Focus: Detailed proposals announced for Hong Kong's new insurance regulator
3 October 2011
In brief: Detailed proposals have been announced for Hong Kong's independent Insurance Authority, which will have comprehensive powers regarding insurers and insurance intermediaries. Partner Simon McConnell , Senior Associate Kieran Humphrey and Trainee Solicitor Alice Mok consider its key features and potential impact on the market.
- The independent IA's role and powers
- The independent IA's structure and funding
- Proposed cooperation between the IA and the HKMA
How does it affect you?
- It is proposed that the independent Insurance Authority (the IA):
- 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, and also help to maintain Hong Kong's financial stability;
- directly control the licensing and supervision of insurance intermediaries, requiring it to perform the functions of the three self-regulatory bodies that currently supervise insurance intermediaries, and become the primary and lead regulator for all insurance intermediary activities;
- work closely with the Hong Kong Monetary Authority (the HKMA) and delegate some powers to it regarding insurance sold by banks, in order to maintain regulatory consistency; and
- be funded by licence fees and a levy charged on insurance premiums. These amounts will increase incrementally over a five-year period, with a cap imposed on the levy.
- The industry and relevant stakeholders will be engaged to refine the proposals, and draft legislative provisions are scheduled to be available in early 2012.
On 12 July 2010, the Financial Services and Treasury Bureau (the FSTB) released a consultation paper on the establishment of an independent IA, and invited public submissions on the proposal until 12 October 2010. The consultation conclusions and detailed proposals for the establishment of the IA were announced on 24 June 2011.
The reforms are intended to create a single independent regulator to replace the various bodies that now perform the task. These include the OCI, the existing IA and the 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 IA will also bring Hong Kong into 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 is part of the Government.
During the consultation period, the FSTB received general public support for the proposed establishment of the independent IA. In light of the comments received, the FSTB has formulated detailed proposals that are likely to be incorporated into the draft legislation. They will be subject to further comment by industry and relevant stakeholders until the end of 2011. At this stage, the draft legislation is scheduled to be finalised in early 2012.
Under the FSTB's proposals, the independent IA will assume all the regulatory functions that the OCI, the existing IA and the self-regulatory bodies that supervise insurance intermediaries currently perform. In particular, it will assume the additional function of assisting the FSTB in maintaining Hong Kong's financial stability.
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;
- apply to a magistrate for a warrant to search for, seize and remove any records or documents required to be produced;
- 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.
Importantly, it is proposed that the IA become the primary and lead regulator for all insurance intermediary activities, including the activities of banks and their employees. It will also be the sole regulator to set conduct standards and requirements.
The IA's enhanced role and powers are likely to have the greatest impact on insurance intermediaries, which are currently subject to a system of self-regulation. To minimise such impact, the FSTB has proposed a transitional arrangement. The existing insurance intermediaries that are already registered with the self-regulatory bodies will be deemed to be licensed with the independent IA for three years. After that time, those existing insurance intermediaries will need to apply to the IA to obtain a new licence.
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, including disciplinary decisions. It has the jurisdiction to confirm, vary or set aside any IA decision and even to direct it to make a fresh decision on a specific matter. The proposed tribunal will consist of market practitioners and people with appropriate knowledge and experience in the insurance industry, and be chaired by a person eligible for appointment as a High Court judge. The tribunal's members will be appointed by the Chief Executive of Hong Kong.
The IA is intended to operate using the corporate model that the SFC has adopted. 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 that:
- the CEO and governing board of the IA 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;
- an independent Process Review Panel will be established by the Chief Executive to review the IA's internal operating procedures;
- Industrial Advisory Committees will be appointed by the Government to provide expert advice and recommendations to the IA's governing board; and
- an expert panel will be appointed by the IA's governing board to provide advice for the disciplinary process.
The IA's initial operating costs are expected to be approximately HK$240 million for the first year. This will be met by an initial Government grant and will then be funded from the revenue generated by:
- fixed license fees payable by all insurers and intermediaries;
- variable licence fees payable by insurers and calculated on their liabilities;
- user fees for specific services (such as applications for transfer of business, for authorisation of insurers or change in key personnel); and
- a 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 the fees and levy incrementally over a five-year period and to exempt insurance intermediaries from paying licence fees during this time. In response to feedback, the FSTB also recommends that a cap be imposed on the levy on non-life insurance policies with annual premiums of more than HK$5 million and life insurance policies with single or annualised premiums at or above HK$100,000. The level of this proposed cap will be subject to the IA's review. The FSTB also suggests exempting reinsurance contracts from the levy.
It is proposed that any insurance intermediaries, including any bank employee that sells insurance, must be licensed with the IA. Given the HKMA's role as the primary and lead regulator of banks, this proposal will mean that bank employees are subject to the IA's regime, as well as any relevant regulations that the HKMA imposes.
Due to the significant differences between banks and other insurance intermediaries, the FSTB recommends that the independent IA work closely with the HKMA regarding the regulation of any bank's insurance intermediary activities. Specifically, it is proposed that the IA will need to delegate certain powers to the HKMA, including:
- the power to inspect a bank's premises will be jointly exercised by the IA and the HKMA;
- the IA's investigation powers will be delegated to the HKMA if the alleged wrongdoing concerns a bank, on the condition that the IA can take over any investigations it considers necessary; and
- the existing IA's disciplinary powers will be vested with the IA and the HKMA will only participate actively in the disciplinary process.
In addition, the IA will be responsible for handling complaints from the public against insurers and insurance intermediaries. However, it will refer those relating to a bank's insurance intermediary activities to the HKMA for further investigation. The HKMA will then need to inform the IA of any relevant results.
Any such delegation by the IA will need to be approved by the Chief Executive, who may also impose conditions. The HKMA will also be held accountable to the IA when carrying out the delegated powers.
The FSTB views this proposed cooperation between the IA and the HKMA as an effective means to maintain regulatory consistency between bank and non-bank insurance intermediaries, minimise any regulatory gap and facilitate the exchange of information between the two regulators.
With the draft legislation expected to be completed in early 2012, market participants have a short window of opportunity to comment on the FSTB's detailed proposals. As it stands, the independent IA is likely to introduce a new era of increased regulation for insurers and insurance intermediaries. Given the IA's enhanced role, especially in light of its investigatory and enforcement powers, insurers and insurance intermediaries will presumably be placed under much greater scrutiny. This may mean that insurers and insurance intermediaries need to pay more attention to regulatory compliance in the future. For banks, the introduction of the independent IA may not result in significant change, as the HKMA is likely to remain the primary regulator of the banking sector by exercising the IA's delegated powers.