The much anticipated final stage of Hong Kong's biggest insurance regulatory reform in the last 30 years will take effect on 23 September 2019, when the Insurance Authority (IA) of Hong Kong will take over all aspects of licensing and supervision of insurance intermediaries.

Insurers and insurance intermediaries should pay close attention to how the new regime will be implemented in practice.

Key takeouts

Starting from 23 September 2019, the Insurance Authority (IA) will take over the regulation of insurance intermediaries (including insurance agents and insurance brokers) in Hong Kong

The IA has issued the Insurance (Maximum Number of Authorized Insurers) Rules; Insurance (Financial and Other Requirements for Licensed Insurance Broker Companies) Rules; Code of Conduct for Licensed Insurance Agents; Code of Conduct for Licensed Insurance Brokers; Guideline on Exercising Power to Impose Pecuniary Penalty in Respect of Regulated Persons (GL22); Guideline on "Fit and Proper" Criteria for Licensed Insurance Intermediaries (GL23); Guideline on Continuing Professional Development for Licensed Insurance Intermediaries (GL24) and several guidelines in relation to the sale of long term insurance policies (GL25-30)

Insurance companies, in particular those in charge of legal and compliance, and those dealing with insurance intermediaries should pay close attention to the implementation, interpretation and enforcement of the relevant provisions of the Insurance Ordinance (Cap. 41) ("Ordinance"), codes and guidelines

Starting from 23 September 2019, the Insurance Authority (IA) will take over from the three self-regulatory organisations (SROs) - the Hong Kong Confederation of Insurance Brokers, the Professional Insurance Brokers Association and Insurance Agents Registration Board. It will cover all aspects of regulation of insurance intermediaries in Hong Kong. The IA will be responsible for licensing and supervision and may conduct inspections, investigations and disciplinary proceedings over the activities of insurance intermediaries. New statutory requirements, rules, codes and guidelines published (and to be published) by the IA will be applicable on insurance intermediaries.

Key matters under the new insurance regulatory regime

Licensing

Under the 'direct licensing regime', a new concept of 'regulated activity' has been introduced. Any person who carries on a 'regulated activity' specified in Part 1, Schedule 1 of the Ordinance must be licensed by the IA (Division 2, Part X of the Ordinance), and the IA will only grant licence to persons who it considers 'fit and proper' (Subdivision 2, Division 3, Part X of the Ordinance). The IA has issued a guideline on 'Fit and Proper' Criteria for Licensed Insurance Intermediaries (GL23) to outline the criteria and matters which the IA will normally consider in determining the fitness and properness of licensed insurance intermediaries.

Conduct

In respect of the duties and obligations which apply to licensed insurance intermediaries under the new regime, the insurance industry has expressed concerns about the apparently unclear overarching duty on the part of insurance agents to act fairly in the best interest of policy holders in carrying on regulated activities (S90(a) of the Ordinance). In this regard, the IA has issued two sets of codes of conduct, namely, 'Code of Conduct for Licensed Insurance Agents' and 'Code of Conduct for Licensed Insurance Brokers' to set out fundamental principles of professional conduct. It has also issued the following sales related Guidelines in order to assist the industry to understand the new requirements:

  • Guideline on Offering of Gifts (GL25);
  • Guideline on Sale of Investment-Linked Assurance Scheme (“ILAS”) Products (GL26);
  • Guideline on Long Term Insurance Policy Replacement (GL27);
  • Guideline on Benefit Illustrations for Long Term Insurance Policies (GL28);
  • Guideline on Cooling-off Period (GL29); and
  • Guideline on Financial Needs Analysis (GL30).

Internal control

Insurance intermediary companies should note that they are expected to maintain effective internal control to ensure compliance by their individual intermediaries (S64ZZA(2)(c) of the Ordinance; paragraph 6.4(c)(iv) of GL23). Authorised insurers are also encouraged to appoint a designated person(s) to take charge of compliance functions (which presumably include intermediary management function) (paragraph 7.19(a), Guideline on the Corporate Governance of Authorized Insurers (GL10). While whether to appoint a key person in intermediary management function is a decision for insurers, if an insurer decides not to appoint such position, it should be able (when asked) to justify such decision and to demonstrate how its corporate governance structure and internal controls remain adequate (Circular issued by the IA dated 30 August 2019 (ref: MC/INT/5)).

Inspections and investigations

Similar to other financial regulators, the IA will have powers to conduct inspections and investigations (Division 4, Part X of the Ordinance). Failure to comply with the IA's investigators' requirements can be a criminal offence (S64ZZL of the Ordinance).

Disciplinary matters

There will also be new rules governing disciplinary proceedings to be administered by the IA (Division 2, Part XI and Part XII of the Ordinance). Disciplinary sanctions against insurance intermediaries under the new regime include reprimand, suspension and revocation of licence, prohibition of licence application, and fines (S81(4) of the Ordinance). The maximum pecuniary penalty the IA can impose will be the higher of HK$10,000,000 or three times the amount of profit gained or loss avoided (S81(4)(e) of the Ordinance). The industry has previously requested that a tariff table be set to standardise pecuniary sanctions for specific misconducts; nevertheless, the IA rejected the idea of a tariff table and responded that sanctions would be imposed on a case-by-case basis. The IA has issued the Guideline on Exercising Power to Impose Pecuniary Penalty in Respect of Regulated Persons (GL22) for the industry's reference.

Transitional arrangements

To facilitate transition, insurance intermediaries who are validly registered with the SROs immediately before 23 September 2019 will be deemed as licensees under the new regime for a period of three years. During this period, it is expected that the IA will arrange for application of formal licensing by the deemed licensees under the new regime.

Certain (but not all) of the sales-related guidelines have transitional provisions allowing insurers and insurance intermediaries some time to adapt within a 12-month transitional period (from 23 September 2019 to 22 September 2020).

All complaints and non-compliance cases which are not resolved by the SROs as at 23 September 2019 will be handled by the IA in accordance with the 'old rules'. In other words, the new regime does not have retrospective effect.

Conclusion

While most (if not all) insurers and insurance intermediaries have been actively preparing themselves for the new regime, the facts that the new regime imposes new and heightened standards on industry players; that the regulator's powers to inspect and investigate are novel to the industry; and that there has been no precedence of how the IA exercises its powers mean that the industry should pay close attention to the developments of the regime, maintain a dialogue with the IA, and where needed, seek professional advice in ensuring compliance under the new regime.