News
News //
Submitted by // Y Ho, Associate
14 February 2012

Insurance Broker Commission: No Secret Profit

Introduction

The judgment of the Court of First Instance in Hong Kong on 6 January 2012 in the case of Hobbins v Royal Skandia Life Assurance Ltd. & Clearwater International Ltd., HCCL15/2010 ("Hobbins") confirmed that the customary practice in the insurance industry for insurance brokers to receive commission from the insurers would not be contrary to s.9 of the Prevention of Bribery Ordinance ("PBO"), provided that the commission is not in excess of the normal level of commission paid in the insurance market and that that the broker had made disclosure to its client.

This has provided much assurance to insurance brokers regarding the legitimacy of receiving commissions from insurers and useful guidance on the extent of its duty of disclosure to its clients.

Background Facts

Hobbins was an extremely successful businessman and an experienced investor.

Clearwater, an insurance broker acted as Hobbin's agent to purchase Investment Linked Assurance Scheme products from Skandia and other insurers.

Clearwater made it known to Hobbins from the outset of their relationship that it made money from commissions and fees paid by insurers whose products were purchased by Hobbins.  It is also clearly stated in the client agreements with Hobbins that Clearwater would be earning commission from such of his business as Clearwater placed with insurers.

Hobbins later sought to set aside those investment schemes and to be restored to the position he was in immediately before purchasing those products. 

The Court found no basis for holding any of the contracts void or unenforceable.  All of Hobbins' claims against Skandia and Clearwater were dismissed.

Key Findings on Issues in Hobbins

  1. Agency

    It has long been established at common law that insurance brokers are acting solely as agents for an insured.  The mere fact that an insurer pays brokerage fees to a broker does not mean that the broker is undertaking to perform any obligation on behalf of the underwriter.

    In order to establish agency there must be express or implied authority for the agent to enter into any transaction or act in any way on the principal's behalf.  It was clear in this case from the contracts between the insurers and Clearwater that Clearwater was not appointed as an agent and it had no express or implied authority to enter into any transaction or act in any way on the insurer's behalf.  Therefore Clearwater was not an agent of the insurer.

  2. Illegal Contract

    There is "lawful authority" for the commercial practice that an insurance broker acts as an agent of the insured and not of the insurance company.  It has long been settled at common law that commission paid to an insurance broker by an insurer does not constitute an ilIegal secret profit unless it is in excess of what is normally paid within the insurance market.

    In this case, there is no evidence that the level of commissions or fees received by Clearwater was excessive by industry standard.

  3. Breach of Fiduciary, Common Law or Statutory Duty

    Equity imposes on the agent a duty to make disclosure of commission or fees earned from third parties in connection with the agent's handling of a principal's business.  That duty however did not extend to providing specific details of the quantum of commission.

    There was no dispute that Clearwater disclosed the fact that it would be remunerated by way of commissions and other fees received from the insurers.  It was then up to the principal to ask the insurance broker for further and better particulars of the commission to be received and then decide accordingly whether to proceed with a transaction.

    To impose a duty on the broker to specifically disclose the quantum of commission it expected to receive would be a standard at odds with case law on prevailing commercial practice among insurance brokers.  If there is to be a change that initiative has to be for the legislature to bring about.

HKFI Initiatives

Prior to Hobbins, concerns over the applicability of s.9 PBO on the commission received by insurance broker have already prompted the Hong Kong Federation of Insurers to issue a circular to all its member companies on 13 October 2011, to draw to their attention to the risk of such breach ("HKFI Circular"). 

The HKFI Circular advised insurers to require brokers to disclose to their clients that they will receive a commission from the insurer as a result of taking up the policy issued by the insurer and proposed that a broker must sign a declaration to the insurer that he has made such disclosure.  

Since Hobbins, the Hong Kong Federation of Insurers has in its January 2012 Monthly Brief announced that the Task Force on the disclosure of Intermediaries Remuneration has been re-activated to review the need to refine the legal advice provided to Member Companies in the HKFI Circular and to explore the possibility of devising a simplified version of the Broker’s Declaration in the context of the Prevention and Bribery Ordinance and protect the legal position of insurers.

Conclusion

Pending further revision to the HKFI Circular, Hobbins now gives clear authority that:

  1. an insurance broker is only an agent of the insured;

  2. commission received from the insurer does not constitute an illegal secret profit unless it is in excess of what is normally paid within the insurance market; and

  3. it is sufficient for insurance brokers to disclose to the insured the fact that it would be remunerated (and only remunerated) by way of commissions and other fees received from insurers, without specifying to the insured the amount of commission received.


About us

HWB is a new, independent Hong Kong law firm which combines the in-depth experience of its lawyers with a creative, forward thinking approach.  Our key practice areas are maritime and commercial dispute resolution and corporate / commercial law, with particular skills in medico-legal law. 

As an independent Hong Kong law firm, we are well positioned to provide high quality legal services to local and international clients whilst minimising the limitations of legal and commercial conflicts of interest.  The partners' long history in the city enables us to deliver a blend of international know-how and Asian insight. 

At HWB we understand business and above all our focus is on results.  We are committed to providing all our clients with realistic, commercial legal advice that gives them ‘edge’.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

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Submitted by // W Wu, Paralegal
14 February 2012

Privity of Contract

As Reyes J. expounded in a recent Court of First Instance judgment, "…that cannot be a right result.  It violates the principle of privity of contract"[1]

The common law doctrine of privity of contract has existed in English law since the middle of the nineteenth century when it was firmly established in Tweddle v Atkinson[2] and reaffirmed by the House of Lords in Dunlop Pneumatic Tyre Co. Ltd. v Selfridge & Co. Ltd.[3] Under the Hong Kong Basic Law, this doctrine survived the transition post 1997 and to this day remains alive and well within the HKSAR common law system.

Under the existing Hong Kong "privity" doctrine a person cannot acquire and enforce rights under a contract to which he is not a party.

For example, if A has an agreement with B that A would do something for C and A subsequently does nothing, C cannot enforce the contract against A because C is not a party (or "privy") to the contract. "The doctrine of ‘privity’ requires a person to be ‘privy’ to a contract before he can sue on it,"[4]

The doctrine has accordingly been reformed in many common law jurisdictions, including Australia (the Northern Territory, Queensland and Western Australia) Canada, England and Wales, New Zealand and Singapore.

In November 2010, the Department of Justice advised the Law Reform Commission ("LRC") of the Administration's plan to implement the LRC's recommendations contained in the report on Privity of Contract, published in October 2005. The Department of Justice said:

"The Department of Justice has carefully considered the recommendations in the Law Reform Commission's report on Privity of Contract and agrees with the Commission that the doctrine of privity of contract should be reformed by means of a comprehensive, systematic and coherent legislative scheme. The Department of Justice intends to prepare a Bill to implement this proposal and will consult relevant stakeholders on the draft legislation in due course."

The LRC’s recommendations, if adopted, will bring Hong Kong’s law inline not just with the law in other parts of the common law world, but also with common sense. The result of the LRC’s proposals will be that third parties (persons not "privy" to a contract) should, subject to the intention of the contracting parties, be able to enforce agreements for their benefit.

For example, A is buying a watch from B, which A makes clear at the time of purchase is intended as a gift for C. "Under the existing common law, C cannot sue B if the watch proves defective, as C is not a party to the contract. However, under the LRC’s proposals, C is a party intended by A and B to be benefited by the purchase and he can sue B directly,"[5]

Other examples of the effect of the proposed reform on everyday life are:

  1. Contracts for holiday packages – A enters into an agreement with a tour company for a holiday package for his parents. The tour company fails to honour its promise under the contract. Since the contract was made for the benefit of A’s parents, they would, subject to the intention of the contracting parties, be entitled to claim in breach of contract against the tour company. The parents, however, cannot enforce the contract under the current law.

  2. Building contracts – A developer enters into a contract with a building contractor for the provision of labour and materials of a specified standard, intending that the contract would benefit the purchaser who buys the unit in the development. If the building contractor fails to provide materials of the specified standard, the purchaser of the unit can, subject to the intention of the contracting parties, sue the building contractor for damages arising from the breach. The purchaser of the unit, however, cannot enforce the contract under the current law.

  3. Insurance contracts – B is a sub-contractor of A. B takes out an insurance policy with an insurer (C) to cover his and A’s liability to employees’ compensation. A is not joined as a party. One of B’s employees is injured in the course of employment because of the negligence of one of A’s employees. A pays the required compensation to B’s employee. Under the existing law, A would have difficulties in seeking indemnity from C, since A is not a party to the insurance contract even though the parties intend to benefit him. In contrast, A would be able to seek indemnity from C under the report’s proposals.

The report makes clear that the LRC does not recommend the complete abolition of privity, as the LRC believes that it is important to preserve the principle of freedom of contract. The contracting parties’ freedom of contract should be respected and they should be able to opt out of any new statutory provisions giving rights of suit to third parties.

So it appears that the wheels are turning and the movement towards making the words of Reyes J. within Sinokor Merchant Marine Co Ltd v Vessel Marcatania, a distant and less frequent visitor in future contract litigation.
 

About us

HWB is a new, independent Hong Kong law firm which combines the in-depth experience of its lawyers with a creative, forward thinking approach.  Our key practice areas are maritime and commercial dispute resolution and corporate / commercial law, with particular skills in medico-legal law. 

As an independent Hong Kong law firm, we are well positioned to provide high quality legal services to local and international clients whilst minimising the limitations of legal and commercial conflicts of interest.  The partners' long history in the city enables us to deliver a blend of international know-how and Asian insight. 

At HWB we understand business and above all our focus is on results.  We are committed to providing all our clients with realistic, commercial legal advice that gives them ‘edge’.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.



[1] Sinokor Merchant Marine Co Ltd v Vessel Marcatania Court of First Instance, 2 December 2011

[2] (1861) 1 B&S 393.

[3] (1915) A.C. 847.

[4] Mr Benjamin Yu, SC, Press Release - LRC report on privity of contract released, 25 October 2005

[5] Mr Benjamin Yu, SC, Press Release - LRC report on privity of contract released, 25 October 2005

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Submitted by // J Mok, Associate
14 February 2012

Anti-Money Laundering and Counter-Terrorist Financing (Financial Institution) Ordinance – effective on 1 April 2012

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institution) Ordinance ("AMLO") was gazetted on 8 July 2011 and will come into effect on 1 April 2012.

Background

FATF, an international Anti-Money Laundering ("AML") standard setter, conducted an evaluation on the Hong Kong’s AML regime in 2008. FATF highlighted in their evaluation the following deficiencies that should be addressed: (i) the lack of statutory backing for customer due diligence ("CDD") and record keeping requirements (ii) the lack of appropriate sanction for these requirements (iii) the limited range of regulators’ supervisory and enforcement powers and (iv) the absence of an AML regulatory regime for money service operators, namely remittance agents and money changers.

Hong Kong (a member of the FATF) was required by FATF to implement improvement measures to address the deficiencies identified by FATF. Failure to do so will result in enhanced scrutiny by the FATF and could subject Hong Kong to counter measures by other FATF members. The introduction of the AMLO was an effort by the Hong Kong Government to address the deficiencies identified by FATF.

AMLO & Guidelines

Previously, the requirements on CDD and record keeping by financial institutions were implemented mainly through guidelines issued by the Monetary Authority ("MA"), the Securities and Future Commission ("SFC") and the Insurance Authority ("IA").

The new AMLO provides a uniform set of requirements applicable to all financial institutions in the banking, securities, insurance and remittance and money changing sectors ("FIs"). In addition, the four relevant authorities (MA, SFC, IA and the Customs and Excise Department) ("RAs"), in consultation with the Financial Services and Treasury Bureau, jointly drafted a set of guidelines applicable to all FIs. Individual RAs also added supplementary or sector specific guidance that is necessary or appropriate for their respective sectors.

Key Elements in the AMLO & Guidelines

Some key elements in the AMLO & Guidelines are summarized below:

  • If the FIs’ implementation measures of the AMLO depart from the guidelines issued by the RAs, the rationale for doing so should be documented and the FIs will have to stand prepared to justify departures to the RAs.
  • The AMLO makes it a criminal offence if an FI knowingly or with the intent to defraud any RA, contravenes a specified provision in the AMLO. The “specified provisions” are listed in section 5(11) of the AMLO and comprises of CDD and record keeping requirements. The FI is liable to a maximum term of imprisonment of 2 years and a fine of HK$1 million upon conviction if it knowingly contravenes a specified provision and is liable to a maximum term of imprisonment of 7 years and a fine of HK$1 million upon conviction if it contravenes a specified provision with the intend to defraud any RA.
  • A person who is an employee of an FI or is employed to work for an FI or is concerned in the management of an FI who causes or permits the FI to contravene a specified provision will also be subject to the same penalties as referred to above.
  • The AMLO empowers the RAs to take disciplinary actions against FIs for any contravention of a specified provision in the AMLO. The disciplinary actions that can been taken include (i) publicly reprimanding the FI (ii) ordering the FI to take any action for the purpose of remedying the contravention (iii) ordering the FI to pay a pecuniary penalty not exceeding the greater of HK$10 million or 3 times the amount of profit gained, or costs avoided, by the FI as a result of the contravention.
  • The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Review Tribunal will be established to review certain decisions made by the RAs.


The four main pieces of legislation in Hong Kong that are concerned with AML are the AMLO (effective on 1 April 2012), the Drug Trafficking (Recovery of Proceeds) Ordinance, the Organized and Serious Crime Ordinance and the United Nations (Anti-Terrorism Measures) Ordinance. Financial institutions should ensure that they have implemented adequate policy & procedures and staff training to comply with the AML legislation.

 

About us

HWB is a new, independent Hong Kong law firm which combines the in-depth experience of its lawyers with a creative, forward thinking approach.  Our key practice areas are maritime and commercial dispute resolution and corporate / commercial law, with particular skills in medico-legal law. 

As an independent Hong Kong law firm, we are well positioned to provide high quality legal services to local and international clients whilst minimising the limitations of legal and commercial conflicts of interest.  The partners' long history in the city enables us to deliver a blend of international know-how and Asian insight. 

At HWB we understand business and above all our focus is on results.  We are committed to providing all our clients with realistic, commercial legal advice that gives them ‘edge’.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

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Submitted by // C Leung, Associate
14 February 2012
  1. Holidays

    The General Holidays and Employment Legislation (Substitution of Holidays) (Amendment) Bill 2011 was passed on 14 December 2011 and it will amend the Employment Ordinance ("EO") and the General Holidays Ordinance ("GHO"). The Ordinance will come into operation on a day appointed by the Secretary for Labour and Welfare by notice published in a Gazette.

    As a general rule, where a statutory holiday stipulated under the EO falls on a rest day or a general holiday under the GHO falls on a Sunday, the day following the holiday is taken as a holiday in substitution. However, this does not apply to Lunar New Year and Chinese Mid-Autumn Festival.

    Currently, if any of the first three days of Lunar New Year fall on a Sunday, the day immediately preceding Lunar New Year’s Day (i.e. Lunar New Year’s Eve) is designated as a holiday in substitution. In the event that the day following the Chinese Mid-Autumn Festival falls on a Sunday, the day of the Chinese Mid-Autumn Festival, which is a Saturday, is designated as a holiday in substitution. This does not benefit those employees who work on a five-day workweek basis with a day off on Saturdays and Sundays.

    With the introduction of the amended law, if any of the first 3 days of a Lunar New Year falls on a Sunday, the fourth day of the Lunar New Year is substituted as a general holiday. By the same token, if the day following the Chinese Mid-Autumn Festival falls on a Sunday, the day after is designated as a holiday.

    The next time Lunar New Year’s Day falls on a Sunday is in 2013. The new law is expected to take effect in 2013 at the earliest.

  2. Mandatory Provident Fund

    The Hong Kong government introduced the Mandatory Provident Fund Schemes Ordinance ("MPFSO") in 2000 because it wanted to provide a suitable retirement protection system for people working in Hong Kong.

    As a result of which, all employers are currently required to enroll all of its employees (other than exempt employees) into a scheme registered with the MPFSO and both employers and employees are required to contribute an amount into the scheme. Independent contractors and individuals engaged in contract for services are excluded from the scheme.

    Contribution Levels

    The minimum level of relevant income for MPF contributions was raised from HK$5,000 to HK$6,500 with effect from 1 November 2011.

    This means that after 1 November 2011, employees with a monthly relevant income of less than HK$6,500 will not have to make any contributions to the MPF scheme. Employers are, however, still required to contribute 5% of the relevant income, regardless of the fact that the employee earns less than HK$6,500. 

    The maximum level of relevant income for MPF contributions will also rise from HK$20,000 to HK$25,000 with effect from 1 June 2012.

    This means that for those employees who earn a monthly relevant income in excess of HK$20,000, both the employers and employees will need to make a greater amount of contribution to the MPF schemes when the law comes into effect on 1 June 2012. Currently, both employers and employees are required to contribute to the MPF scheme at a rate of 5% of relevant income and the maximum contribution is capped at HK$1,000 per month (HK$20,000 x 5%). After 1 June 2012, the maximum contribution level will be capped at HK$1,250 per month (HK$25,000 x 5%).

    A summary of the mandatory contributions to be made by employees and employers should be calculated according to the following table[i]:

    Monthly paid regular employees and their employers:

     

    Mandatory contribution amount

    Monthly relevant income

    Employer’s contributions

    Employee’s contributions

    Less than $6,500

    Relevant income x 5%

    Not required

    $6,500 to $25,000

    Relevant income x 5%

    Relevant income x 5%

    More than $25,000

    $1,250

    $1,250

Employers should:

  • take positive steps to update its relevant administrative arrangements and payroll systems so that the new contribution levels are correctly reflected from 1 June 2012

  • liaise with its MPF service provider to ensure that the correct contribution amounts are made into the MPF schemes to ensure compliance with the MPFSO.

 

About us

HWB is a new, independent Hong Kong law firm which combines the in-depth experience of its lawyers with a creative, forward thinking approach.  Our key practice areas are maritime and commercial dispute resolution and corporate / commercial law, with particular skills in medico-legal law. 

As an independent Hong Kong law firm, we are well positioned to provide high quality legal services to local and international clients whilst minimising the limitations of legal and commercial conflicts of interest.  The partners' long history in the city enables us to deliver a blend of international know-how and Asian insight. 

At HWB we understand business and above all our focus is on results.  We are committed to providing all our clients with realistic, commercial legal advice that gives them ‘edge’.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.





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