Hong Kong - Insurance Authority Consults On Draft Codes Of Conduct For Licensed Insurance Intermediaries.
Legal News & Analysis – Asia Pacific - Hong Kong - Regulatory & Compliance - Insurance & Reinsurance
20 April, 2019
Introduction and Background
On 28 March 2019, the Insurance Authority (the “IA”) launched a two-month public consultation (the “Consultations”) on the draft Code of Conduct for Licensed Insurance Agents (the “Agents’ Code”) and the draft Code of Conduct for Licensed Insurance Brokers (the “Brokers’ Code” and together with the Agents’ Code, the “Codes”).
In recognition of the different capacities served by insurance agents (as representatives of insurers) and insurance brokers (as representatives of policy holders or potential policy holders), the IA proposes to issue two codes of conduct.
The Agents’ Code will apply to all licensed individual insurance agents, licensed insurance agencies and licensed technical representatives (collectively, “Licensed Insurance Agents”). The Brokers’ Code will apply to all licensed insurance broker companies and licensed technical representatives (collectively, “Licensed Insurance Brokers”). In addition, the proposed Codes will also set out the responsibilities of responsible officers and senior management of the licensed insurance agencies and licensed insurance broker companies respectively, relating to the carrying on of regulated activities by the licensed insurance agencies and licensed insurance broker companies.
At present, insurance intermediaries are required to comply with conduct requirements promulgated by their respective self-regulatory organisations (i.e. the Insurance Agents Registration Board set up by the Hong Kong Federation of Insurers, the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association).
Under the new statutory regime for insurance intermediaries, which is expected to come into effect in mid-2019, the IA will take over the regulatory functions of insurance intermediaries from the three self-regulatory organisations.
The IA indicated that, in formulating the proposed Codes, it had taken into account, amongst others, the norms and practices which have emerged from the day-to-day operation of the insurance market, existing codes and guidelines which apply to insurance agents and insurance brokers, other codes and guidelines and guidelines issued by regulatory authorities in Hong Kong and overseas and prevailing international standards. In addition, the IA indicated that the proposed Codes are principles-based to allow flexibility for the insurance market to evolve, adapt and innovate. Additional product specific requirements will be imposed through other regulatory instruments that apply in addition to the proposed Codes such as in relation to investment-linked assurance schemes and mandatory provident fund products.
The proposed Codes will come into operation on the day on which the new statutory regime for insurance intermediaries comes into operation.
Both proposed Codes are divided into four parts. Parts C and D of the proposed Codes set out the substantive requirements.
Part A contains the introductory paragraphs and background to the relevant Code.
Part B sets out the defined terms of the relevant Code.
Part C sets out the general principles, standards and practices.
Part D provides guidance on the corporate governance, controls and procedures that Licensed Insurance Agents and Licensed Insurance Brokers should establish and implement.
Schedule 1 sets out standards and practices for referral of business.
Certain of the requirements in the proposed Codes appear to be similar to the requirements contained in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (for example, the requirement to enter into a written client agreement and the requirement to report material incidents to the relevant regulator).
The general principles, standards and practices
The proposed Agents’ Code and the proposed Brokers’ Code set out eight core general principles under each of which, there is elaboration on the relevant standards and practices applicable to Licensed Insurance Agents/Brokers. In some instances, the standards and practices applicable to Licensed Insurance Agents/Brokers are different in light of the different capacities served by Licensed Insurance Agents (as representatives of insurers) and Licensed Insurance Brokers (as representatives of policy holders or potential policy holders). We have highlighted some of the differences below.
The IA noted in particular that the requirements in the Codes serve as minimum levels of professional conduct which policy holders and potential policy holders are entitled to expect when dealing with Licensed Insurance Agents or Licensed Insurance Brokers.
The eight general principles are as follows:
GP 1. Honesty and Integrity
Licensed Insurance Agents and Licensed Insurance Brokers are required to be trustworthy and act honestly, ethically and with integrity. In addition, Licensed
Insurance Brokers are also required to act in the utmost good faith. The IA noted that “utmost good faith” remains a sacrosanct tradition of the insurance market.
GP 2. Acting Fairly and in the Clients’ Best Interests/Acting in the Best Interests of Clients and Treating Clients Fairly
Licensed Insurance Agents should always treat clients fairly and act in their best interests. The IA noted that a core theme running through the entirety of the Codes is that of “treating clients fairly”. The IA noted in particular that as Licensed Insurance Brokers serve as the representatives of their clients, it is the clients who should always be at the forefront of a Licensed Insurance Broker’s considerations.
GP 3. Exercising Care, Skill and Diligence
A Licensed Insurance Agent/Broker should act with due care, skill and diligence. The additional standards in the Brokers’ Code include:
(a) where a client terminates its appointment of a licensed insurance broker company, the broker company should, amongst others, provide all reasonable cooperation to bring the appointment to an end in an orderly manner; and
(b) unless stated otherwise in the client agreement, a Licensed Insurance Broker should (where requested by a client) provide the client with reasonable assistance with regards to the client’s insurance claims and exercise reasonable care to discharge all obligations in relation to the administration, negotiation and settlement of such claims to the extent that such obligations are within the scope of the Licensed Insurance Broker’s services stated in the relevant client agreement.
GP 4. Competence to Advise
A Licensed Insurance Agent/Broker should possess appropriate levels of professional knowledge and experience and only carry on regulated activities in respect of which the agent has the required competence.
GP 5. Disclosure of Information
A Licensed Insurance Agent/Broker should provide clients with accurate and adequate information to enable them to make informed decisions. The additional standards in the Brokers’ Code include:
(a) a Licensed Insurance Broker should not hold itself out as an insurer or an agent of an insurer in carrying on regulated activities;
(b) where a Licensed Insurance Broker intends to arrange an insurance policy with an insurer which is not authorised by the IA, the Licensed Insurance Broker should disclose to the client: (i) the name and address of the insurer in the jurisdiction where the insurer has issued the policy and (if different) the jurisdiction where the insurer is incorporated (ii) the fact that the insurer is not regulated by the IA and is subject to different laws and regulations, (iii) the financial standing
of the insurer (e.g. credit rating), and (iv) the governing law of the insurance policy and the jurisdiction in which disputes under the policy will be determined. In the case where the client is an individual, the Licensed Insurance Broker should also obtain written acknowledgement from the client of the disclosure of (i) to (iv);
(c) when negotiating or arranging an insurance policy with an insurer on behalf of a client, a Licensed Insurance Broker should: (i) not make any false statements or mislead the insurer, (ii) disclose to the insurer all material information in relation to the insurance policy, and (iii) disclose all material facts in relation to the prospective insurance policy of which the Licensed Insurance Broker is aware; and
(d) a Licensed Insurance Broker should enter into a written agreement with each client before arranging an insurance policy with the client which contains certain prescribed requirements, and a copy of the agreement should be provided to the client.
GP 6. Suitability
Before giving regulated advice, a Licensed Insurance Agent/Broker should properly carry out a suitability assessment of the client’s objectives, circumstances, needs and priorities.
GP 7. Conflicts of Interest
A Licensed Insurance Agent/Broker should make every effort to avoid conflicts of interests and when such conflicts cannot be avoided, should manage them with appropriate disclosure to ensure clients are fairly treated at all times.
The proposed Agents’ Code (and its related standards and practices) seeks to address the conflicts of interests that will likely arise as a result of a Licensed Insurance Agent’s role as agent of its insurer principals and relationship with policy holders. For example, the proposed related standards and practices state that, to avoid potential conflicts of interest and provide transparency, a licensed insurance agent should disclose that: (i) it is appointed by its appointing insurer to promote and advise on the insurance products offered by the insurer; and (ii) the insurance products it can promote and advise on are limited to the insurance products offered by its appointing insurer.
Although Licensed Insurance Brokers act for policy holders, they are sometimes remunerated by insurers by way of commission. General Principle 7 of the proposed Brokers’ Code (and its related standards and practices) requires a licensed insurance broker company which receives remuneration in this form to give adequate disclosure in relation to such remuneration to the client before arranging the relevant insurance policy.
GP 8. Client Assets
A Licensed Insurance Agent/Broker should have sufficient safeguards in place to protect the assets of clients.
Broadly, Licensed Insurance Agents should only receive payment of premiums where it is within the scope of their authority as granted by the appointing
insurer or appointing agency. On the other hand, as Licensed Insurance Brokers receive monies on behalf of clients, the proper handling of such client monies is vital; a licensed insurance broker company should have sufficient controls and security in place to prevent unauthorised access to client assets.
Corporate governance, controls and procedures
Part D of the proposed Codes require licensed insurance agencies and licensed insurance broker companies to establish and implement organisational structures and adequate controls to ensure:
(a) that interests of clients are not prejudiced;
(b) that there are clear roles and lines of responsibility; and
(c) accountability of senior management.
In particular, it is proposed that licensed insurance broker companies should have in place proper controls and procedures to conduct due diligence on insurers and the nature and key features of insurance products it intends to provide regulated advice on.
It is also proposed that licensed insurance agencies and licensed insurance broker companies will be required to report incidents that are material to their business to the IA as soon as reasonably practicable after they become aware of such incidents, e.g. a material breach of requirements under the Insurance Ordinance and any rules, regulations, codes, guidelines, circulars or regulatory instruments administered or issued by the IA, by the broker company or its licensed technical representatives.
Additional Standards and Practices for Referral of Business
Schedule 1 of the proposed Codes sets out requirements in respect of referral of business. It covers two referral arrangements:
(a) where a client is referred to a Licensed Insurance Agent/Broker by another person (the “Referrer”). In such a case the Licensed Insurance Agent/Broker should ensure that the client is properly informed of a number of matters such as the Referrer does not represent the Licensed Insurance Agent/Broker, the Licensed Insurance Agent/Broker disclaims all liability for any advice given by the Referrer in relation to the insurance policy, a benefit is to be provided by the Licensed Insurance Agent/Broker to the Referrer etc; and
(b) where a client is referred by one Licensed Insurance Agent/Broker to another:
(i) where a Licensed Insurance Agent intends to refer a client to another Licensed Insurance Agent/Broker with a view to the latter arranging an insurance policy for the client, the Licensed Insurance Agent should ensure that it complies with policies, procedures and other applicable requirements of its appointing insurer or appointing agency; and
(ii) where a licensed insurance broker company intends to refer a client to another Licensed Insurance Agent/Broker with a view to the latter arranging an insurance policy for the client, the broker company should ensure that it obtains prior consent from the client concerned before making the referral. Where a licensed technical representative (broker) intends to refer a client to another Licensed Insurance Agent/Broker with a view to the latter arranging an insurance policy for the client, the technical representative should ensure that it complies with policies, procedures and other applicable requirements of appointing licensed insurance broker company.
Effect of a breach of the Codes
A failure to comply with the proposed Codes shall not by itself render a Licensed Insurance Agent or Licensed Insurance Broker liable to any judicial or other proceedings. However, the IA may take guidance from the Codes in considering whether:
(a) there has been an act or omission by Licensed Insurance Agents or Licensed Insurance Brokers which is or is likely to be prejudicial to the interests of policy holders or potential policy holders or the public interest;
(b) a Licensed Insurance Agent or Licensed Insurance Broker is fit and proper to remain licensed; or
(c) a Licensed Insurance Agent or Licensed Insurance Broker has satisfied the statutory conduct requirements in the Insurance Ordinance.
Next steps and how we can help
Should the Consultations on the Codes be of interest to you, you have until 28 May 2019 to submit feedback to the IA. We have represented many industry groups and individual clients in responding to regulatory consultations and assisting them in effectively presenting feedback on them. We would be delighted to discuss any aspects of the above with you.
For further information, please contact:
Annabella Fu van Bijnen, Partner, Linklaters