Hong Kong’s proposed Independent Insurance Authority
October 2014 update
The race is well underway to enact the provisions required to set up the
Independent Insurance Authority (IIA) and transition to the new insurance regulatory
regime in Hong Kong.
All of this is all occurring against the backdrop of international regulatory reform
including:

The development and implementation of the back stop capital standard during
2014 for Globally Systemically Important Insurers (GSIIs)

The designation of reinsurer GSIIs in late 2014

The development of the higher loss absorbency requirements for GSIIs by 2015

The finalisation of the Global Capital Standard by 2016 with implementation to
commence in 2019 for both GSIIs and Internationally Active Insurance Groups
(IAIGs)

The finalisation of the Common Framework for the Supervision of IAIGs (the
Common Framework)
To date, nine insurers have been identified as GSIIs (with an unspecified number of
reinsurer designations to follow by late 2014). Some 50 insurance groups are expected to
be eventually identified as IAIGs.
The Insurance Companies (Amendment) Bill 2014 (the Bill) was gazetted and presented
to the Legislative Council for first reading in April 2014. It marks a key milestone in the
Hong Kong insurance regulatory reform.
What you should know:





How the Bill will be enacted
The key provisions
How transitional issues will be dealt with
The work of the Bills Committee and what lies ahead
What you need to do to plan for when the Bill becomes law
In proposing the Bill, the Financial Services and Treasury Bureau (FSTB) had a number of
important objectives:

To replace the existing Insurance Authority with a new regulatory body for the
insurance industry in Hong Kong that is financially and operationally independent
of government – the IIA

To introduce a statutory licensing regime for insurance intermediaries (including
banks)
Hong Kong’s proposed
Independent Insurance Authority

To modernise the insurance regulatory infrastructure by giving the IIA additional
powers of oversight, inspection, investigation, discipline and prosecution
1 2014 Update
October
Hong Kong’s proposed Independent Insurance Authority
October 2014 update
The process
The Bill proposes to amend the Insurance Companies Ordinance (ICO). It is the first
major addition to the ICO since the inclusion of agents and brokers regulatory
requirements introduced in 1994, some 20 years ago.
The Bill must proceed through three readings in the Legislative Council. The first
reading was effectively the introduction of the Bill. The second reading was where the
FSTB introduced and explained the Bill. The debate on the Bill was then adjourned,
referred to the House Committee in May 2014 and a Bills Committee, chaired by the
Honourable Wong Ting Kwong, was then formed.
The Bills Committee has now met on four occasions but a significant amount of work
remains to be done. The proposed work plan for the Bills Committee (see Insurance
Companies (Amendment) Bill 2014) suggests this work will not be completed until June
2015. Once this work is done, debate on the second reading will recommence. Once it
has passed the Bill, it will be read a third time, presented to the Chief Executive for
execution and gazetted (when the effective date will be notified). It is anticipated that
this legislative process could be complete by as early as July 2015.
The enactment of the Bill is only the first step. Apart from the transitional
arrangements, which we outline below, a significant body of work will need to be
undertaken in recruitment, establishing systems and procedures and preparing industry
codes of practice. Whilst it remains to be seen how these codes will be implemented,
some of the rules will be made by way of regulations enacted under the ICO. The
industry has an opportunity now to consider what provisions are appropriate for industry
codes so that these can be considered by the provisional IIA as soon as it is formed.
The headlines on the Bill
Licensing of insurance intermediaries
Perhaps the most significant change proposed is that the IIA will take over responsibility
for the regulation of insurance intermediaries from the various self regulatory bodies
(the Hong Kong Federation of Insurers (HKFI) for agents and the Confederation of
Insurance Brokers (CIB) and the Professional Insurance Brokers Association (PIBA) for
brokers).
2
Hong Kong’s proposed Independent Insurance Authority
October 2014 update
Regulated activities
In contrast to the current need to be licensed for “advising on or arranging
insurance”, intermediaries and their technical representatives (TRs) will, assuming
the Bill in its current form becomes law, need to be licensed if they:

Negotiate or arrange a contract of insurance

Invite or induce, or attempt to invite or induce, another person to enter
into a contract of insurance

Invite or induce, or attempt to invite or induce, another person to make a
material decision including decisions on certain specified matters

Give regulated advice including an opinion on certain specified matters
The proposals define these activities as “regulated activities”.
Further guidance is provided on what constitutes the making of a “material
decision” or providing “an opinion”. These terms are fairly wide and include:

Making an insurance application or proposal for a policy

Issuance, continuance or renewal of a policy including any supplementary
contract (which the Commissioner of Insurance refers to by the shorthand
term ‘rider’)

Cancellation, termination, surrender or assignment of a policy including any
rider

Exercising rights under a policy including any rider

Changes to terms and conditions of a policy including any rider

Making or settling an insurance claim
Certain exemptions are proposed. These include a full exemption for a person
carrying on a regulated activity if it involves only clerical or administrative duties
for an insurer. A partial exemption is provided for:

Solicitors, counsels, certified public accountants, certain trust companies,
certain actuaries and certain loss assessment and claims settling businesses
in respect of the provision of regulated advice wholly incidental to their
practice or business

Persons providing regulated advice through newspapers, magazines, books
or other publications generally available to the public (excluding
subscriptions), on television or radio broadcast to the public or through an
electronic communication to the public
3
Hong Kong’s proposed Independent Insurance Authority
October 2014 update
Advisors and publishers will need to understand the limited scope of these
exemptions.
The IIA will assume responsibility for the licensing, supervision and discipline of
new insurance intermediaries and their TRs. Existing licences for intermediaries
and their TRs granted under the former self regulatory regime will expire at the
end of a three year transitional period. Licences for intermediaries (who may be
individuals, partnerships or corporations) and their TRs will generally still need to
be renewed every three years.
Corporate agents and brokers will continue to need to apply for the approval of a
Responsible Officer (RO). An insurer will need to apply for approval before
appointing a key person in a control function including a function responsible for
ensuring that internal controls and procedures are in place and observed by its
appointed insurance agents.
Extraterritorial application
Section 64H of the Bill introduces extraterritorial effect with respect to the
regulated activities of insurance intermediaries. It provides:

a person (or someone on behalf of that person),

who markets to the public,

from a place outside Hong Kong,

a regulated activity that they provide,

is to be regarded as holding out that the person is carrying on a regulated
activity.
The consequence is that such person may not undertake those activities without
being licensed for that regulated activity. It is not certain whether the intention of
this provision is to capture activity from abroad that is directed:

to the public in Hong Kong while they are physically located in Hong Kong
only; or

to the public in Hong Kong wherever they are physically located (for
example, while they are visiting another country).
In the latter case, the activity of product sales (for example) to Hong Kong public
entirely abroad could be caught. If this is not caught by the provision, subsequent
servicing of entirely offshore products by approaches into Hong Kong (for example,
by negotiating and settling a claim) would be captured by reason of the extended
definition of regulated activities.
4
Hong Kong’s proposed Independent Insurance Authority
October 2014 update
Liabilities and responsibilities for “misconduct”
There are substantial financial penalties for “misconduct” by agents and brokers
and their ROs and the same apply to insurers guilty of “misconduct”. The IIA may
impose a fine of up to HK$10M or three times the amount of the profit gained/loss
avoided as a result of the “misconduct”.
The introduction of the concept of “misconduct” by reference to actions that are
“prejudicial to the interests of the policyholder” is very broad. The industry needs
to consider and ideally have input into the guidance on what will constitute
“misconduct” proposed to be set out in the code of conduct to be published under
the proposed section 93 or any code or guideline to be published under the
proposed section 131 of the Bill.
Transition
The Bill plans for transition by allowing for:

A lead in time for the establishment of the IIA (with the initial
establishment of the provisional IIA)

The grandfathering of existing intermediary licences for the first three years
after the new provisions come into force.
On 3 October 2013, the FSTB announced it was forming a working group to
facilitate smooth transition to the IIA. The Convenor of the working group is the
Deputy Secretary for Financial Services and the Treasury (Financial Services). The
other members include:

the Assistant Commissioner of Insurance (Enforcement);

the Principal Assistant Secretary for Financial Services and the Treasury;

the Chairman of the CIB;

the Convenor of the Insurance Industry Regulatory and Development
Concern Group;

the Chairman of the Insurance Agents Registration Board (IARB);

the Chairman of PIBA;

the President of the Life Underwriters Association of Hong Kong;

the Past President of the General Agents and Managers Association of Hong
Kong; and

the Chairman of the HKFI’s Task Force on the Independence of the
Insurance Authority.
5
Hong Kong’s proposed Independent Insurance Authority
October 2014 update
The first meeting of this working group took place on 24 October 2013 when it was
agreed that:

CIB, PIBA and the IARB - the Self Regulatory Organisations (SROs) - would
prepare submissions on the transfer of SRO complaint and appeal cases that
remain outstanding when the IIA is established;

the Office of the Commissioner of Insurance (OCI) would prepare a list of
past codes and guidelines published by SROs;

the FSTB would discuss guidance on “acting in the best interest of
policyholders” with relevant stakeholders for the IIA’s future reference;

the FSTB would provide an outline of options to deal with applications for
registration and change notices made before the IIA is operational;

at each meeting of the working group, the OCI would report on progress for
the transfer of data to establish the IIA public register; and

the FSTB would establish a dedicated webpage to provide information on
the working group’s discussions and outcomes.
In its most recent meeting on 5 June 2014, the FSTB noted the need for the IIA to
issue new rules, guidance notes and codes, some of which were required by the Bill
(for example, the guidelines on pecuniary penalties). In that meeting, the OCI
agreed to prepare a list of guidelines required to be issued by the IIA.
The Bill and Bills Committee progress
The most recent Committee Meeting was on 21 July 2014. Some key developments
are as follows:
A. Enhancement of Existing Regulatory Powers in respect of Insurers
(Amendments to Parts II – VII of the ICO)
Legislative Purpose: enhance corporate governance of authorised insurers so that
only fit and proper persons will be in charge of authorised insurers’ business. This
will also benefit policy holders.
The Bill’s provisions include:
1. Controllers, Directors and Key Persons in Control Functions of Authorised
Insurers

Clause 23 of the Bill substitutes a new section 13A for the ICO.

The proposed new section 13A states that an authorised Insurer
incorporated in Hong Kong cannot appoint a controller unless they are first
6
Hong Kong’s proposed Independent Insurance Authority
October 2014 update
approved by the IA (or IIA after establishment), and the IIA may revoke that
approval if the appointee is not, or is no longer fit and proper.1

Empowers the IIA to approve the appointment of directors of authorised
insurer incorporated in Hong Kong, and revoke approval on fitness and
proprietary grounds.2

Fit and proper determination grounds are to be provided

An authorised insurer can only appoint an individual as a key person in
control function of that insurer, provided that the individual is fit and
proper and approved by the IIA. Approval can also be revoked on fitness and
proprietary grounds.3

The ‘control function’ definition of an authorised insurer: includes the
intermediary management control function such as administering and
monitoring compliance with statutory requirements by licensed insurance
agencies, licensed individual agents, ensuring compliance with conduct
requirements by licensed insurance intermediaries that refer insurance
business to that insurer.4

The IIA may impose conditions when granting approval to an authorised
insurer for the appointment of a controller, director or key personnel in
control functions of that authorised insurer.5
2. Other regulatory powers in respect of insurers

The appointment by an authorised insurer incorporated in Hong Kong and
carrying on long term business of their appointed actuary is subject to IIA
prior approval. The IIA has authority to revoke that approval and may also
amend / impose conditions on that approval.6

Authorised insurers must maintain separate accounts for each class of its
long term business, and assets representing the fund should be applicable
only for the purposes of that part of business to which the fund relates.7

The IIA may disclose to the public details of relevant decisions made after it
has exercised its power to impose disciplinary sanctions against an
authorised insurer.8

There are increased penalties for the offence of recklessly furnishing
materially false information to the IIA.9
1
Clause 23 of Bill, replaces the current s13A with a new s13A.
Clause 25 of Bill, added as s13AC.
3
Clause 25 of Bill, added as s13AE.
4
S13AE(12)(a)
5
Clause 25 of Bill added as new s13AF.
6
Clause 32 of Bill added as s15AA.
7
Clauses 40 and 42 of Bill as amendments to s22 and 23.
8
Clause 54 of Bill as amendments to s41.
9
Ibid.
2
7
Hong Kong’s proposed Independent Insurance Authority
October 2014 update
Anticipated future developments:

Subject to consultation, more control functions may be prescribed in the
Bill through Committee Stage Amendments. According to Insurance Core
Principle 8, control functions should include at least risk management,
compliance, actuarial matters and internal audit.

The scope of the intermediary management function is to be discussed
further, with the objective of promoting effective authorised insurer
internal control system for good business conduct of insurance
intermediaries.

The IIA will promulgate a code or guidelines on the definition of “fit and
proper”. Though major factors have been considered (see below and also
the new section 14A(1) of the Bill), the IIA should consider other factors on
a case-by-case basis. Further guidelines may be required.

The current requirement (i.e. segregation of assets and funds) which applies
to all assets and liabilities of authorised long term insurers irrespective of
source of business will be maintained.10

The IIA will promulgate codes and guidelines on the definition of
“misconduct”. The current “misconduct” definition is modelled on the
Securities and Futures Ordinance (SFO) which regulates licensees under the
supervision of the Securities and Futures Commission of Hong Kong (SFC).
B. New Regulatory Powers in respect of Insurers (New Part VA)
Legislative Purpose: To provide the IIA with express powers to conduct inspections,
initiate investigations, and to impose range of disciplinary sanctions on authorised
insurers. The propound powers are similar to those vested in financial services
regulators under the SFO, the Mandatory Provident Fund Schemes Ordinance and
the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions)
Ordinance.
The Bill’s provisions include:
1. IIA Inspection and Investigation Powers

The IIA inspector is entitled to enter the insurer’s business premises,
inspect and make copies of their business records and make enquiries.11

The IIA is empowered to direct its employees or, with consent of Financial
Secretary, appoint other persons to initiate investigations if it is satisfied
that certain conditions exist. The conditions include:
10
11
CB(1)1817/13-14(03)
s41B
8
Hong Kong’s proposed Independent Insurance Authority
October 2014 update
(a)
Reasonable cause to believe there has been a breach of the ICO;
(b)
Reasonable cause to believe a person is involved in fraud, misfeasance,
defalcation or other misconduct;
(c)
Reasonable cause to believe that a person has carried on or is carrying
on insurance business in a manner that is not in the interests of policy
holders or potential policy holders or is not in the public interest;
(d)
Reasons to enquire if a person is, or was, guilty of misconduct or is not
fit and proper before considering if disciplinary sanctions should be
imposed on the person.

An investigator can require a person to produce records and documents, and
give explanations in respect of the same, answer questions in relation to the
investigation and give other assistance.12

An inspector or investigator can require a person to, by statutory
declaration, verify his/her answer or provide an explanation to inquiries. If
that person fails to comply because that information is out of that person’s
knowledge or possession, the inspector or investigator may require the
person to verify, by statutory declaration that he/she has not complied with
requirements for that reason.13

An inspector or investigator may apply to the Court of First Instance for an
inquiry into a person’s failure to comply with a requirement imposed by
inspector or investigator. The court may make orders for the person to
comply with the requirement within a specific time, or punish the person as
if the person had been guilty of contempt to court.14

A person commits an offence if they15:
12
(a)
fail to comply with inspector / investigator requirements;
(b)
fail to comply with inspector/investigator with intent to defraud;
(c)
give a materially false or misleading answer or explanation for
purported inspector / investigator requirements compliance;
(d)
give a materially false or misleading answer or explanation for
purported inspector / investigator requirements compliance with
intent to defraud;
(e)
cause or allow another person to fail to comply with a requirement
imposed by inspector or investigator or give materially false or
misleading answer or explanation.
s41D(5)
s41C and 41E
14
s41F
15
s41G(1) to (5)
13
9
Hong Kong’s proposed Independent Insurance Authority
October 2014 update

A person also commits an offence if they destroy, falsify, conceal or dispose
of a record / document required by the inspector or investigator with an
intent to conceal matters capable of being disclosed.16

Refusing to comply with an inspector’s or investigator’s requirements by
reason of potential incrimination is not a justifiable excuse.17

If the person is made aware by the investigators or inspectors that they
might be incriminated by giving answer or explanations, the requirement,
answer or explanation shall not be admissible in evidence in criminal
proceedings in court of law.18

A magistrate may issue a warrant authorising a person to enter premises and
to search for, seize and remove a record or document if there are
reasonable grounds to suspect that there may be a record or document
required by an inspector or investigator on those premises.19
2. IIA Disciplinary Powers

The IIA may exercise disciplinary powers with regard to an authorised
insurer if that insurer is or was guilty of misconduct, or when a person is or
was not fit and proper to hold the position of director or controller of that
insurer.

Those disciplinary powers include20:
(a)
revoking the authorisation of authorised insurer in relation to all or
any classes of insurance business;
(b)
suspending authorisation of the authorised insurer in relation to all or
any classes of insurance business;
(c)
prohibiting the authorised insurer from applying to be authorised
authorised to carry on a class of insurance business for a specific
period;
(d)
reprimanding the authorised insurer publicly or privately; and
(e)
ordering the authorised insurer to pay a pecuniary penalty.

The IIA must not exercise the above disciplinary powers before giving the
authorised insurer the right to be heard and it must also observe certain
procedural requirements in that regard.21

Even whilst an authorised insurer is suspended, it must still comply with the
applicable provisions of the ICO.22
16
s41I
s41G(6)
18
s41H(2)
19
s41K
20
s41P(2)
21
s41Q
17
10
Hong Kong’s proposed Independent Insurance Authority
October 2014 update

Suspension or revocation of the authorisation of an insurer does not avoid or
affect an agreement or arrangement entered into by that insurer.23

The IIA may require an insurer whose authorisation is revoked or suspended
to transfer to a policy holder copy of records relating to that policy holder’s
assets or affairs.24

All the above provisions in Part VA are applicable to Lloyd’s and its
members.25
Anticipated future developments:

An independent Process Review Panel will be established to review the
procedural fairness of the IIA in exercising its powers.

The IIA will also consult an expert panel if expert advice is required for
making disciplinary decisions.

The IIA’s decisions are reviewable by the Insurance Appeals Tribunal (IAT).
The operational details for the IAT will be discussed at future Committee
Meetings. Decisions of the IAT may be appealable to the Court of Appeal
with its leave.
What you should plan for
Some practical matters insurers should consider are as follows:


22
Preparing the following draft codes for consideration by the provisional IIA:

Misconduct and acting in the best interest of policyholders

What is considered “fit and proper”
Conduct a business review

identify products that may be affected

consider any distribution arrangements that may be affected

document retention and retrieval arrangements

calculate possible compliance costs
s41U
s41V
24
s41W
25
s50G added by Clause 62 of the Bill.
23
11
Hong Kong’s proposed Independent Insurance Authority
October 2014 update

Commencing planning



review and revise compliance plans and procedures including:
-
new controls on and review and document obligations of
intermediaries
-
a documented compliance plan for the Bill including regular
reporting and review mechanics
-
identifying new resource needs
-
draft additional policy disclosure statements where necessary
-
consider intermediary contractual provisions including document
retention, audit, periodical reports and reviews
for liability exposures (including vicarious liability for agents) and
insurance coverage issues and solutions
Prepare policies and procedures

for appropriate officers

ensuring internal controls and procedures are in place and observed by
intermediaries
For more information on these proposals or the impact they may have on you or your
business, please contact Peter Cashin, Head of Corporate Insurance, Hong Kong on +852
2848 6306 or at [email protected] or Richard Bates, Head of Corporate, Hong
Kong on +852 2848 6308 or at [email protected].
Peter Cashin
Head of Corporate Insurance
Hong Kong
T: +852 2848 6306
E: [email protected]
Richard Bates
Head of Corporate
Hong Kong
T: +852 2848 6308
E: [email protected]
12
Hong Kong’s proposed Independent Insurance Authority
October 2014 update
Kennedys Hong Kong
11/F, Hong Kong Club Building
3A Chater Road
Central, Hong Kong
T: +852 2848 6300
F: +852 2848 6333
www.kennedys-law.com
Source: Legislative Council, Hong Kong
13