Consumer Council Submission on Intention by Government to Review Institutional Set-up of the Office of the Commissioner of Insurance (OCI)

INTRODUCTION

1. The Council notes that the current proposal by the Government is to consider transforming the OCI into an independent regulatory agency, i.e. independent of the Government, in order to achieve the following:
   1. To be in line with international and local regulatory trends.
   2. To allow greater operational independence and flexibility.
   3. To meet the 'Core Principles on the Organization of an Insurance Supervisor', as issued by the International Association of Insurance Supervisors (IAIS)
2. Further, the Council understands the Government's intention is that:
   1. no expansion in supervisory powers and roles is anticipated;
   2. there is no intention to assume the responsibilities of the Insurance Agents Registration Board; and
   3. it will continue the review on the self-regulatory system of insurance intermediaries in a separate exercise.
3. The Council supports, in principle, the restructuring of the OCI for the reasons as noted in paragraph 1 above.
4. The Council is aware that industry members are concerned that the structural separation will result in a larger funding burden falling on insurance companies; and accordingly they disagree with the Government proposal.
5. However, the Council considers that the introduction of new structural arrangements presents an opportunity for the industry to offer practical suggestions as to how the present costs of regulating the industry can be reduced.
6. In this regard, the Council also considers that the review on new structural arrangements:
   1. presents an ideal opportunity for the Government, the industry and the wider community to debate the overall state of regulation for the insurance industry; and that
   2. the review should not be undertaken without examining alternative regulatory options, taking into account serious consumer issues that have arisen over the past few years.
7. The Council has in the past made a number of submissions to the Government regarding problems in the insurance industry that point to possible regulatory solutions. Accordingly, it considers that the opportunity should be taken to review the arrangements concerning regulation of the industry as a whole, rather than merely changing organizational arrangements.
8. In this regard, the Council has set out below, for the consideration of the Government, various comments it has made in regard to the regulatory mechanisms that may be appropriate to address various problems which have arisen in the industry over the previous years.

COUNCIL'S PREVIOUS COMMENTS

9. The Council has previously commented on regulation of the insurance industry when making submissions on the insurance industry and the finance industry. For example, in November 2001, the Council made a submission to the OCI on the Review of the Regulatory System for Insurance Intermediaries in which it provided some comments relating to the role and function of the insurance regulatory authority in respect of self-regulation systems and on the benefits of having an insurance ombudsman.
10. In submissions on the finance industry the Council has also raised issues regarding convergence between the finance and insurance sector. The Council's comments on these three issues are discussed below.

Self-Regulation Systems

11. The Council noted that under the existing system, self-regulatory bodies are required to enforce compliance of the relevant codes of conduct and membership rules by those insurance intermediaries registered with them.
12. While the OCI had noted in its previous review that a good regulatory system should encourage open and fair competition, the Council restated its long term position for the enactment of comprehensive competition legislation and the establishment of an overseeing authority.
13. The Council noted that a number of the OCI's previous findings suggested that the current self-regulatory system might not be effective in discharging licensing requirements. For example, self-regulatory bodies did not have effective measures in enforcing codes, there was no legal backing, the codes were silent on certain important areas, and the credibility and impartiality of the Insurance Agents Registration Board had been questioned by some insurers.
14. Further, judging from the review findings, the self-regulatory bodies may have been less than diligent in the pursuit against members who breached fair practice.
15. Having regard to the above, the Council suggested that some thought could be given as to whether the OCI, like the Securities and Futures Commission, should assume a direct supervisory role over the insurance industry.

Insurance Ombudsman

16. The Council noted that at present, if consumers want to lodge complaints relating to the activities of insurance agents or claims, they can either go to the IARB or the Insurance Claims Complaints Bureau.
17. There had been a concern whether the existing complaint handling mechanisms were a cost effective service in view of the rising costs of handling complaints. Furthermore, there was a rising of public expectation of a fair and timely mechanism for better consumer protection.
18. In light of this concern, the Council suggested whether an Independent Insurance Ombudsman might be appropriate for Hong Kong, or having the OCI assume the role of an Insurance Ombudsman. As a suggestion, the Insurance Ombudsman's jurisdiction would be to consider any complaint (including a dispute or claim) referred to it in connection with or arising out of a policy (or proposed policy) of insurance. Further consideration could be made on the Insurance Ombudsman's functions, e.g. to make monetary award.
19. The aim of setting up the Ombudsman would be to have arrangements which are fair, efficient and simple to administer; which provided consumers with certainty in terms of one-stop complaint mechanism and consistency in Ombudsman's decision; and which would encourage firms to resolve complaints at an early stage. The Council suggested that Insurance Ombudsman service could be funded by a combination of a general levy paid by all firms and a user-pays element (i.e. case fees) paid by firms for individual complaints. This latter feature would act as a means to discipline firms to ensure their agents do not cause complaints.

Convergence within the financial/insurance sector

20. The Council also noted in submissions to the Government and LegCo, as a related issue, that
    1. insurance products were becoming increasingly sophisticated and the boundaries between such products and other investment vehicles were being blurred; and
    2. that intermediaries selling insurance-related products might be subject to different regulatory regimes.
21. The Council opined that given the fragmentation of regulatory oversight, based not on the markets involved, but on the organisational characteristics of market participants, the effectiveness of protecting consumer interests may be compromised. In view of such developments, the Council suggested the Government should consider the form of regulation in the UK, where the two industries are regulated under the one roof. The Council also suggested the Government should also consider whether it would be more appropriate to propose a Financial Ombudsman Service instead of a sector specific Ombudsman. It was noted that in the UK, the Financial Ombudsman Service currently handles complaints on behalf of six different complaints-handling schemes (including the Insurance Ombudsman) under the one roof.

CONCLUSION

22. As noted above, the Council supports in principle the Government's initiative to separate the institutional arrangement of the OCI from the Government. However, in the light of international regulatory trends, market developments in recent years, and various consumer issues, some questions arise as to the value of the current limited exercise to merely examine the structural arrangements pertaining to the OCI.
23. The first question, is whether the costs of merely separating the OCI will actually bring about benefits to the industry and consumers, i.e. a cost benefit exercise needs to be undertaken.
24. The second question is whether the restructuring exercise should also include an examination of the following issues previously raised by the Council:
    1. To reconsider the appropriateness of using self regulatory mechanisms, i.e. that a direct regulatory model should be introduced.
    2. That a revised regulatory model should include the setting up of an Insurance Ombudsman.
    3. Because financial institutions are expanding beyond their traditional product boundaries to seek and exploit new market opportunities, the Government should consider the issue of consolidation of financial/insurance regulators.
25. The Council trusts the Government will consider the issue of regulation of the insurance industry in its entirety, and address the various issues that have arisen that cast doubts that the current regulatory environment is producing benefits for the industry and consumers as a whole.