The new Hong Kong insurance intermediary regime is expected to commence in mid-2019. In preparation, the Insurance Authority (“IA”) of Hong Kong has sought consultation on the Draft Guideline on Exercising Power to Impose Pecuniary Penalty in Respect of Regulated Persons under the Insurance Ordinance Cap. 41 (“Draft Guideline”).
Under the new s. 81 of the Insurance Ordinance, the IA has power to take a number of disciplinary actions against a regulated person for misconduct or if the regulated person is not fit or proper. Pecuniary penalties are not to exceed HK$10 million or three times the amount of profit gained or loss avoided.
Under the new intermediary regulatory regime, a “regulated person” means a licensed insurance intermediary and includes the responsible officer and a person involved in the insurance intermediary’s management. Under the new intermediary regulatory regime, any person undertaking “regulated activities” will require an insurance intermediary licence unless exempt. “Regulated activities” is a broad concept which includes arranging and negotiating a contract of insurance, inviting or inducing a person to enter into a contract of insurance, giving regulated advice and inducing or inviting a person to make a material decision.
In the consultation paper, the IA indicated that it proposes to take a balanced approach in imposing pecuniary penalties and in ensuring that they are “effective, proportionate and fair”. The Draft Guideline sets out a number of factors the IA proposes to take into account in imposing pecuniary penalties and the amount of such penalties, including:
- Nature, seriousness and impact of conduct: whether conduct was intentional, reckless or negligent, duration and frequency of the conduct, loss and risk of loss, impact on the industry, whether conduct involved breach of fiduciary duty or trust or financial crime.
- Subsequent behaviour: manner of reporting, cooperation, remedial steps taken.
- Previous disciplinary record and compliance history.
- Other factors: financial resources of the person, result of any civil or criminal actions.
The IA will also take into account in relation to:
- A firm: whether there was a systemic weakness in the firm’s internal controls and risk management systems.
- An individual: the person’s experience in the industry and whether there was an abuse of a position of trust.
Given the diverse range of regulated activities and different types of regulated persons, the IA has decided not to take a tariff-based approach in imposing pecuniary penalties as this may not achieve effective, proportionate or fair outcomes.
The consultation was closed late last year and still waiting for consultation conclusions. The Draft Guideline provides a broad framework for the IA to impose pecuniary penalties in light of its objective to ensure pecuniary penalties are effective, fair and proportionate.
The IA has broader powers than the self-regulated bodies currently regulating insurance intermediaries (“SROs”). Insurance intermediaries and insurers should carefully study the factors set out in the Draft Guideline and consider whether they are appropriate and suitable.
Further, regulated activities cover a broad scope of activities beyond traditional insurance agents and brokers. For instance, regulated persons also include employees of insurance companies engaged in regulated activities. Given the broad scope of regulated activities and different types of regulated persons, insurance industry players need to carefully consider how the Draft Guideline may apply to regulated persons involved in their business and take the opportunity during the consultation process to clarify anything required.
Finally, it is important that the regulated person is given an opportunity to be heard. The IA is required to give the regulated person a reasonable opportunity to be heard. However, currently, there is a lack of details regarding the proposed procedure and whether this is different to the current disciplinary procedure with SROs (for instance, is there a right for the intermediary to directly question the complainant during the disciplinary hearing?).