Proposed Provision for Disclosure of Commission

Written by David Smyth, Senior Partner, Smyth & Co in association with RPC

In our January 2013 “Industry Insights” we reported on the outcome in Hobbins v Royal Skandia Life Assurance Ltd & Anor [2012] 1 HKLRD 977, following the withdrawal of the plaintiff’s appeal.

In that case, the High Court held (among other things) that, in a civil context, commission paid by an insurer to a broker with respect to business placed did not contravene section 9 (“Corrupt transactions with agents”) of the Prevention of Bribery Ordinance (Cap. 201).

Interestingly, at paragraph 89 of the judgment, the judge stated:

“The practice of insurers paying commission to insurance brokers may or may not be unsound. It ought possibly to be strictly regulated or even prohibited altogether. I express no view on the matter. That is a question of policy best left to the legislature, not the Court, to tackle.”

The issue of such commissions with respect to ILAS products (“Investment Linked Assurance Schemes”) was much in the news at the time of the Hobbins case. A few years on, proposed legislation is afoot to provide for rules relating to the disclosure of commissions that an insurance intermediary receives.

Tucked away in clause 84 of the Insurance Companies (Amendment) Bill 2014 (the “Bill”) is a proposed new section 92 to the Insurance Companies Ordinance (Cap. 41). As readers may recall, a key provision of the Bill is the formation of an Independent Insurance Authority (“IIA”).

The proposed new section provides that the IIA may make “rules on conduct” requirements for licensed insurance intermediaries (including, licensed insurance agents and brokers).

One such rule would allow the IIA to make provision for insurance intermediaries to disclose to their clients any commission or advantage received in relation to policies recommended to insureds (section 92(2)(f) of the Bill). That provision is not, of itself, controversial. However, far more important will be the wording of the provision (for example, what steps are required regarding disclosure) and how it is to be enforced.

The Bill was gazetted in April 2014 and is currently before the relevant Bills Committee. The Bills Committee was due to have four meetings before LegCo’s summer recess in July. If the list of deputations and written submissions so far is anything to go by, there is much hard work to be done if the Bill is to be enacted in 2015.

In the meantime, best practice is for brokers to give clients written confirmation of the percentage range of commission payable out of the premium charged by insurers.