Hong Kong's Insurance Regulatory Reform Closer to Completion
The Financial Services and the Treasury Bureau have announced that the newly established Insurance Authority (IA) will take over the statutory functions of the Office of the Commissioner of Insurance (OCI) starting 26 June 2017, which marks the commencement date for the second stage of the three stage regulatory reform.
The OCI currently regulates insurance companies and three self-regulatory organisations (SROs), namely the Insurance Agents Registration Board, the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association. SROs will continue to be self-regulated for the time-being (for another two years), allowing time for the IA to prepare the necessary tools and guidelines for regulating insurance intermediaries.
At the final stage of the regulatory reform, the Insurance Companies (Amendment) Ordinance 2015 (ICO 2015) will be renamed the Insurance Ordinance. The IA will then begin to exercise its statutory powers as an independent regulator to license and regulate insurance intermediaries (taking over the supervisory function from the three SROs), and introduce further requirements.
Enforcement of Provisions in ICO 2015
A majority of provisions in the ICO 2015, not previously in force, will come into effect on 26 June 2017 (except provisions concerning insurance intermediaries). Some include provisions relating to the appointment of key persons in control functions; regulatory, investigatory and enforcement powers; and pecuniary penalties.
• Key Persons in Control Functions
The appointment of key persons in control functions will require the IA's prior approval as a pre-condition to ascertain that the potential appointee is fit and proper. Key persons are individuals who hold positions that are likely to exercise a significant influence on the insurer's business, such as individuals performing financial control compliance or actuarial functions.
• Regulatory, Investigatory and Enforcement Powers
The IA may appoint an investigator to conduct an investigation if it has reasonable cause to believe an individual has carried out insurance business in a matter that is not in the interests of the policy holder / public, or in contravention of the ICO 2015.
An investigator may enter an authorised insurer's premises and make copies of business records at any reasonable time and without the need for a warrant. During an investigation, the Insurer's employees should fully cooperate and provide all necessary assistance to the investigator. A person commits an office if he / she fails to comply with a requirement imposed by the investigator, and may be liable to a maximum fine of up to HK$200,000 and one year imprisonment.
• Pecuniary Penalties
The IA will have powers to impose pecuniary penalties for the misconduct of directors and controllers of an insurer. The IA will take into account the following factors when imposing penalties: (i) the nature, severity and impact of the relevant misconduct; (ii) the insurer's conduct in response to the breach; (iii) any prior breach; and (iv) the financial consequence of the breach.
Enforcement of Subsidiary Legislation
The following existing subsidiary legislation will also come into effect on 26 June 2017:
(a) Insurance Companies (Actuaries' Qualifications) (Amendment) Regulation 2017;
(b) Insurance Companies (Register of Insurers) (Prescribed Fee) (Amendment) Regulation 2017;
(c) Insurance Companies (Authorization and Annual Fees) (Amendment) Regulation 2017;
(d) Insurance Ordinance (Amendment of Schedules) Notice 2017;
(e) Insurance Companies (Determination of Long Term Liabilities) Regulation (Amendment) Rules 2017;
(f) Insurance Companies (Margin of Solvency) Regulation (Amendment) Rules 2017;
(g) Insurance Companies (General Business) (Valuation) Regulation (Amendment) Rules 2017; and
(h) Insurance Companies (Actuaries' Standards) Regulation (Amendment) Rules 2017.
The subsidiary legislation will enable the IA to collect authorisation fees from insurance companies and user fees on specific services. Insurers currently pay the OCI a fixed rate for the annual authorisation fee. Under the new regime, the annual authorisation fee will comprise two parts - a fixed fee and a variable fee, calculated on the insurer's insurance liabilities.
A user fee will also be introduced for services including applications for the approval of controllers, directors, key persons in control functions or appointed actuaries; updates to the insurer's information on the register of authorised insurers or obtaining a duplicate certificate of authorisation. It is aimed that the IA will be financially independent of the Government in the long run.
It remains uncertain how some of these amendments will be implemented in practice. Insurers and stakeholders should consider the changes coming into effect during June 2017 (including subsidiary legislation and future guidance notes), and implement compliance policies and internal controls to comply with the new assessments / procedures to respond to the IA's new requirements and powers. Adequate preparation is necessary so that insurers have the ability to mitigate the potential impact and to minimize the risk of being the subject of an IA investigation or disciplinary action.
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