- The Insurance Authority (the “IA”) took over responsibility for direct regulation of insurance agents and insurance brokers from 23 September 2019.
- Under the new regime the IA gained investigative and disciplinary powers, which can be used to punish misconduct by Insurance Intermediaries, their responsible officers (“ROs”) and management. These new enforcement powers are similar to those which the IA already exercised in relation to authorized insurers in Hong Kong (“Insurers”), and are more extensive than those under the pre-existing self-regulatory system.
1. A new, modern insurance regulator
Establishment of OCI
2015 Enactment of Insurance Ordinance & setting up of IA
2017 IA took over statutory functions from OCI
Source credit: Insurance Authority
2020-2022 Transitional period
Existing intermediaries will be deemed as licensees for three years.
2019 IA commences licensing and regulation of Insurance Intermediaries
> The Insurance Authority (the â€œIAâ€) took over responsibility for direct regulation of insurance agents and insurance brokers from 23 September 2019.
> Under the new regime the IA gained investigative and disciplinary powers, which can be used to punish misconduct by Insurance Intermediaries, their responsible officers (â€œROsâ€) and management. These new enforcement powers are similar to those which the IA already exercised in relation to authorized insurers in Hong Kong (â€œInsurersâ€), and are more extensive than those under the pre-existing self-regulatory system.
> In this note we recap the IAâ€™s powers in relation to Insurers and explore the IAâ€™s new powers in relation to Insurance Intermediaries under the Insurance Ordinance (the â€œOrdinanceâ€).
> If you are interested in finding out more about this topic, or need support handling a prospective IA investigation or in managing dialogue with regulators, please do not hesitate to get in touch.
Since 26 June 2017, the IA has been responsible for the regulation and supervision of Insurers in Hong Kong, replacing the Office of the Commissioner of Insurance (the â€œOCIâ€). The replacement of the OCI with the IA is intended to modernize the insurance regulatory regime in line with international standards, in particular with international recommendations that insurance regulators should be financially and operationally independent of government and industry.
> The Insurance Agents Registration Board (the â€œIARBâ€) established by the Hong Kong Federation of Insurers (the â€œHKFIâ€)
> The Hong Kong Confederation of Insurance Brokers (the â€œHKCIBâ€)
> The Professional Insurance Brokers Association (the â€œPIBAâ€)
Three pre-existing SROs
Once subject to regulation by the IA, Insurance Intermediaries are required (among other things) to comply with codes of conduct issued by the IA. See our client note on the IAâ€™s finalised codes of conduct for Insurance Intermediaries for further detail, and our summary on Ten things you need to know about the new Insurance Authority regime for Insurance Intermediaries.
2. The IAâ€™s disciplinary powers & penalties for Insurers have been extended to cover Insurance Intermediaries
2.1 When disciplinary powers may be exercised in relation to Insurers
In relation to Insurers, the IA may exercise its disciplinary powers where an Insurer is (or was) guilty of â€œmisconductâ€, or where it is of the opinion that any director or controller of the Insurer is (or was) not a â€œfit and properâ€ person.
It is worth noting that the concept of a â€œcontrollerâ€ here is broad and captures (among others) a managing director or chief executive of the Insurer or any parent company, and any person who (alone or with an associate) is entitled to exercise 15% or more of the votes at a general meeting of the Insurer or a parent company. In respect of an Insurer incorporated outside Hong Kong, a â€œmanaging directorâ€ includes a person who is a managing director in respect of so much of its insurance business as is carried on within Hong Kong, and a â€œchief executiveâ€ captures a person responsible for the conduct of the whole of the insurance business carried on within Hong Kong (unless that person is also responsible for insurance business carried on elsewhere, and has a subordinate responsible for the whole of the insurance business carried on within Hong Kong). The IAâ€™s regulatory remit therefore extends beyond only considering the conduct of the Insurer itself.
2.2 Insurance Intermediaries
Prior to 23 September 2019, disciplinary measures in relation to Insurance Intermediaries were in part undertaken by the SROs. The IARB, for example, was empowered to take disciplinary actions (such as the issuance of a reprimand or suspension) in relation to an insurance agent, responsible officers or technical representatives. Under the pre-existing regime the IA, by contrast, was only empowered to require Insurers to de-register insurance agents in the event of non-compliance with the HKFI Code of Practice.
Responsibility for the exercise of disciplinary powers in relation to Insurance Intermediaries now sits solely to the IA, exercising powers in relation to Insurance Intermediaries similar to those it previously possessed in relation to Insurers. As well as applying to Insurance Intermediaries, the IAâ€™s disciplinary powers also extend to cover the misconduct or a lack of fitness and properness of responsible officers (â€œROsâ€), as well as persons concerned in the management of the regulated activities carried on by an Insurance Intermediary (together â€œRegulated Personsâ€).
In addition to being directly exposed individually to regulatory action for their own misconduct or lack of fitness and properness, ROs (and former ROs) of Insurance Intermediaries may also be guilty of misconduct where misconduct by the relevant Insurance Intermediary occurred with their consent or is attributable to their neglect.
On 23 September 2019, the remaining provisions of the Insurance Companies Amendment Ordinance 2015 (the â€œIC Amendment Ordinanceâ€) entered into force, activating the IAâ€™s regulatory and supervisory powers in relation to licensed insurance agents (including a licensed insurance agency, licensed individual insurance agent and licensed technical representative (agent)) and licensed insurance brokers (including a licensed insurance broker company and a licensed technical representative (broker)) (collectively, â€œInsurance Intermediariesâ€). The IA takes over from the pre-existing self-regulatory system for Insurance Intermediaries which was administered by three self-regulatory organisations (â€œSROsâ€). Under the IC Amendment Ordinance, there are transitional arrangements for Insurance Intermediaries validly registered with SROs immediately before the commencement of the new regime, which are deemed to be licensed under the new regime for a period of three years following 23 September 2019 (similar provisions apply for existing responsible officers of insurance agencies and chief executives of insurance brokers).
More detailed guidance is set out in the IAâ€™s Guidelines on â€œFit and Properâ€ criteria for Insurers, and its Guidelines on â€œFit and Properâ€ criteria in relation to Insurance Intermediaries.
In determining whether a person is â€œfit and properâ€, the IA will take into consideration factors including that personâ€™s:
> ability to carry on a regulated activity competently, honestly and fairly;
> reputation, character, reliability and integrity;
> financial status or solvency;
> disciplinary actions taken by regulators (including those outside HK).
> a contravention of the Ordinance;
> a contravention of any term or condition of a licence granted under the Ordinance;
> a contravention of any other condition imposed under the Ordinance; and
> an act or omission relating to the carrying on of any regulated activity which, in the IAâ€™s view, is likely to be prejudicial to the interests of policy holders or of the Hong Kong public (having regard to the IAâ€™s Codes and Guidelines).
â€œMisconductâ€ captures: â€œFit and properâ€:
If the IA determines that there has been misconduct or that a person is no longer a â€œfit and properâ€ person, the penalties that the IA can impose are potentially severe (resembling those available to the Securities and Futures Commission (the â€œSFCâ€) under the Securities and Futures Ordinance). Penalties include:
> the nature, seriousness and impact of the conduct, e.g.
> whether the conduct was intentional, reckless, fraudulent or dishonest;
> the impact of the conduct and the loss, or risk of loss caused;
> duration and frequency of the conduct
> behaviour since the conduct was identified, including whether the conduct was self-reported and remedial steps taken;
> previous disciplinary record and compliance history; and
> other relevant factors such as the IAâ€™s decisions in similar previous cases, the result of any criminal or civil action relevant to the conduct, and the decisions of overseas regulators.
Naturally, disciplinary actions and penalties may also lead to negative publicity, since the IA may publish the details of the disciplinary acts that it takes to the public, including the reasons for which it decided to act and material facts of the case.
> revocation and suspension of the licences of an Insurer or Insurance Intermediary (or revocation/suspension of approvals as an RO of an Insurance Intermediary);
> prohibition against applying for licences for a period of time (or for applying for approval as an RO of an Insurance Intermediary);
> public or private reprimand; and
> a pecuniary penalty (per breach) not exceeding the greater of HK$10m or 3 times the amount of profit gained/loss avoided.
Licences (or approvals of ROs) may also be revoked/suspended in certain circumstances related to insolvency/bankruptcy, criminal conviction or mental incapacity.
Separately, it is worth noting that the IA may also revoke its approval of the appointment of a managing director or chief executive of an Insurer, a director of an insurer incorporated in Hong Kong, or a key person in control functions of an Insurer, if it is of the opinion that such person is no longer â€œfit and properâ€.
The IAâ€™s approach to imposing pecuniary penalties is naturally of significant interest. The IA has published Guidelines on the application of pecuniary penalties to Insurers or Regulated Persons (in relation to Insurance Intermediaries). In both cases, the IA indicates that it views a pecuniary penalty as more severe than a reprimand, and that a pecuniary penalty should be â€œeffective, proportionate and fairâ€. When considering whether to impose a penalty and the amount of the penalty, the IA will take into account all the circumstances of the relevant case, with the relevant Guidelines setting out a non-exhaustive list of factors that the IA will take into consideration. Such factors include:
3. A high-level overview of enforcement procedure
Disciplinary Process in Outline
Preliminary AssessmentCase Assessment
Preliminary Findings Letter* * If the case is complicated or the
breach/misconduct is serious
Insurance Appeals Tribunal
Notice of Proposed Disciplinary Action
Representations by Regulated Persons
Written Representations Oral Representations
Source credit: Insurance Authority
In September 2019, the IA published an Overview of Disciplinary Process document, which is intended to provide a broad overview of its disciplinary process (but not to be definitive or exhaustive). While focussed on the disciplinary process that would apply in relation to Regulated Persons, the IA indicates that in broad terms the same disciplinary process would be adopted in relation to other disciplinary actions, including those against Insurers.
Exercisable where Powers
Inspection The IA may appoint an inspector to determine whether there is/has been:
> compliance with the Ordinance;
> compliance with a notice/requirement under the Ordinance;
> compliance with terms/conditions of authorization; and/or
> compliance with any conditions imposed under the Ordinance.
The IAâ€™s website indicates that on- site inspections will form part of its ongoing supervisory approach (and thus inspections are not necessarily an enforcement tool) and be risk-based. The IA may communicate deficiencies/ concerns identified as part of an inspection to the relevant firm and require rectification. Suspected non-compliance may be subject to consideration of further investigation (see below) or other supervisory intervention by the IA.
The inspector may:
> enter premises;
> have access to business records; and/or
> make enquiries of persons he believes to be in possession of relevant information.
Verification of answers by statutory declaration may be required.
Investigation The IA may appoint an investigator where the IA has reasonable cause to believe:
> there has been a contravention of the Ordinance;
> that a person may have been involved in defalcation, fraud, misfeasance or other misconduct; and/or
> that a person has carried on/is carrying on a regulated activity in a manner that is not in the interests of policyholders or the public interest.
In addition, the IA may investigate where it has reason to enquire whether a person is or was guilty of misconduct or is or was not a fit and proper person.
The investigatorâ€™s powers include requiring a person to:
> produce and explain relevant records or documents;
> attend interviews to answer questions;
> answer written questions; and
> to give other assistance in connection with the investigation.
Verification of answers by statutory declaration may be required.
In support of these powers, the appointed investigator/inspector may apply to a magistrate for a warrant to enter premises and search for, seize and remove relevant documents.
Persons who fail to comply with an inspection or who knowingly or recklessly provide false information (or who cause or allow others to do so) commit an offence punishable by fines and imprisonment (with penalties being highest if there is an intent to defraud). Destruction of records or documents is also an offence, as is disclosure of an ongoing inspection/ investigation without the IAâ€™s consent (subject to exemptions). It is worth noting that the Ordinance contains statutory secrecy provisions (similar to those under the Securities and Futures Ordinance), which extend to persons assisting the IA in performing its functions. Insurers and Insurance Intermediaries should ensure that they also consider the effect of these statutory secrecy provisions when considering disclosure of an inspection or investigation.
An inspector/investigator may also apply to the Court of First Instance for an order requiring compliance (and a person who the Court of First Instance determines failed to comply without reasonable excuse may be punished as if guilty of contempt of court). A person who has been compelled to answer questions by an investigator cannot refuse to do so on the grounds that the answer may incriminate him, but can â€œmake a claimâ€ to prevent such answers being used in criminal proceedings.
3.1 The IAâ€™s powers of inspection & investigation
3.2 Preliminary findings letter
If a matter is serious or complex and an investigation reaches a point where the investigator considers that the evidence reveals misconduct, the IA has indicated that the investigator may send a â€œPreliminary Findings Letterâ€ to summarize the case based on preliminary findings and will invite the Regulated Person to respond within a certain period of time. The IA indicates that the Preliminary Findings Letter should provide the Regulated Person with an opportunity to respond to the allegations and may also serve as a means of narrowing the issues in dispute.
3.3 Disciplinary Assessment and Notice of Proposed Disciplinary Action
If an investigator forms the view that allegations are substantiated, then the case will be passed to a separate team (that has not been involved in the investigation) within the IA to take the matter forward. If that separate team finds the allegations have been substantiated, the views of the IAâ€™s Disciplinary Panel are sought.
If the Disciplinary Panel is of the view that the matter should move to the next stage, it will direct that a Notice of Proposed Disciplinary Action (â€œNPDAâ€) is issued to the Regulated Person, setting out the facts on which the case is based, and the evidence relied upon by the IA to support those facts. The NPDA will indicate the sanctions which the IA considers appropriate to impose, as well as a list of documents relied upon by the IA.
Prior to the exercise of its disciplinary powers, the Ordinance requires that the IA gives the relevant person a reasonable opportunity to make written or oral representations to the IA. The IAâ€™s Disciplinary Process document indicates that the NPDA will inform the Regulated Person of their right to make representations, and that a Regulated Person who wishes to have an oral hearing should make their request in writing as soon as possible so that a Disciplinary Panel meeting can be convened. The NPDA will also specify the deadline by which a response is due.
3.5 Provision of a decision notice
If the IA decides to exercise its disciplinary powers, it must serve a written decision notice on the relevant person. The Ordinance requires that this notice includes:
Generally, the decision takes effect 21 days after from the date on which the notice is served, unless the affected person appeals the decision or notifies the IA within 21 days that they do not intend to appeal.
3.6 Appeals to the Insurance Appeals Tribunal
Appeals may be made to the Insurance Appeals Tribunal (the â€œIATâ€). Established in July 2017, the statutory purpose of the IAT is to ensure that the relevant regulatory decisions made by the IA are reasonable and fair. Appeals must be lodged with the IAT within the period ending 21 days after the service of the decision notice.
The IAT is empowered to confirm, vary or set aside decisions of the IA, or to remit decisions back to the IA with appropriate directions.
As yet, the IAT website does not list any scheduled applications or concluded review cases, and so how (in practice) the appeals system will function remains to be seen. However, the IAT is required to give the parties a reasonable opportunity to be heard and is empowered to (among other things) receive and consider evidence, require persons to attend and give evidence before sittings of the IAT and require witness evidence. Alternatively, the IAT may with the consent of the IA and the applicant(s) determine the review on the basis of written submissions only.
Should the parties be dissatisfied with a determination of the IAT, subject to conditions a further appeal may be made to the Court of Appeal.
> a statement of the IAâ€™s reasons;
> the time when the IAâ€™s decision is to take effect;
> the duration and terms of any relevant revocation, suspension or prohibition;
> the terms in which the person is to be reprimanded, if relevant; and
> if relevant, the amount of pecuniary penalty and time in which it is required to be paid.
4. What about Insurance Intermediaries that are also HKMA regulated?
Given their significance as distribution channels for insurance products, it is important to note that the IA has delegated its powers of inspection and investigation in relation to the insurance-related business of licensed banks, restricted licence banks and deposit-taking companies (â€œauthorized institutionsâ€ or â€œAIsâ€) to the Hong Kong Monetary Authority (the â€œHKMAâ€). A Memorandum of Understanding (the â€œMoUâ€) outlining how the HKMA and IA intend to cooperate in the licensing and supervision of AIs (in respect of which the HKMA is the primary regulator) that are also licensed as Insurance Intermediaries was published on 19 July 2019. Although the IA is not prevented from concurrently exercising the delegated powers, as a general principle inspections and investigations into insurance-related activities of AIs will be conducted by the HKMA, but with the MoU providing for consultation and information sharing between the two regulators. Should the IA decide to carry out its own inspections or investigations, it must first consult with the HKMA.
In terms of imposing disciplinary sanctions, pursuant to the MoU, the IA must consult with the HKMA prior to taking action against an AI, or a person who is an employee/agent of an AI. Reflecting its status as frontline regulator of AIs, the HKMA will then be responsible for monitoring the implementation of any remedial actions to an AIâ€™s internal control and management systems required pursuant to an IA disciplinary action.
From 23 September 2019, all complaint and non-compliance cases unresolved by the SROs will be handled by the IA by reference to the applicable rule (such as the codes, guidance notes and guidelines issued by the SROs) that would have applied to the case had it been handled by the SRO concerned (the IA has published a list of the relevant rules on its website). As a result, there is no retrospective application of conduct requirements newly-introduced after 23 September 2019 to Insurance Intermediaries.
In respect of cases transferred as a consequence of these transitional arrangements, the IA may:
6 Enforcement powers under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (â€œAMLOâ€)
The IA is also empowered under the AMLO to investigate suspected offences or non-compliance with anti-money laundering or counter-terrorist financing obligations. These powers are applicable to Insurers carrying on long-term business and Insurance Intermediaries carrying on a regulated activity that relates to long-term business. Although we do not go into detail here, the AMLO provides for investigative procedures and also for the imposition of penalties in relation to breaches of the AMLO. Penalties may include public reprimands, the ordering of remedial actions, or the payment of a pecuniary penalty not exceeding the greater of HK$10m or 3 times the profit gained or costs avoided as a result of the contravention. Decisions of the IA under the AMLO are appealable to the Anti-Money Laundering and Counter-Terrorist Financing Review Tribunal.
> conduct an investigation;
> commence disciplinary proceedings;
> impose a disciplinary sanction (that could have been imposed by the relevant SRO); or
> dismiss the case.
Next steps and how Linklaters can help
Should you like more information on the topics discussed in this note or require assistance with an ongoing investigation or prospective investigation, please do not hesitate to reach out to us.
7 Powers of intervention in relation to Insurers
In addition to the disciplinary powers outlined above, it is worth noting that the IA may also exercise extensive powers of intervention in the business of Insurers. These powers are exercisable where (among other circumstances):
The IAâ€™s powers of intervention in these circumstances are extensive. For example, the IA may place restrictions on the Insurer entering into new business, restrictions on the Insurer making or realizing particular investments, impose limitations on premium income from specified categories of business, and require the production of information and documents. Where the IA is not satisfied that its other powers would be sufficient to protect the interests of policyholders, it may exercise â€œresidual powersâ€ to require an Insurer to take such action as the IA considers appropriate. Where necessary to protect policyholders against the risk that the Insurer cannot meet its liabilities, the IA may take further steps such as appointing a â€œManagerâ€ to manage the affairs of the relevant Insurer for a period of time.
> the IA considers exercise of its intervention powers desirable for protecting policyholders against the risk that the insurer may be unable to meet its liabilities or fulfil policyholdersâ€™ reasonable expectations;
> breach of an obligation under the Ordinance;
> failure to comply with minimum capital and margin of solvency requirements;
> the directors or controllers of the Insurer are not fit and proper persons; or
> the IA is not satisfied that the Insurer can pay its debts as they fall due.
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