1 Establishment of an Independent Insurance Authority (“IIA”) Key Legislative Proposals Financial Services and the Treasury Bureau The Government of the

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Establishment of an Independent Insurance Authority (“IIA”)

Key Legislative Proposals

Financial Services and the Treasury BureauThe Government of the Hong Kong Special Administrative Region

2Financial Services and the Treasury BureauThe Government of the Hong Kong Special Administrative Region

Foreword

2010 Public consultation

2011 Published consultation conclusions and detailed proposals – general public support for the establishment of an IIA

2012 Public consultation on key legislative proposals

Target

2013 Introduction of an Insurance Companies (Amendment) Bill into LegCo

2015 Establishment of IIA


Purpose To meet international regulatory requirement that

financial regulators should be financially and operationally independent of the government

To ensure that Hong Kong has a modern regulatory infrastructure to facilitate the stable development of the insurance industry

To establish a licensing regime for insurance intermediaries to strengthen consumer protection


Key legislative proposals Functions and governance structure of the IIA

Licensing regime for insurance intermediaries

Regulatory powers of the IIA

Regulatory arrangements for banks’ insurance intermediary activities

Appellate mechanism and checks and balances

Levy and fees

Transitional arrangements for pre-existing insurance intermediaries


Functions and governance structure of the IIA(1) Additional functionsTo regulate the conduct of insurance intermediaries through a licensing regimeTo promote understanding of insurance products and the insurance industry in HKTo formulate effective regulatory strategies and facilitate sustainable market development of the industryTo conduct studies on matters affecting the industryTo assist the Financial Secretary in maintaining HK’s financial stability


Functions and governance structure of the IIA (con’t)

(2) Governance structureThe IIA will be established as a body corporate comprising a chairman, a CEO and not fewer than six directors (including one to two persons with knowledge of the insurance industry)The Government does not intend to appoint any representative to the IIA Governing BoardTwo Industry Advisory Committees, one on life insurance and the other on non-life insurance, will be established to advise and make recommendations to the IIA Governing Board


Licensing regime for insurance intermediaries(1) Definition of “regulated activities”A person who carries on or holds himself out to carry on insurance intermediary activities in the course of the person’s business or employment or for reward will require a licenceInsurance intermediary activities will be defined as “regulated activities”. A person carries on a regulated activity if the person -

a) negotiates or arranges a contract of insurance;b) invites or induces, or attempts to invite or induce, another person to

enter into a contract of insurance;c) invites or induces, or attempts to invite or induce, another person to

make a material decision; ord) gives regulated advice


Licensing regime for insurance intermediaries (con’t)

A person makes a “material decision” or gives “regulated advice” if the person makes a decision as to or gives an opinion in relation to the following matters –

n making of an insurance application or proposal;n issuance, continuance or renewal of a contract of insurance or any

supplementary contract attached thereto;n cancellation, termination, surrender or assignment of a contract of

insurance or any supplementary contract attached thereto;n exercise of a right under a contract of insurance or any

supplementary contract attached thereto;n changes of any terms and conditions of a contract of insurance or

any supplementary contract attached thereto; ora) making or settlement of an insurance claim



Professionals, such as accountants, lawyers, and actuaries, giving regulated advice wholly incidental to their professional practice as well as trust companies giving regulated advice wholly incidental to their discharge of their duties will be exempted from the licensing requirement

Loss adjusters/assessors, claims settling agents and persons providing ancillary services such as back office supporting staff of an authorized insurer or an insurance intermediary will also be exempted

(2) Licensing frameworkFive types of insurance intermediary licences –

Insurance agents Insurance brokers

Individual insurance agents Insurance broker companiesInsurance agencies Technical representatives Technical representatives (TRs) (broker)(TRs) (agent)

In formulating the eligibility criteria and procedures for obtaining a licence from the IIA, we have drawn reference from those of the three self-regulatory organizations (SROs)

* The three SROs are the Insurance Agents Registration Board (“IARB”) under the Hong Kong Federation of Insurers, the Confederation of Insurance Brokers (“CIB”) and the Professional Insurance Brokers Association (“PIBA”)



Eligibility criteriaApplicants for insurance intermediary licences will be required to fulfill the following eligibility criteria –

a) to be considered as “fit and proper” persons by the IIA;b) for applicants who are individuals (viz. individual insurance agents, TRs

(agent) and TRs (broker)), they have passed the qualifying examinations as specified by the IIA;

c) for applicants to be a licensed insurance agency or a licensed individual insurance agent, they are appointed by at least one authorized insurer;

d) for applicants to be a licensed insurance broker company, they have fulfilled the requirements in respect of capital and professional indemnity insurance, etc.; and

e) for applicants to be a TR(agent) or TR(broker), they are engaged by a licensed insurance agency or a licensed insurance broker company, as the case may be



Fitness and proprietyThe IIA will have regard to the following when considering whether an applicant for licence or a licensee is fit and proper –

a) education or other qualifications or experience;b) ability to carry on a regulated activity competently, honestly

and fairly;c) reputation, character, reliability and integrity;d) record of offence or non-compliance with requirements under

the Insurance Companies Ordinance (ICO) or relevant regulations;

e) financial status or solvency;f) relevant decisions made by other financial services regulators

in Hong Kong; andg) record of misconduct in a profession, trade or industry



Responsible officer (RO)Each and every licensed insurance agency and licensed insurance broker company is required to appoint an RO to ensure that internal control and procedures are in place

(3) Establishment of a register of licensed insurance intermediaries for public inspectionLicensed insurance intermediaries and ROs are required to provide the IIA with the necessary information and inform the IIA of any changes of particulars for maintaining and updating the register



(1) Regulatory powers on insurance intermediaries

The IIA will be vested with the following regulatory powers -

a) to initiate inspections / investigations;

b) as a stopgap measure, to suspend a licensed insurance intermediary or an RO from carrying on a regulated activity; and

c) to impose disciplinary sanctions


Regulatory powers of the IIA (con’t)

To lay down in the legislation the broad principles of conduct requirements, such as acting honestly, fairly and competently in the best interest of existing or potential policyholders, and promulgate the details in subsidiary legislation (subject to negative vetting by LegCo)

Misconduct “Misconduct” will be broadly defined as –

a) a contravention of any of the relevant statutory provisions in the ICO;b) a contravention of any of the terms and conditions of licence;c) a contravention of any other conditions imposed by the IIA under the

ICO; andd) any act or omission relating to the carrying on of any regulated

activities which in the IIA’s opinion, is or is likely to be prejudicial to the interest of existing or potential policyholders or to the public interest.


Regulatory powers of the IIA

Inspection / InvestigationWe propose to confer on the IIA the following powers –

a) to initiate inspection/enter into premises of regulated entities to conduct inspection;

b) to initiate investigations/enter into premises of regulated entities to conduct investigations;

c) to make inquiries and have access to records and documents;

d) to make an application to the Court of First Instance for court orders to compel compliance with requirements in relation to inspections or investigations;

e) to apply to a Magistrate for a warrant to search for, seize or remove records or documents on reasonable grounds; and

f) to prosecute offences summarily



Inspection / Investigation (con’t)Similar to the powers of other financial market regulatorsNon-compliance with IIA’s requirements related to inspection and investigation, or knowingly or recklessly providing false or misleading information in relation to inspection and investigation, will be an offenceOnly persons proven to have criminal intent (e.g. knowingly or recklessly providing false or misleading information) will attract criminal liabilitiesWe propose to delegate powers of inspection and investigation to HKMA for the regulation of banks’ insurance intermediary activities (see below)



Specified suspension powerAs a stopgap damage control measure, we propose to empower the IIA to, in the interest of the public or policyholders, suspend a licensed insurance intermediary or an RO from carrying on a regulated activity before it has made a final determination on the disciplinary sanction in serious and complicated casesIn exercising this power, the IIA must follow due process and procedures (e.g. according the licensee / RO concerned an opportunity to be heard and the right of appeal to the Insurance Appeals Tribunal, etc.)We propose to delegate the specified suspension power to HKMA for the regulation of banks’ insurance intermediary activities (see below)



Disciplinary sanctionsThe IIA may impose any one or more of the following sanctions in proven cases of misconduct or being not fit and proper –

a) private or public reprimand;

b) a fine not exceeding the amount which is the greater of- $10,000,000; or three times the amount of the profit gained or loss avoided by

the licensee as a result of his misconduct, or of the other conduct of the licensee which leads the IIA to form the opinion that he is not fit or proper;

c) prohibition from applying for a licence for a specified period;

d) suspension of a licence for a specified period; and

e) revocation of a licence



Disciplinary sanctions (con’t)The IIA will establish a Disciplinary Committee to assist it in determining disciplinary sanctionsDo not involve criminal proceduresThe IIA will make reference to the guidelines issued by other regulatory authorities and existing SROs in determining the level of disciplinary sanction and fine. In general, the IIA will consider-

Nature and seriousness of the conduct, whether the conduct was intentional, reckless or negligent, the duration and frequency of the conduct

Whether losses have been caused to others or benefits have been obtained by the insurance intermediary

Whether the IIA has issued any guideline in relation to the conduct in question

Whether the insurance intermediary have taken any remedial steps

A fine should not have the likely effect of putting the insurance intermediary in financial difficulties



Disciplinary sanctions (con’t)Statutory safeguards include –

a) fair hearing requirement;

b) the obligation of IIA to state the reasons for imposing disciplinary sanctions;

c) the disclosure of the facts and rationale behind disciplinary decisions to the public where appropriate;

d) right of appeal against IIA’s specified regulatory decisions to the Insurance Appeals Tribunal

All fines will be credited to the general revenue of the Government instead of being IIA’s operational revenue



(2) Regulatory powers on insurance companiesSimilar to the regulation of insurance intermediaries, the IIA will be vested with regulatory powers including inspection, investigation, imposing disciplinary sanctions, and prosecuting offences summarilyThe IIA may impose sanctions including reprimand, pecuniary penalty, and suspension or revocation of authorization in relation to any class of insurance businessNon-compliance with IIA’s requirements related to inspection and investigation, or knowingly or recklessly providing false or misleading information in relation to inspection and investigation, will be an offence



The Insurance Appeals Tribunal (IAT) will be established to review decisions (including disciplinary decisions) made by the IIA (and HKMA)

The IAT may confirm, vary or set aside any decision, as well as direct the relevant authority to make a decision afresh


Appellate mechanism and checks and balances

Other checks and balances include – The IIA will table its annual report before LegCo, and submit the

annual budget and corporate plan to the Financial Secretary for approval

A Process Review Panel will be established to review the internal process and procedures of the use of regulatory powers by the relevant authorities

The IIA will be listed as a body bound by the Ombudsman Ordinance and the Prevention of Bribery Ordinance

The Director of Audit may conduct value for money audit on the IIA

The IIA will need to comply with the Personal Data (Privacy) Ordinance


Appellate mechanism and checks and balances (con’t)

For the effective regulation of banks’ insurance intermediary activities, the IIA may delegate, subject to approval by the Chief Executive in Council, to HKMA the powers of inspection and investigation, as well as the specified suspension power

Before exercising the specified suspension power, HKMA must consult the IIA and follow the procedures (including appellate procedures) to be prescribed in the ICO

To ensure consistency in regulation, the IIA must not delegate to HKMA powers to license, formulate regulatory standards or impose sanctions


Regulatory arrangements for banks’ insurance intermediary activities

The IIA will collect a levy of 0.1% on insurance premiums for all insurance policies

The IIA will review levy levels once its reserve has reached a level equivalent to 24 months of its operating expense, after deducting depreciation and all provisions

Levy and fee levels will be subject to approval by the ExCo and LegCo

The Government will provide a lump sum of $500 million to the IIA upon its inception


Levy and fees

Pre-existing insurance intermediaries validly registered with the SROs before IIA’s establishment will be deemed as licensees for 3 years starting from the commencement of the new licensing regime

Licence fee for insurance intermediaries will be waived in the first 5 years after IIA’s establishment


Transitional arrangements forpre-existing insurance intermediaries

Pre-IIA complaint

and disciplinary

cases

Taken up by IIA

New statutory powers and procedures

Old standards and sanctions adopted by SROs

Transitional arrangements forpre-existing insurance intermediaries (con’t)


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Pre-IIA appeal cases

Taken up by IAT

New statutory procedures

Old standards



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Pre-IIA sanctions

imposed by SROs

IIA’s inception

Effective period of sanctions imposed by SROs

Sanctions imposed by SROs continue to have

effect



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Outstanding cases not yet completed by the SROs before IIA’s inception -(i) changes of particulars and appointments(ii) application for registration

IIA’s inception



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Please send your written comments on or before 26 January 2013 through any of the following means -

Mail: Special Duties Division, Financial Services Branch

Financial Services and the Treasury Bureau24/F, Central Government Offices2 Tim Mei Avenue, Tamar

Fax: 2527 0292 Email: [email protected]

Submission of comments


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Documents

1 Establishment of an Independent Insurance Authority (“IIA”) Key Legislative Proposals Financial Services and the Treasury Bureau The Government of the