Independent Insurance Authority

Transcription

1 The race is well underway to enact the provisions required to set up the Independent Insurance Authority (IIA) and transition to the new insurance regulatory regime in Hong Kong. All of this is all occurring against the backdrop of international regulatory reform including: The development and implementation of the back stop capital standard during 2014 for Globally Systemically Important Insurers (GSIIs) The designation of reinsurer GSIIs in late 2014 The development of the higher loss absorbency requirements for GSIIs by 2015 The finalisation of the Global Capital Standard by 2016 with implementation to commence in 2019 for both GSIIs and Internationally Active Insurance Groups (IAIGs) The finalisation of the Common Framework for the Supervision of IAIGs (the Common Framework) To date, nine insurers have been identified as GSIIs (with an unspecified number of reinsurer designations to follow by late 2014). Some 50 insurance groups are expected to be eventually identified as IAIGs. The Insurance Companies (Amendment) Bill 2014 (the Bill) was gazetted and presented to the Legislative Council for first reading in April It marks a key milestone in the Hong Kong insurance regulatory reform. What you should know: How the Bill will be enacted The key provisions How transitional issues will be dealt with The work of the Bills Committee and what lies ahead What you need to do to plan for when the Bill becomes law In proposing the Bill, the Financial Services and Treasury Bureau (FSTB) had a number of important objectives: To replace the existing Insurance Authority with a new regulatory body for the insurance industry in Hong Kong that is financially and operationally independent of government the IIA Hong Kong s proposed October Update To introduce a statutory licensing regime for insurance intermediaries (including banks) To modernise the insurance regulatory infrastructure by giving the IIA additional powers of oversight, inspection, investigation, discipline and prosecution Independent Insurance Authority

2 The process The Bill proposes to amend the Insurance Companies Ordinance (ICO). It is the first major addition to the ICO since the inclusion of agents and brokers regulatory requirements introduced in 1994, some 20 years ago. The Bill must proceed through three readings in the Legislative Council. The first reading was effectively the introduction of the Bill. The second reading was where the FSTB introduced and explained the Bill. The debate on the Bill was then adjourned, referred to the House Committee in May 2014 and a Bills Committee, chaired by the Honourable Wong Ting Kwong, was then formed. The Bills Committee has now met on four occasions but a significant amount of work remains to be done. The proposed work plan for the Bills Committee (see Insurance Companies (Amendment) Bill 2014) suggests this work will not be completed until June Once this work is done, debate on the second reading will recommence. Once it has passed the Bill, it will be read a third time, presented to the Chief Executive for execution and gazetted (when the effective date will be notified). It is anticipated that this legislative process could be complete by as early as July The enactment of the Bill is only the first step. Apart from the transitional arrangements, which we outline below, a significant body of work will need to be undertaken in recruitment, establishing systems and procedures and preparing industry codes of practice. Whilst it remains to be seen how these codes will be implemented, some of the rules will be made by way of regulations enacted under the ICO. The industry has an opportunity now to consider what provisions are appropriate for industry codes so that these can be considered by the provisional IIA as soon as it is formed. The headlines on the Bill Licensing of insurance intermediaries Perhaps the most significant change proposed is that the IIA will take over responsibility for the regulation of insurance intermediaries from the various self regulatory bodies (the Hong Kong Federation of Insurers (HKFI) for agents and the Confederation of Insurance Brokers (CIB) and the Professional Insurance Brokers Association (PIBA) for brokers). 2

3 Regulated activities In contrast to the current need to be licensed for advising on or arranging insurance, intermediaries and their technical representatives (TRs) will, assuming the Bill in its current form becomes law, need to be licensed if they: Negotiate or arrange a contract of insurance Invite or induce, or attempt to invite or induce, another person to enter into a contract of insurance Invite or induce, or attempt to invite or induce, another person to make a material decision including decisions on certain specified matters Give regulated advice including an opinion on certain specified matters The proposals define these activities as regulated activities. Further guidance is provided on what constitutes the making of a material decision or providing an opinion. These terms are fairly wide and include: Making an insurance application or proposal for a policy Issuance, continuance or renewal of a policy including any supplementary contract (which the Commissioner of Insurance refers to by the shorthand term rider ) Cancellation, termination, surrender or assignment of a policy including any rider Exercising rights under a policy including any rider Changes to terms and conditions of a policy including any rider Making or settling an insurance claim Certain exemptions are proposed. These include a full exemption for a person carrying on a regulated activity if it involves only clerical or administrative duties for an insurer. A partial exemption is provided for: Solicitors, counsels, certified public accountants, certain trust companies, certain actuaries and certain loss assessment and claims settling businesses in respect of the provision of regulated advice wholly incidental to their practice or business Persons providing regulated advice through newspapers, magazines, books or other publications generally available to the public (excluding subscriptions), on television or radio broadcast to the public or through an electronic communication to the public 3

4 Advisors and publishers will need to understand the limited scope of these exemptions. The IIA will assume responsibility for the licensing, supervision and discipline of new insurance intermediaries and their TRs. Existing licences for intermediaries and their TRs granted under the former self regulatory regime will expire at the end of a three year transitional period. Licences for intermediaries (who may be individuals, partnerships or corporations) and their TRs will generally still need to be renewed every three years. Corporate agents and brokers will continue to need to apply for the approval of a Responsible Officer (RO). An insurer will need to apply for approval before appointing a key person in a control function including a function responsible for ensuring that internal controls and procedures are in place and observed by its appointed insurance agents. Extraterritorial application Section 64H of the Bill introduces extraterritorial effect with respect to the regulated activities of insurance intermediaries. It provides: a person (or someone on behalf of that person), who markets to the public, from a place outside Hong Kong, a regulated activity that they provide, is to be regarded as holding out that the person is carrying on a regulated activity. The consequence is that such person may not undertake those activities without being licensed for that regulated activity. It is not certain whether the intention of this provision is to capture activity from abroad that is directed: to the public in Hong Kong while they are physically located in Hong Kong only; or to the public in Hong Kong wherever they are physically located (for example, while they are visiting another country). In the latter case, the activity of product sales (for example) to Hong Kong public entirely abroad could be caught. If this is not caught by the provision, subsequent servicing of entirely offshore products by approaches into Hong Kong (for example, by negotiating and settling a claim) would be captured by reason of the extended definition of regulated activities. 4

5 Liabilities and responsibilities for misconduct There are substantial financial penalties for misconduct by agents and brokers and their ROs and the same apply to insurers guilty of misconduct. The IIA may impose a fine of up to HK$10M or three times the amount of the profit gained/loss avoided as a result of the misconduct. The introduction of the concept of misconduct by reference to actions that are prejudicial to the interests of the policyholder is very broad. The industry needs to consider and ideally have input into the guidance on what will constitute misconduct proposed to be set out in the code of conduct to be published under the proposed section 93 or any code or guideline to be published under the proposed section 131 of the Bill. Transition The Bill plans for transition by allowing for: A lead in time for the establishment of the IIA (with the initial establishment of the provisional IIA) The grandfathering of existing intermediary licences for the first three years after the new provisions come into force. On 3 October 2013, the FSTB announced it was forming a working group to facilitate smooth transition to the IIA. The Convenor of the working group is the Deputy Secretary for Financial Services and the Treasury (Financial Services). The other members include: the Assistant Commissioner of Insurance (Enforcement); the Principal Assistant Secretary for Financial Services and the Treasury; the Chairman of the CIB; the Convenor of the Insurance Industry Regulatory and Development Concern Group; the Chairman of the Insurance Agents Registration Board (IARB); the Chairman of PIBA; the President of the Life Underwriters Association of Hong Kong; the Past President of the General Agents and Managers Association of Hong Kong; and the Chairman of the HKFI s Task Force on the Independence of the Insurance Authority. 5

6 The first meeting of this working group took place on 24 October 2013 when it was agreed that: CIB, PIBA and the IARB - the Self Regulatory Organisations (SROs) - would prepare submissions on the transfer of SRO complaint and appeal cases that remain outstanding when the IIA is established; the Office of the Commissioner of Insurance (OCI) would prepare a list of past codes and guidelines published by SROs; the FSTB would discuss guidance on acting in the best interest of policyholders with relevant stakeholders for the IIA s future reference; the FSTB would provide an outline of options to deal with applications for registration and change notices made before the IIA is operational; at each meeting of the working group, the OCI would report on progress for the transfer of data to establish the IIA public register; and the FSTB would establish a dedicated webpage to provide information on the working group s discussions and outcomes. In its most recent meeting on 5 June 2014, the FSTB noted the need for the IIA to issue new rules, guidance notes and codes, some of which were required by the Bill (for example, the guidelines on pecuniary penalties). In that meeting, the OCI agreed to prepare a list of guidelines required to be issued by the IIA. The Bill and Bills Committee progress The most recent Committee Meeting was on 21 July Some key developments are as follows: A. Enhancement of Existing Regulatory Powers in respect of Insurers (Amendments to Parts II VII of the ICO) Legislative Purpose: enhance corporate governance of authorised insurers so that only fit and proper persons will be in charge of authorised insurers business. This will also benefit policy holders. The Bill s provisions include: 1. Controllers, Directors and Key Persons in Control Functions of Authorised Insurers Clause 23 of the Bill substitutes a new section 13A for the ICO. The proposed new section 13A states that an authorised Insurer incorporated in Hong Kong cannot appoint a controller unless they are first 6

7 approved by the IA (or IIA after establishment), and the IIA may revoke that approval if the appointee is not, or is no longer fit and proper. 1 Empowers the IIA to approve the appointment of directors of authorised insurer incorporated in Hong Kong, and revoke approval on fitness and proprietary grounds. 2 Fit and proper determination grounds are to be provided An authorised insurer can only appoint an individual as a key person in control function of that insurer, provided that the individual is fit and proper and approved by the IIA. Approval can also be revoked on fitness and proprietary grounds. 3 The control function definition of an authorised insurer: includes the intermediary management control function such as administering and monitoring compliance with statutory requirements by licensed insurance agencies, licensed individual agents, ensuring compliance with conduct requirements by licensed insurance intermediaries that refer insurance business to that insurer. 4 The IIA may impose conditions when granting approval to an authorised insurer for the appointment of a controller, director or key personnel in control functions of that authorised insurer Other regulatory powers in respect of insurers The appointment by an authorised insurer incorporated in Hong Kong and carrying on long term business of their appointed actuary is subject to IIA prior approval. The IIA has authority to revoke that approval and may also amend / impose conditions on that approval. 6 Authorised insurers must maintain separate accounts for each class of its long term business, and assets representing the fund should be applicable only for the purposes of that part of business to which the fund relates. 7 The IIA may disclose to the public details of relevant decisions made after it has exercised its power to impose disciplinary sanctions against an authorised insurer. 8 There are increased penalties for the offence of recklessly furnishing materially false information to the IIA. 9 1 Clause 23 of Bill, replaces the current s13a with a new s13a. 2 Clause 25 of Bill, added as s13ac. 3 Clause 25 of Bill, added as s13ae. 4 S13AE(12)(a) 5 Clause 25 of Bill added as new s13af. 6 Clause 32 of Bill added as s15aa. 7 Clauses 40 and 42 of Bill as amendments to s22 and Clause 54 of Bill as amendments to s41. 9 Ibid. 7

8 Anticipated future developments: Subject to consultation, more control functions may be prescribed in the Bill through Committee Stage Amendments. According to Insurance Core Principle 8, control functions should include at least risk management, compliance, actuarial matters and internal audit. The scope of the intermediary management function is to be discussed further, with the objective of promoting effective authorised insurer internal control system for good business conduct of insurance intermediaries. The IIA will promulgate a code or guidelines on the definition of fit and proper. Though major factors have been considered (see below and also the new section 14A(1) of the Bill), the IIA should consider other factors on a case-by-case basis. Further guidelines may be required. The current requirement (i.e. segregation of assets and funds) which applies to all assets and liabilities of authorised long term insurers irrespective of source of business will be maintained. 10 The IIA will promulgate codes and guidelines on the definition of misconduct. The current misconduct definition is modelled on the Securities and Futures Ordinance (SFO) which regulates licensees under the supervision of the Securities and Futures Commission of Hong Kong (SFC). B. New Regulatory Powers in respect of Insurers (New Part VA) Legislative Purpose: To provide the IIA with express powers to conduct inspections, initiate investigations, and to impose range of disciplinary sanctions on authorised insurers. The propound powers are similar to those vested in financial services regulators under the SFO, the Mandatory Provident Fund Schemes Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. The Bill s provisions include: 1. IIA Inspection and Investigation Powers The IIA inspector is entitled to enter the insurer s business premises, inspect and make copies of their business records and make enquiries. 11 The IIA is empowered to direct its employees or, with consent of Financial Secretary, appoint other persons to initiate investigations if it is satisfied that certain conditions exist. The conditions include: 10 CB(1)1817/13-14(03) 11 s41b 8

9 (a) (b) (c) (d) Reasonable cause to believe there has been a breach of the ICO; Reasonable cause to believe a person is involved in fraud, misfeasance, defalcation or other misconduct; Reasonable cause to believe that a person has carried on or is carrying on insurance business in a manner that is not in the interests of policy holders or potential policy holders or is not in the public interest; Reasons to enquire if a person is, or was, guilty of misconduct or is not fit and proper before considering if disciplinary sanctions should be imposed on the person. An investigator can require a person to produce records and documents, and give explanations in respect of the same, answer questions in relation to the investigation and give other assistance. 12 An inspector or investigator can require a person to, by statutory declaration, verify his/her answer or provide an explanation to inquiries. If that person fails to comply because that information is out of that person s knowledge or possession, the inspector or investigator may require the person to verify, by statutory declaration that he/she has not complied with requirements for that reason. 13 An inspector or investigator may apply to the Court of First Instance for an inquiry into a person s failure to comply with a requirement imposed by inspector or investigator. The court may make orders for the person to comply with the requirement within a specific time, or punish the person as if the person had been guilty of contempt to court. 14 A person commits an offence if they 15 : (a) (b) (c) (d) (e) fail to comply with inspector / investigator requirements; fail to comply with inspector/investigator with intent to defraud; give a materially false or misleading answer or explanation for purported inspector / investigator requirements compliance; give a materially false or misleading answer or explanation for purported inspector / investigator requirements compliance with intent to defraud; cause or allow another person to fail to comply with a requirement imposed by inspector or investigator or give materially false or misleading answer or explanation. 12 s41d(5) 13 s41c and 41E 14 s41f 15 s41g(1) to (5) 9

10 A person also commits an offence if they destroy, falsify, conceal or dispose of a record / document required by the inspector or investigator with an intent to conceal matters capable of being disclosed. 16 Refusing to comply with an inspector s or investigator s requirements by reason of potential incrimination is not a justifiable excuse. 17 If the person is made aware by the investigators or inspectors that they might be incriminated by giving answer or explanations, the requirement, answer or explanation shall not be admissible in evidence in criminal proceedings in court of law. 18 A magistrate may issue a warrant authorising a person to enter premises and to search for, seize and remove a record or document if there are reasonable grounds to suspect that there may be a record or document required by an inspector or investigator on those premises IIA Disciplinary Powers The IIA may exercise disciplinary powers with regard to an authorised insurer if that insurer is or was guilty of misconduct, or when a person is or was not fit and proper to hold the position of director or controller of that insurer. Those disciplinary powers include 20 : (a) (b) (c) (d) (e) revoking the authorisation of authorised insurer in relation to all or any classes of insurance business; suspending authorisation of the authorised insurer in relation to all or any classes of insurance business; prohibiting the authorised insurer from applying to be authorised authorised to carry on a class of insurance business for a specific period; reprimanding the authorised insurer publicly or privately; and ordering the authorised insurer to pay a pecuniary penalty. The IIA must not exercise the above disciplinary powers before giving the authorised insurer the right to be heard and it must also observe certain procedural requirements in that regard. 21 Even whilst an authorised insurer is suspended, it must still comply with the applicable provisions of the ICO s41i 17 s41g(6) 18 s41h(2) 19 s41k 20 s41p(2) 21 s41q 10

11 Suspension or revocation of the authorisation of an insurer does not avoid or affect an agreement or arrangement entered into by that insurer. 23 The IIA may require an insurer whose authorisation is revoked or suspended to transfer to a policy holder copy of records relating to that policy holder s assets or affairs. 24 All the above provisions in Part VA are applicable to Lloyd s and its members. 25 Anticipated future developments: An independent Process Review Panel will be established to review the procedural fairness of the IIA in exercising its powers. The IIA will also consult an expert panel if expert advice is required for making disciplinary decisions. The IIA s decisions are reviewable by the Insurance Appeals Tribunal (IAT). The operational details for the IAT will be discussed at future Committee Meetings. Decisions of the IAT may be appealable to the Court of Appeal with its leave. What you should plan for Some practical matters insurers should consider are as follows: Preparing the following draft codes for consideration by the provisional IIA: Misconduct and acting in the best interest of policyholders What is considered fit and proper Conduct a business review identify products that may be affected consider any distribution arrangements that may be affected document retention and retrieval arrangements calculate possible compliance costs 22 s41u 23 s41v 24 s41w 25 s50g added by Clause 62 of the Bill. 11

12 Commencing planning review and revise compliance plans and procedures including: - new controls on and review and document obligations of intermediaries - a documented compliance plan for the Bill including regular reporting and review mechanics - identifying new resource needs - draft additional policy disclosure statements where necessary - consider intermediary contractual provisions including document retention, audit, periodical reports and reviews for liability exposures (including vicarious liability for agents) and insurance coverage issues and solutions Prepare policies and procedures for appropriate officers ensuring internal controls and procedures are in place and observed by intermediaries For more information on these proposals or the impact they may have on you or your business, please contact Peter Cashin, Head of Corporate Insurance, Hong Kong on or at peter.cashin@kennedyslaw.com or Richard Bates, Head of Corporate, Hong Kong on or at richard.bates@kennedyslaw.com. Peter Cashin Head of Corporate Insurance Hong Kong T: E: peter.cashin@kennedyslaw.com Richard Bates Head of Corporate Hong Kong T: E: richard.bates@kennedyslaw.com 12

13 Kennedys Hong Kong 11/F, Hong Kong Club Building 3A Chater Road Central, Hong Kong T: F: Source: Legislative Council, Hong Kong 13