, a person to enter into a contract of insurance;
- inviting or inducing, or attempting to invite or induce, a person to make a material decision (decisions regarding an insurance contract’s application/renewal/change/assignment/termination, or the making/settling of an insurance claim);
- giving regulated advice.
There are five types of licence which cover brokers and agents, a) insurance agency, b) individual insurance agent, c) technical representative (agent), d) insurance broker company, and e) technical representative (broker).
The overall position is that where banks are providing clients with general information on insurance, they will not be carrying out regulated activities. If, however, the information given relates to specific insurance products, or the bank takes the initiative to approach the client or encourage the client in relation to an insurance product, then they are more likely to fall into a regulated activity role. Referrals to insurance intermediaries are permitted without a licence subject to disclosures.
We have summarised some other key points below.
- Providing clients with information about insurance or types of insurance, without giving opinions and without specifying a particular insurance product, should not be a regulated activity.
- Giving a client a marketing leaflet for a particular insurance product is likely to constitute a regulated activity as the bank staff member is inviting or inducing a person to enter into a contract of insurance.
- Banks which are not licensed for insurance intermediation can refer clients to a licensed insurance intermediary, but the bank staff member must make it clear that the staff member is not a representative of the insurance intermediary and is not licensed as an insurance intermediary.
- A bank receiving remuneration for referrals to insurers or licensed intermediaries may not necessarily trigger a licence requirement per se, but it will be an important fact in the IA assessing whether any regulated activities are taking place. The IA underlines that if a bank’s remuneration structures directly incentivise staff to encourage clients to enter into insurance contracts, this would be a “key fact to consider” in assessing whether regulated activities took place, so banks should carefully review their remuneration structures.
- Identifying and informing a client that they may require a type of insurance is not a regulated activity provided bank staff members do not encourage, or otherwise induce, the client to purchase the insurance, and do not discuss specific insurance products.
- Regarding policy or premium financing, a bank should not take the initiative to suggest policy or premium financing to a client it knows has, or is planning to purchase, a life insurance policy, as this could amount to inducing a client to make a material decision.
- Informing a client that a specific type of insurance is required under a mortgage contract will not be a regulated activity, even if the bank refers the client to an insurance intermediary to purchase the insurance.
- Where a bank is a licensed insurance intermediary, any bank staff intending to carry on regulated activities as representatives of the bank must be licensed technical representatives (agent) or licensed technical representatives (broker).
- Where a client assigns an insurance policy as collateral for credit facilities, the bank is unlikely to need a licence to exercise its right as an assignee if the client defaults on the credit facilities.
The IA’s note and FAQ provide further detail on the IA’s interpretation of what could fall into the category of “regulated activities”, as well as giving some examples. The FAQs include discussion of retirement planning, insurance required under a mortgage, key man insurance, remuneration, policy financing, policy assignment, exercising a right in an insurance policy and trust arrangements.
The IA’s note and FAQ are applicable from now and are provided as guidance only. This means they should not be interpreted in a way that overrides the provisions of any law. The list of examples provided in the FAQ are not exhaustive, and the IA has said that it will keep them under review and add to them as required.