As Hong Kong plans to establish a new independent body as the regulator for the jurisdiction's insurance industry, Martin Lister of Simmons & Simmons looks at the ramifications this will have on the market.
Hong Kong plans to replace the Office of the Commissioner of Insurance (OCI), a government body established to administer the Insurance Authority, the regulator for the insurance industry in Hong Kong, in 2016 with a new independent body possessing wide-ranging powers and a specific remit to regulate insurance intermediaries directly. The Insurance Companies (Amendment) Bill 2014 (Amendment Bill) is presently being considered by the Bills Committee in the Legislative Council. The new regulator will be independent from government (hence it is described as the Independent Insurance Authority (IIA) but will be financed initially by a grant from government. The IIA will continue to regulate insurers carrying on classes of insurance business in or from Hong Kong and Lloyd’s.
The IIA will be considerably bigger than the current OCI and will recruit a range of professional talent to ensure public and international confidence in the regulation of the Hong Kong insurance industry and to support its expanded functions. These functions will include facilitating sustainable market development and the promotion of an understanding of insurance products in the community, as well as the implementation of a risk-based capital framework, group-wide supervision of insurance groups, enhanced corporate governance and prudential surveillance of insurers. The increased sophistication of insurance products and the need for enhanced consumer protection also require closer supervision and direct oversight of insurance intermediaries. The cost of the IIA will be borne under the user-pays principle by fees on insurers and insurance intermediaries and by a levy (introduced over a five-year period) on insurance premiums.
The most significant of these new functions is the direct supervision of insurance intermediaries. Under the present arrangements, insurance intermediaries (that is insurance brokers and insurance agents) are principally regulated by self-regulatory organisations: the Hong Kong Confederation of Insurance Brokers (CIB) and the Professional Insurance Brokers Association (PIBA) in the case of insurance brokers, and the Insurance Agents Registration Board established by the Hong Kong Federation of Insurers (HKFI) in the case of insurance agents. The membership regulations of the CIB and PIBA are approved by the Insurance Authority and the HKFI is required to issue a code of practice for the administration of insurance agents, which is also approved by the Insurance Authority. Self-regulation is no longer the industry norm or considered appropriate in the financial services industry and, following the establishment of the IIA, the regulatory functions of these three bodies will be transferred to the IIA.
A number of concerns have been expressed regarding this new role of the IIA, ranging from excessive control of insurance intermediaries to the complexity of the relevant activities that will be regulated. However, two issues have caused the legal profession most concern: first, the inherent conflict of interest and potential causes of action created by an insurance agent being required to act in the best interests of the policyholder concerned; and second, the new disciplinary process which appears to contradict the rules of natural justice.
Under the Amendment Bill, an insurance agent will be required to act in the best interests of a policyholder or potential policyholder, and if any provision in the relevant agency agreement between an insurer and its agent affects that best interests obligation, that provision will be void. However, the obligation for an insurance agent to act in the best interests of a policy holder or potential policyholder creates an immediate conflict of interest with his principal, the appointing insurer. An agent has a fiduciary duty to his principal, to act in good faith and not to act for the benefit of a third party without his principal’s informed consent. By being required to act in the best interests of an insured, the insurance agent will be acting in the role of an insurance broker (the agent of the insured), a dual role expressly prohibited under the current Insurance Companies Ordinance. By acting in the best interests of an insured (and by implication not in the best interests of the insurer), an insurance agent would be unable to assist the insurer properly and may even be prevented from selling the insurer’s products to the insured; equally if the insurance agent acts in the best interests of his principal (the traditional agency role), the agent may well act in breach of his new statutory duty. This muddled obligation is likely to result in an insurance agent being confused as to the conduct expected of him.
In addition, this obligation may give rise to new civil claims by policyholders against insurance agents (and insurance brokers) for breach of statutory duty and negligence, particularly if an insurance agent is unclear as to his duties to a policyholder. It is uncertain whether it is intended by the legislature that a breach of this statutory duty will give rise to a private cause of action; and there is also concern that if an insurance agent fails to exercise reasonable skill and care in the exercise of his duties he will be liable for loss suffered as a result of his negligence. In either case the risk of such an action where the underlying conduct that might give rise to the action is so uncertain is highly undesirable.
The second concern relates to the proposed power of the IIA to act in the multiple roles of rule-making body, investigator of alleged breaches of those rules, prosecutor for those breaches and decision-maker or adjudicator in those prosecutions (with the power to reprimand, impose fines or suspend or revoke a licence). This clearly contravenes the traditional separation of powers and may be contrary to natural justice and the rule of law. It would be preferable if those functions were separated, or at least that independent parties were empowered to review the exercise of those functions. There are also concerns that, in light of the costs and potential orders that may be made in disciplinary hearings, insurance intermediaries will not have adequate access to justice and may not be able to respond properly to a prosecution.
One feature that has also been the subject of debate is the delegation of some of the IIA’s powers of supervision, inspection and investigation to the Hong Kong Monetary Authority (HKMA), the banking regulator, in connection with the regulation of banks’ insurance intermediary activities. The Insurance Authority and HKMA have entered into a Memorandum of Understanding to ensure that there is a level playing field between insurance intermediaries supervised by the different regulators and that there are no regulatory gaps and to try and minimise the opportunities for regulatory arbitrage. However, there remains concern that there will inevitably be a difference in approach to the supervision of the relevant insurance intermediary activities.
A satisfactory resolution of these issues is important and it is hoped that the Amendment Bill will be amended to ensure that an agent is always required to act in the best interests of his principal, even if he may also be required to consider the suitability of his principal’s products for a potential policyholder, and to clarify that a policyholder will not have a right of action against an insurance agent for breach of those obligations. It would also be preferable for the proposed disciplinary powers of the IIA to be separated, failing which an independent body should be established to oversee the proper exercise of those powers. These issues, and other issues raised by various parties, will be considered by the Bills Committee in its deliberations on the Amendment Bill and we await the revised Amendment Bill with interest.