The three-month consultation runs until 26 Jan 2013, and, as the topic has in the past, is already reportedly generating concern in some insurance distribution channels, given that the new IIA would cause shifts in the way the industry is regulated and empowered to do business.
The new independent Insurance Authority (IIA) is envisioned as being in place by 2015 and would be financially and operationally separate from the government, according to Hong Kong’s secretary for financial services and treasury, KC Chan.
Specifically, the consultation now under way concerns certain amendments to the Insurance Companies Ordinance (ICO), which sets out the legal structure under which insurance is marketed and sold to individuals in the Hong Kong SAR.
Upon completion of the consultation, the Government is expected to introduce the package of amendments necessary to create the IIA into the Legislative Council sometime in 2013.
Issue of power to suspend
Among the areas of concern in the new, 156-page consultation document, which may be viewed and downloaded here, is said to be a provision that would give power to the new IIA to “suspend a licensee [insurance company] or [its] responsible officer” even before disciplinary procedures had been completed, in the event that “the IIA is satisfied that it is in the public interest or the interests of existing and potential policyholders to do so”.
This power is seen as excessive compared with what other major financial services regulators in Hong Kong, such as the Securities & Futures Commission, are able to do, but it is defended in the document as being justifiable, “given that one of IIA’s key functions is the protection of policyholders”.
In a statement, Professor Chan noted that the establishment of an IIA to replace the Office of the Commissioner of Insurance – which is a government department – was “in line with the international practice for financial regulators to be independent of the Government, operationally and financially”.
He added that the previous consultation on the matter had revealed general public support for the establishment of an IIA, as had been explained in the report that followed that consultation, which was published in June 2011.
"In drawing up the legislative amendments, the Government has carefully considered the views of insurers, self-regulatory organisations (SROs) and insurance intermediary bodies. They seek to crystallise the detailed proposals published in 2011, and the outcome of further deliberation on industry feedback," he said.
The idea of establishing an independent insurance authority has been described as having been discussed as long ago as the mid-1990s, although it was initially dropped in response to industry opposition. The current effort is part of a general campaign in Hong Kong to tighten up on the financial services industry, in the wake of a 2008 mis-selling scandal there involving Lehman Brothers minibonds. More than 29,000 Hong Kong investors bought the high-risk derivatives before the New York-based investment bank collapsed. Many have since received a significant percentage of their money back.
The current timetable sees the IIA going live in 2015, with around 240 staff and an annual budget of HK$200m ($25.8m, £ 16.2m).
The Hong Kong Government would provide the money to set it up, after which it would be funded by licence fees paid by insurers and agents, and levies paid by policyholders. Its mandate would be to oversee all of Hong Kong’s insurers and sales representatives.
As envisioned by the Government, the new IIA would be a "body corporate", comprised predominately "of non-executive directors from a cross-section of the community, including… members with knowledge of the insurance industry" as well as other professionals.
The Government says it will not seek to be represented on the governing board, as part of its determination to promote the IIA’s independence. Instead, it is proposing the establishment of two "Industry Advisory Committees", one on life insurance and the other on non-life insurance, to advise the IIA’s governing board on insurance matters.
On the licensing of insurance intermediaries, the Government is proposing legislative amendments that would define insurance intermediary activities as "regulated activities" that could only be carried out by IIA licensees. The amendments would also set out the eligibility criteria of five categories of licensees that would be given.
Other features of the proposed new insurange regulatory framework include:
- Every authorised insurer, licensed insurance agency or licensed insurance brokerage would be required to appoint a "responsible officer" who would oversee the implementation of internal controls and procedures, in order to ensure the business was able to comply with conduct requirements
- A “broad range” of conduct requirements would be established, including requirements that insurance intermediaries act “honestly and fairly”, exercise “a reasonable level of care and diligence”, and make “necessary disclosure of information”
- Breaches of such conduct requirements would be “subject to proportionate disciplinary sanctions by the IIA, including reprimand, pecuniary penalty, suspension or revocation of licence”