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Focus: New Insurance Regulator proposed for Hong Kong

3 August 2010

In brief: The Hong Kong Government has recently proposed establishing an independent Insurance Authority to regulate the insurance market, which would be entrusted with comprehensive powers regarding insurers and insurance intermediaries. Partners Simon McConnell and Mun Yeow and Lawyer Kieran Humphrey consider its key features and potential impact on the market.

How does it affect you?

  • The consultation period for the introduction of an independent Insurance Authority (IA) ends on 12 October 2010. The draft Bill for the proposal is scheduled to be submitted to the Legislative Council during 2011.
  • It is proposed that the independent IA will assume the responsibilities of the Government-run Office of the Commissioner of Insurance (the OCI) and the existing IA, in order to create a single independent market regulator.
  • It is proposed that the IA should directly control the licensing and supervision of insurance intermediaries. This approach will require it to perform the functions of the three self-regulatory bodies that currently supervise insurance intermediaries (ie the Professional Insurance Brokers Association, the Insurance Agents Registration Board and the Hong Kong Confederation of Insurance Brokers).
  • The Hong Kong Monetary Authority's (the HKMA) powers may expand to match those proposed for the IA regarding insurance sold by banks.
  • It is proposed that the IA be funded by licence fees and a levy charged on insurance premiums. These amounts will increase incrementally over a five-year period.

Background

On 12 July 2010, the Financial Services and Treasury Bureau (the FSTB) released a consultation paper on the establishment of an independent IA, and has invited public submissions on the proposal until 12 October 2010. The reforms are intended to create a single independent regulator to replace the various bodies that perform the task now. These include the OCI, the existing IA and the self-regulatory bodies that currently supervise insurance intermediaries.

The IA will also bring Hong Kong in line with the international practice that financial regulators be operationally and financially independent of the Government. The OCI is currently the only financial services regulator in Hong Kong that remains part of the Government.

The independent IA's role and powers

Under the FSTB's recommended proposal, the independent IA will assume all of the regulatory functions currently performed by the OCI, the existing IA and the self-regulatory bodies that supervise insurance intermediaries. This change is likely to have the greatest impact on insurance intermediaries, which are currently subject to a system of self-regulation.

While the FSTB has not ruled out the possibility of adopting a closely supervised model of self-regulation, its stated preference is for the IA to become directly responsible for the licensing and supervision of insurance intermediaries. The FSTB considers that the current system of self-regulation is open to criticism resulting from perceived and real conflicts of interest, inadequate complaint handling and the inconsistencies that have emerged between the three separate self-regulatory bodies. The FSTB has also highlighted the need to subject intermediaries to greater supervision by providing the IA with additional powers that are not currently available to the three self-regulatory bodies.

On this basis, the FSTB's consultation proposes to update the Insurance Companies Ordinance (Cap. 41) to provide the IA with a full range of investigatory and enforcement powers regarding both insurers and insurance intermediaries. These powers are similar to those already afforded to the Securities and Futures Commission (the SFC) and include the power to:

  • enter the premises of a regulated entity to conduct an inspection;
  • initiate and pursue an investigation into a regulated entity or its staff;
  • require the production of documents or other information;
  • apply to the Court of First Instance to obtain an order requiring compliance with any conditions imposed during the course of an investigation or inspection;
  • impose sanctions such as a public reprimand and fine for non-compliance or misconduct; and
  • prosecute certain offences summarily.

The FSTB also proposes to establish a statutory appeals tribunal to provide a check and balance on the IA's powers. This tribunal will provide an independent review mechanism for appeals against any IA decision. The structure and powers of the tribunal are yet to be determined.

The independent IA's structure and funding

The IA is intended to operate using the corporate model adopted by the SFC. While the IA will function independently, a number of checks and balances have been proposed to ensure that the Government can continue to monitor its operations. These include:

  • the CEO and Governing Board of the IA will be appointed by the Chief Executive;
  • the IA's annual budget and corporate plan must be approved by the Financial Secretary;
  • the IA's annual report must be tabled before the Legislative Council; and
  • an independent Process Review Panel will be established by the Chief Executive to review the IA's internal operating procedures.

The IA's initial operating costs are expected to be approximately HK$240 million. This will be met by an initial Government grant and will then be funded from the revenue generated by a:

  • fixed license fee payable by all insurers and intermediaries;
  • variable licence fee payable by insurers and calculated based on their liabilities; and
  • levy of 0.1 per cent to be charged on all insurance premiums.

To offset the impact of these costs, the FSTB proposes to introduce them incrementally over a five-year period and to exempt insurance intermediaries from paying licence fees during that period.

Enhanced powers for the HKMA

It is proposed that any bank employee who sells insurance must be licensed with the IA. This will mean that such employees are subject to the IA's regime, as well as any relevant regulations that the HKMA imposes.

In this context, the FSTB recommends that the HKMA is given similar powers to the independent IA regarding insurance sold by banks. The nature and extent of these powers has not been made clear. However, they are expected to include the supervisory and enforcement measures proposed for the IA.

While this creates the potential for overlap between the independent IA and the HKMA, the FSTB considers that such reforms are necessary given that the client profile and sales environment of banks are significantly different from that of other intermediaries. Accordingly, the FSTB favours giving additional powers to the HKMA to ensure that banks can be held to additional standards (over and above those that the IA prescribes) that reflect the way in which insurance is sold to banking customers.

Conclusion

The independent IA is likely to introduce a new era of increased regulation for insurers and insurance intermediaries. In particular, the FSTB consultation paper indicates that the IA will be expected to place intermediaries under far greater scrutiny than they have experienced under self-regulation. The powers proposed for the IA also suggest that it will adopt a robust approach to the investigation and enforcement of regulatory non-compliance and misconduct. This may lead to increased regulatory issues for insurers and intermediaries. In any event, it seems probable that regulatory compliance will receive greater emphasis under the independent IA and become a more pressing concern for the market in the future.

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