The independent Insurance Authority goes live

Yesterday the Insurance Authority (IA) replaced the Office of the Commissioner of Insurance. The Insurance Authority also launched its website and this is available at www.ia.org.hk.

The Insurance Companies Ordinance, with effect from yesterday, was renamed the Insurance Ordinance (Cap. 41) (the Ordinance). The amendment of the Ordinance is taking effect in three stages and the second phase of amendments commenced yesterday. The Ordinance brings wide-ranging changes to the regulation of insurance and insurance companies in Hong Kong.

One of the most significant aspects of the new regulatory framework is the expanded scope of individual accountability and the enhanced investigatory and enforcement powers. The change reflects a global trend towards enhanced scrutiny of individual conduct in regulatory enforcement.

The new individual accountability framework clarifies the definition of “controllers” and introduces the concept of “key person in control functions” [1].

Under this new framework, controllers, directors, and appointed actuaries of insurers appointed before 26 June 2017 are not required to apply to the IA for (re)approval of their existing appointments.

For individuals who fall within the definition of “key person in control functions” before 26 June 2017, they are now required to seek the IA’s approval. Therefore, anyone performing a “control function” [2] before yesterday will need to seek explicit approval from the new IA for their existing appointments. Insurers have three months, from 26 June 2017 (i.e. until 30 September 2017), to lodge applications with the IA (using Form A1 of Schedule 4). Application fees for these applications are waived. For new appointments on or after 26 June 2017, an application fee of HK$18,000 is payable for certain applications including those for certain controllers, directors, key persons in control function and actuaries.

To be approved to perform a “control function”, an individual must satisfy and maintain the criteria for approval (i.e. the fit and proper test). Whether an individual is fit and proper is determined through assessment of criteria prescribed in the Ordinance. That assessment must be made having regard to the following factors set out in Section 14A of the Ordinance:

  • (a) the education or other qualifications or experience of the person;
  • (b) the person’s ability to act competently, honestly and fairly;
  • (c) the reputation, character, reliability and integrity of the person;
  • (d) the person’s financial status or solvency;
  • (e) whether any disciplinary action has been taken against the person by—
    • (i) the Monetary Authority;
    • (ii) the Securities and Futures Commission;
    • (iii) the Mandatory Provident Fund Schemes Authority; or
    • (iv) any other authority or regulatory organization, whether in Hong Kong or elsewhere, which, in the [Insurance] Authority’s opinion, performs a function similar to those of the [Insurance] Authority;
  • (f) if the person is a company in a group of companies, any information in the possession of the [Insurance] Authority, whether provided by the person or not, relating to:
    • (i) any other company in the group of companies; or
    • (ii) any substantial shareholder or officer of the person or of any company referred to in subparagraph (i);
    • (g) the state of affairs of any other business which the person carries on or proposes to carry on.

The IA has provided further guidance in a new Guideline 4 on “Fit and Proper” criteria (GL4). GL4 sets out the minimum standard of suitability requirements that are applicable to controllers, directors, key persons in control functions and appointed actuaries. It provides some general principles on how competence and integrity are to be determined. For example, to meet their competence requirements for “key person in control functions”, a person should possess relevant qualification and/or at least five years of related experience.

In addition, the new GL4 includes a new section on “Independence and Conflicts of Interests”. Insurers are required to ensure that controllers, directors, key persons in control functions and appointed actuaries are sufficiently independent to carry out their work in an environment that is free from any suggestion of improper influence. It is, therefore, the responsibility of the insurer to have sufficient safeguards in place to manage any conflict of interests.

There is also a new Guideline 18 on “Exercising Power to Impose Pecuniary Penalty in respect of Authorised Insurers under the Insurance Ordinance” (GL18). GL18 is made pursuant to Sections 41P and 41R of the Ordinance. With effect from yesterday, the IA is empowered to impose pecuniary penalties for insurer misconduct [3] and where the IA is of the opinion that a person who holds/held the position of a director or controller of the insurer is/was not a fit and proper person to hold that position. A pecuniary penalty can be as much as the greater of HK$10 million or three times the amount of the profit gained or loss avoided by the insurer.

In relation to the new enforcement provisions, the Ordinance also provides the IA with enhanced powers to inspect and investigate insurers. This includes powers to enter any premises of insurers to inspect and make copies of business records; to require insurers to answer questions concerning their business records, transactions or activities; and to require a person, who may be considered by the IA as not fit and proper, to attend an investigatory meeting.

The global trend in the insurance sector to enhance responsibility and accountability for the conduct, culture and regulatory compliance of insurers now has its position in the regulatory framework of Hong Kong. The new framework is intended to ensure the quality and accountability of individuals working in leadership positions in the insurance industry.

The commencement of the third phase of legislative amendments is expected to come into effect within the next two years. The balance of the amendments are for the IA to take over the regulation of insurance intermediaries from the three existing self-regulatory organisations and to implement a new licensing regime for insurance agents and brokers.

For more information on the new regulatory landscape, please contact us.

Definitions

1. key person in control functions -

  • (a) in relation to an authorized insurer which is incorporated in Hong Kong—means an individual responsible for the performance of one or more of the control functions for the insurer; or
  • (b) in relation to an authorized insurer which is incorporated outside Hong Kong—means an individual responsible for the performance of one or more of the control functions for the insurer in respect of so much of its insurance business as is carried on within Hong Kong. (Section 13AE(12) of the Ordinance)

2. control function - in relation to an authorized insurer, means any of the following functions that is likely to enable the individual responsible for the performance of the function to exercise a significant influence on the business carried on by the insurer—

  • (a) risk management function, which is a function to establish the strategies, policies and procedures to manage different types of key risks of the insurer;
  • (b) financial control function, which is a function to oversee all financial matters (including investments, accounting and financial reporting) of the insurer;
  • (c) compliance function, which is a function to establish and formulate the standards, policies and procedures to ensure the compliance with legal and regulatory requirements that are applicable to the insurer;
  • (d) internal audit function, which is a function to establish and implement an audit plan to examine and evaluate the adequacy and effectiveness of the controls to manage risks of the insurer;
  • (e) actuarial function, which is a function to evaluate and monitor—
    • (i) the technical provisions, premium and pricing strategies of the insurer;
    • (ii) the reserving and investment policies and reinsurance arrangements of the insurer; and
    • (iii) the policies and controls in respect of the insurer’s vulnerability to fluctuations in risk exposures and distribution policies;
  • (f) [amendments not yet in operation];
  • (g) any other function specified in a notice under subsection (14) (Section 13AE(12) of the Ordinance)

3. misconduct means—

  • (a) a contravention of a provision of this Ordinance;
  • (b) a contravention of a term or condition of an authorization granted under Section 8;
  • (c) a contravention of any other condition imposed on an authorized insurer under a provision of this Ordinance; or
  • (d) an act or omission relating to the carrying on of a class of insurance business by an authorized insurer which, in the [Insurance] Authority’s opinion, is or is likely to be prejudicial to the interests of policy holders or potential policy holders or the public interest,
  • and guilty of misconduct is to be construed accordingly. (Section 41P of the Ordinance).