The regulation of insurance intermediaries in Hong Kong currently runs under a self-regulatory system, with the Hong Kong Federation of Insurers administering the regime for insurance agents and the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association administering the regime for insurance brokers.
New statutory licensing regime and controlled intermediary management function
The Insurance Companies (Amendment) Bill 2014 (the “ICA“) was passed in July 2015 and is expected to be gazetted shortly. The ICA introduces amendments to the Insurance Companies Ordinance, which will be renamed “Insurance Ordinance”. Pursuant to the amendments, a new statutory licensing regime for insurance intermediaries (insurance agents and brokers) will be introduced to replace the current self-regulatory regime over a period of two to three years. The licensing regime will be administered by the new insurance regulator to be created under the amended Insurance Ordinance. The intermediary management function within an insurer will also become a regulated function subject to approval by the regulator (see our blog post on the topic).
The ICA provides for grandfathering provisions under which insurance intermediaries who are validly registered with the self-regulatory organisations will be deemed to be licensed for three years from the commencement of the new licensing regime.
Conduct requirements for intermediaries
One of the key changes brought about by the new regime is the introduction of broadly worded conduct requirements for all insurance intermediaries. Those conduct requirements include duties to “act in the best interests of policyholders” and to avoid conflicts of interests between the intermediary and the policyholders. Intermediaries will also be required to consider the appropriateness of products to policyholders in their particular circumstances and to disclose sufficient information to them for the purposes of entering into, amending or terminating an insurance policy.
The requirements relating to suitability of products and disclosure of information are broader than those stated in the current codes of practice applicable to insurance intermediaries and it remains to be seen whether the new regulator will take a stricter approach to the conduct of sale of insurance products by intermediaries, particularly in the area of general insurance, which is currently subject to less stringent conduct requirements.
During the legislative process the application of the duty to “act in the best interests of policyholders” was the subject of much criticism since as a matter of law, an insurance agent is an agent of the insurer and owes his primary duties to it and not to the policyholder. It will be interesting to see how the new insurance regulator will interpret that statutory duty, which appears to align the regulatory position of insurance agents with that of insurance brokers, ignoring the different roles that the two types of intermediaries have traditionally performed.
Rethinking commission structures
An important area where the interpretation of the “best interest” requirement may become relevant is that of commission structures. Indemnity commissions and other upfront commissions have been prohibited for ILAS business and are about to become prohibited for life insurance business generally (see our blog post on the Life Insurance Guidance Note (GN 16)). It is necessary that insurers reconsider their commission structures and the disclosure of remuneration – whether in the life or the non-life sector – in light of the “best interest” requirement.
Training and supervision of intermediaries
Given the increased focus on the licensing and conduct of intermediaries, and the new regulated intermediary management function, insurers will be likely to impose tighter requirements on internal training and supervision of intermediaries in order to avoid regulatory breaches and sanctions.