Mr Simon McConnell and Mr Kevin Martin of Clyde & Co’s Hong Kong office highlight the key changes by the Insurance Companies (Amendment) Bill 2014 which is now being tabled, and say there is still time for the industry to influence the final form of the Bill as there are still a lot of detailed regulations in the Bill which will need to be determined by the Independent Insurance Authority (IIA) after it is established.
After many years of industry and public consultations, on 30 April 2014, the Insurance Companies (Amendment) Bill 2014 (the Bill) to amend the Insurance Companies Ordinance (Chapter 41 of the Laws of Hong Kong) (Ordinance) was tabled at the Legislative Council for first reading. If enacted (as expected), the Bill will significantly change Hong Kong’s insurance regulatory regime.
Key changes by the Bill
The key changes envisaged by the Bill are:
• the establishment of an independent insurance authority (IIA) – a better resourced and more flexible/powerful regulator, with enhanced rule setting, inspection and disciplinary powers;
• a statutory licensing regime operated by the IIA for persons conducting regulated activities;
• conduct requirements for insurance intermediaries; and
• prior approval of key persons in control functions.
The overall framework of the new regulatory landscape is now clear, so insurers and licensed insurance intermediaries can begin to think strategically about their impact and to consider the effects of the regulatory changes.
However, there is still time to influence the final form of the Bill and there are a lot of detailed regulations to be determined by the IIA after it is established - so there is still time for industry participants to be involved in shaping this process.
The IIA
The proposed IIA will regulate and supervise the insurance industry and be responsible for supervising an authorised insurer’s and licensed insurance intermediary’s compliance.
To allow it to do this, the IIA will be vested with appropriate powers of inspection, investigation and be able to impose disciplinary sanctions, including reprimands, fines, suspension or revocation of licences.
A lot of industry attention is being paid to:
• the composition of the board of the IIA and the role of Industry Advisory Committees – to ensure that the IIA has the right level of industry involvement and expertise, without there being the real or perceived risk of regulatory capture by the industry; and
• the high level of penalties the IIA can potentially impose on regulated entities.
The industry concerns are particularly acute as the IIA will have powers to:
• formulate regulations;
• conduct investigations in respect of authorised insurers’ and licensed insurance intermediaries’ contraventions of the Ordinance;
• take disciplinary actions against authorised insurers and licensed insurance intermediaries if they are guilty of “misconduct”;
• withhold or withdraw authorisation from persons deemed not to be “fit and proper”.
Whilst there is broad agreement on the need for an IIA, there is a concern from the industry that with independence, flexibility and extensive powers - there is the potential for an aggressive IIA to use these powers extensively in a manner that is not currently envisaged.
This is clearly something of concern to the industry, hence its interest to have as strong a voice as possible in the IIA and advising the IIA. We have seen examples overseas of powerful independent regulators challenging existing (profitable) industry practices - for example where a regulator considers that there is a conflict of interest or lack of transparency to the detriment of policyholders.
It is proposed that the IIA will be financed by fees payable by insurers and insurance intermediaries, user fees for providing specific services by the IIA, and a levy of 0.1% on insurance premiums, although a levy cap of HK$100 (US$13) per life insurance policy and HK$5,000 per non-life insurance policy will be imposed.
Licensing of regulated activities
Another significant change to the insurance regulatory regime in Hong Kong will be that a person will require a license granted by the IIA to carry on “regulated activities”.
“Regulated activities” will be defined in the amended Ordinance and will include:
• negotiating or arranging an insurance contract;
• inviting or inducing (or attempting the same) a person to enter an insurance contract or to make a material decision; and
• providing regulated advice.
Detailed guidance on the scope of these regulated activities has not been published at present. Industry involvement in preparing these guidelines will be important, to ensure that the guidance in respect of regulated activities takes into account the full range of distribution models, including retail distribution, online sales/aggregators, third party administrators etc.
In any event, the scope of regulated activities appears to broader than at present, so market participants will need to review their existing operations to ensure that they comply with the new broader scope, and if applicable become licensed.
Regulation of intermediaries by the IIA and conduct requirements
The IIA is replacing the three self-regulatory organisations in licensing and regulating insurance intermediaries. As such, we expect the application of the regulations to be more actively enforced over time.
Conduct requirements for licensed insurance intermediaries will be set out in primary legislation and detailed in subsidiary legislation. Non-statutory codes and guidelines will be issued by the IIA.
We expect that over time the regulatory burden on licensed intermediaries (particularly agents) will increase - which may make the sustainability of the mass agency model difficult and lead to a difficult transition to a greater reliance on larger more professional agencies, broker channels and increasingly direct sales.
The Bill also introduces a statutory duty for licensed insurance intermediaries to act in the best interests of policyholders. There is significant industry concern as to how this obligation will be enforced in practice by the regulator and the extent to which the guidance by the regulator can be relied on in court.
One concession, to allay insurance agents’ concerns in respect of potential conflicts of interest, has been to specify in the Bill that any term in an agreement between the insurer and its agent that contravenes the statutory “best interest” provision duty will be unenforceable. However, to date there is no concession in the Bill as to this in terms of the relationship between agent and insured.
It remains to be seen if and how the new regulatory regime under the IIA will affect the regulatory arbitrage between the broker and agent channels and/or if there will be further changes to arrangements in respect of commission disclosure.
Insurers will be required to appoint a key person for performing the function of intermediary management.
Prior approval for appointment of key persons
The IIA’s prior approval will now be required to the appointment of a director or key person in control functions (ie a person responsible for the management of intermediaries (see above) or a function whereby a person is likely to exercise a significant influence on the business carried on by the insurer). The IIA will also be empowered to revoke the approval of the appointment if the IIA is satisfied that the officer in question is no longer fit and proper.
Mr Simon McConnell is Partner and Mr Kevin Martin is Senior Associate at Clyde & Co’s Hong Kong office.