30 August, 2015
Hong Kong is now just months away from embarking on the implementation of an important process which will lead to the establishment, tentatively by mid-2017, of a unified insurance regulatory regime, bringing Hong Kong in line with other major financial centers around the world.
A single body, known as the Insurance Authority, will be responsible for granting authorisations and licences, regulating both insurers and insurance intermediaries, and imposing disciplinary sanctions where necessary. The Insurance Authority will be financially and operationally independent of the government and the industry, as required by the International Association of Insurance Supervisors’ established principles.
1. STATUTORY BASIS OF THE NEW AUTHORITY
2. NEW REGIME TO BE IMPLEMENTED IN PHASES
3. BASIC STRUCTURE OF THE NEW IIA
4. DUTIES AND POWERS OF THE NEW IIA
5. COMMENTARY
1. STATUTORY BASIS OF THE NEW AUTHORITY
On 10 July 2015, the Legislative Council passed proposed amendments to the Insurance Companies Ordinance (to be renamed the Insurance Ordinance). The finalised amendments, in the form of the Insurance Companies (Amendment) Ordinance 2015 (ICAO 2015), were published on 17 July 2015 and primarily provide for the establishment of:
- an independent Insurance Authority (IIA) with enhanced regulatory powers; and
- a statutory licensing regime for insurance intermediaries to replace the existing self-regulatory regime.
The IIA’s enhanced regulatory powers and the new licensing regime will be, in many respects, similar to those of other financial regulators in Hong Kong, in particular the Securities and Futures Commission.
2. NEW REGIME TO BE IMPLEMENTED IN PHASES
The ICAO 2015 will be implemented in three phases to allow for a transition from the existing Office of the Commissioner of Insurance (OCI) and the self-regulatory organisations (SROs)1 to the IIA.
Phase 1 (tentatively by October 2015): A provisional Insurance Authority (PIA) will be set up and be given the necessary administrative powers to undertake essential preparatory work for the establishment of the IIA, such as recruitment of key personnel and leasing of office premises.
Phase 2 (tentatively by October 2016): The IIA will commence operation. The PIA will be renamed the “Insurance Authority” and will take over the existing duties of the OCI, such as prudential and conduct regulation of authorised insurers and anti-money laundering regulation.
The self-regulatory regime for insurance intermediaries will continue in the meantime, while the IIA prepares and consults the public on the tools for regulating the insurance intermediaries, such as subsidiary legislation, codes of conduct and regulatory guidelines.
Phase 3 (tentatively by June 2017): The IIA will take over the role of regulating insurance intermediaries from the SROs and the self-regulatory regime will cease.
It is anticipated that the SROs will thereafter continue to function as trade associations, representing the interests of their members and organising training courses and promotional activities.
3. BASIC STRUCTURE OF THE NEW IIA
Board of directors and industry advisory committees
The board of the IIA, to be appointed by the Chief Executive, will comprise:
- a chairperson (a non-executive director);
- a chief executive officer (an executive director); and
- not less than six other directors.
The number of non-executive directors must exceed the number of executive directors, and at least two of the non-executive directors should be persons with knowledge of and experience in the insurance industry.
The IIA must appoint at least two industry advisory committees to advise it on matters relating to long term business and general business respectively.
Checks and balances
In addition to the requirement for a majority of the IIA’s directors to be non-executive directors, there will be various other checks and balances on the IIA’s powers.
For example, an independent process review panel will be set up to review the IIA’s internal operations and procedures. The IIA must publish a draft of any proposed rules for public consultation and must publish guidelines before it can exercise its power to impose a pecuniary penalty. In addition, specified decisions of the IIA, including the imposition of disciplinary sanctions, are subject to appeal.
4. DUTIES AND POWERS OF THE NEW IIA
The IIA’s new duties and powers fall broadly into four categories:
- increased scrutiny over key persons appointed by authorised insurers;
- licensing of insurance intermediaries and approval of responsible officers;
- inspection and investigation powers; and
- disciplinary powers.
We will be looking at each of the above categories in detail in a guide which we will publish in due course. The guide will also look at the role the IIA will play collaboratively with the Hong Kong Monetary Authority in relation to the insurance intermediary activities of banks and other authorised institutions regulated under the Banking Ordinance.
5. COMMENTARY
Although the IIA will not be assuming its regulatory duties until the latter part of 2016, insurers and insurance intermediaries should plan ahead and review their businesses, documentation and internal policies in anticipation of the new regime.
Matters to start thinking about include, for example:
- reviewing internal policies and codes of conduct in relation to conduct requirements, processes for seeking approval on appointment of key persons of insurers, requirements for new regulated roles including key persons in control functions of insurers and persons concerned in the management of the regulated activities carried on by insurance agencies and broker companies;
- reviewing hiring policies;
- reviewing/developing processes for responding to inspections and investigations by the IIA;
- assessing the extent of additional resources required for compliance with the new regime and budgeting for this; and
- training staff on the new regime.
____________
1 There are three SROs:
Insurance Agents Registration Board (set up by The Hong Kong Federation of Insurers);
Professional Insurance Brokers Association; and
The Hong Kong Confederation of Insurance Brokers.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
