Consumer Council Submission on the Proposed Establishment of an Independent Insurance Authority

1. The Consumer Council (the Council) is pleased to submit its views regarding a consultation paper issued by the Financial Services and the Treasury Bureau (FSTB) on the proposed establishment of an Independent Insurance Authority (IIA) in Hong Kong.
    
2. The following sets out the Council's views to the questions raised in the consultation paper that have direct implications to the interests of consumers/insurance policyholders, for consideration of FSTB.
    

The Council's Views

Q1.    Do you agree that an independent IA should be established along the principles set out in paragraph 2.6 (of the consultation paper)?

3. The Council is glad to see that the Government has taken into account the Council's previous comments on the need for changes to the existing self-regulatory mechanism for the insurance industry by formulating proposals on establishing an IIA to regulate insurers and insurance intermediaries and protect the interests of insurance policyholders.
    
4. Given that the issue of establishing an IIA has been debated for a long time with not much progress made, the Council urges the Government not to delay any further especially in light of rising insurance complaints ¹  which could reflect the inability of the self-regulatory mechanism to render effective regulation of the insurance industry and protection of policyholders' interests.
    
5. The Council believes it is necessary for the proposed IIA to assume a direct supervisory role over the insurance industry which can give it credibility and ensure impartiality in dealing with insurers and insurance intermediaries who breach fair practice.
    
6. As to the principles set out in the consultation paper, the Council believes that having principles alone is not sufficient to achieve any lasting result. It is important for the IIA to devise a guide to action for it to perform its functions and meet its supervisory objectives effectively.
    

Q2.     Do you think that there are other important principles in addition to those set out in paragraph 2.6 that the Administration should adopt in working out the detailed legislative proposals for the establishment of the independent IA? If so, what are they?

7. Other than the proposed core principle for the IIA to be 'independent', both operationally and financially, of the Government in exercising its functions and powers, the Council considers the following fundamental principles should be clearly set out in the legislation for the establishment of the IIA:

1. Accountability' - to clearly define its functions and responsibilities so that its performance can be objectively assessed and made accountable to the community;
    
2. Transparency' - to maintain high level of transparency in its operations, for the purpose of ensuring accountability;
    
3. Fairness' - to adopt processes which are fair and equitable; and
    
4. Not subject to political, governmental and industry interference' - to carry out responsibilities without influence.
    

Q3.     Do you agree that the independent IA should have an expanded role beyond the existing functions of the IA as set out in paragraph 3.1? If so, do you agree that the independent IA should assume the additional functions as proposed in paragraphs 3.3 and 3.4?

8. The Council considers that the IIA should have an expanded role in addition to directly supervising the conduct of insurance intermediaries. The Council welcomes the Government taking on board the Council's views on the need to enhance consumer financial capability by giving the IIA an explicit role in proactively educating the public about insurance matters, rather than merely giving it an institutional separation from the government system as proposed in the Government's 2003 consultation.
    
9. As consumers will be taking on more responsibility in future in financing their medical needs, it is expected that there will be increasing demand for enhancing consumer financial capability and greater consumer protection in relation to insurance products. The Council therefore supports making it one of the IIA's functions to give appropriate information and education program to enhance public understanding in view of the complex nature of insurance products which renders it difficult for consumers to fully understand and make choices appropriate to meet their needs.
    
10. Since a new dedicated Investor Education Council (IEC) will be set up in future to holistically oversee the need for investor education and delivery of related initiatives in respect of the entire financial sector in Hong Kong, the Council considers that necessary arrangements should be made by the IIA to ensure close collaboration with the IEC to minimize overlapping or gaps in education work with respect to insurance issues.
     
11. With regard to additional functions to be taken up by the IIA, the Council considers that the IIA has a role to play in addressing public concern about the reasonableness of insurance premium increases and the suitability of high risk and complicated insurance products on offer to the consuming public. The Council believes it is legitimate for the public to expect that the IIA will do more than what the existing self-regulatory mechanism is doing to ensure the interests of policyholders are well protected.
     

Q4.    Do you agree the independent IA should also have a duty to enhance the competitiveness of the insurance industry, which will help to reinforce Hong Kong's status as an international financial centre?

12. Recognizing the need to strike a balance between regulation and market development, the Council agrees that the IIA should be given a duty to enhance the competitiveness of the insurance industry for reinforcing Hong Kong's status as an international financial centre.
     
13. Nevertheless, the Council is of the view that consideration should be given introducing measures to ensure the interests of policyholders would not be jeopardized as a result of lax regulation in licensing standards for market players, or to deter offer of inappropriate insurance products or use of aggressive marketing tactics which may be disguised as market competition.
     

Q5.    Do you agree that the independent IA should be vested with additional powers as proposed in paragraph 4.7 to enable it to regulate insurers more effectively?

14. Yes, the Council supports vesting the IIA with explicit powers to enter into premises for inspection and investigation, powers to impose supervisory sanctions and power to prosecute summary offence, as proposed in the consultation paper.
     
15. To equip the IIA with a wider range of instrument of different intensity, the Council suggests the IIA should be empowered to take additional actions such as the delivery of a warning or the laying down of institution-specific standards and directions targeted at institutions wavering between compliance and deviance, in additional to the option of enforcing more severe measures such as imposing fines, public reprimand, and suspension or revocation of authorization.
     
16. If the above proposed tools are used appropriately, the Council believes that a market player who has attracted the IIA's special attention by failing to comply may need to bear the burden of extra, intensified requirements. The aim of having in place such additional tools is to help reduce at an early stage the likelihood of failure or non-compliance.
     
17. As regards the existing interventionary actions (e.g. limitation of premium income, custody of assets by an approved trustee, and requirement of a special actuarial investigation), the Council suggests that the IIA should be empowered to direct insurers or insurance intermediaries to stop practices that are unsafe or unsound, for the protection of policyholders.
     

Q6.    Do you consider that the existing self-regulatory arrangements for insurance intermediaries should be changed, and if so, do you support that Option 2 (i.e. direct supervision of insurance intermediaries by the independent IA) should be pursued? If not, why?

18. Yes, in its previous submissions and consultancy interviews, the Council opined that the current regulatory system relies heavily on various industry bodies (e.g. HKFI for insurers, IARB for insurance agents, CIB & PIBA for insurance brokers, ICCB for claim disputes) to assume the fragmented self-regulatory functions. The absence of a direct supervisory role across the insurance industry has caused confusion to consumers in particular when they are lodging complaints or seeking redress. The Council believes more effective and direct regulation of the insurance industry should be introduced to keep in line with Hong Kong's position as an international financial centre.
     
19. The Council is of the view that the self-regulatory mechanism may not be effective to provide adequate protection to consumers. The public may perceive that self-regulatory bodies often have vested interests as they are sponsored by their industry members and may be less than diligent in their pursuit against industry members who have breached fair practices. The Council has long urged that a review of the regulatory arrangements for the insurance industry in its entirely should be carried out.
     
20. The Council therefore supports that the existing self-regulatory mechanism for the insurance industry be changed and sees it as an advancement in protection of the interests of policyholders if the IIA is to assume a direct supervisory role over the insurance industry (i.e. Option 2).
     

Q7.    Do you consider that in relation to the sale of insurance products in banks, the HKMA should be vested with powers similar to those for the independent IA to allow HKMA to regulate bank employees selling insurance products given the different client profile and sale environment in banks?

21. As to the proposed 'shared regulatory responsibility' between the IIA and HKMA, the Council is of the view that regulation should be comprehensive enough so as not to leave any unregulated areas, the so called 'regulatory gaps'. It would be unsatisfactory if activities were left unregulated due to lack of clarity as to which regulator is responsible.
     
22. In light that a single financial regulator (as advocated by the Council) may not be forthcoming in the near future, the Council considers that if the proposed 'shared regulatory responsibility' is to be adopted, it will be important for the IIA and HKMA to take collaborative efforts to ensure regulatory consistency, so as to achieve effective supervision of the insurance intermediaries. For example, there should be increasing cooperation and harmonization of policies and procedures and strengthened communication if HKMA is to be vested with powers similar to those of the IIA to regulate bank staff selling insurance products.
     
23. In this context, the Council is of the view that enhanced insurance-banking linkages are necessary and that a formal inter-regulator communication platform as suggested in the consultation paper (para.7.7) should be established to promote regular exchanges on product trends and associated risks for insurance policyholders.
     
24. From a wider perspective, the Council is of the view that close cooperation amongst financial sector regulators (i.e. the IIA, HKMA, SFC and MPFA) is essential for ensuring the effective supervision of the financial system as a whole. This requires the IIA and other financial regulators to have close communication and cooperation to deal with innovations of new products which may not have been envisaged at the time of establishment of their respective regulatory structure.
     
25. The Council is glad to note that the Council of Financial Regulators chaired by the Financial Secretary and the Financial Stability Committee chaired by the Secretary for Financial Services and the Treasury have been set up to provide regular inter-regulator forums to, amongst others, deliberate on regulatory and supervisory issues carrying a cross-sectoral impact. The Council expects to see that the forums will deal with issues such as regulatory gaps, regulatory overlaps, inconsistency of regulations and differences in operational standards.
     

Q8.    Do you agree that the recommendations as set out in paragraphs 6.5 to 6.8 should be pursued for the independent IA to operate as an independent entity? Any other views?

26. In general, the Council supports the IIA be established and be organized along the proposed structure as set out in the Annex of the consultation paper.
     
27. Under the proposed structure, the Council notes that a new 'Market Conduct' division will be set up for 'supervision of sales conduct of insurers and intermediaries', alongside with 'complaints and investigations'. However, it is not clear to the Council as to its mode of operation in terms of 'complaints and investigations', for instance, whether the new division will handle and resolve complaints lodged by policyholders (i.e. to assume the responsibilities of the SROs for handling of complaints against insurance intermediaries), or it will simply act as a referral mechanism. It is important to give a clear message to the public on the responsibilities of the IIA in terms of complaints handling.
     
28. As the IIA will be the primary regulator to stipulate regulatory requirements for the insurance industry, the Council expects the IIA to act as a focal point for complaints handling, thereby enabling it to better understand what problems are encountered by policyholders and consider if any improvements are needed.
     

Q9.    Do you agree with the proposed checks and balances and governance arrangements for the independent IA as set out in this Chapter (Chapter 7 referred)?

29. The Council fully supports establishing a Governing Board comprising a wide cross-section of the community to provide leadership and direction to the IIA. As an advocate for consumer interests, the Council welcomes its inclusion in the list of stakeholders for consideration of appointment as a member of the Governing Board. The Council will be happy to have a channel to express views from consumer perspectives for policy formulation.
     
30. The Council also considers that setting up an advisory committee with inputs from users/consumer groups is important for enhancing understanding of issues of interest to existing and potential policyholders.
     
31. Whilst recognizing the need to strike a balance, the Council cautions that the composition of the advisory committee should not be overwhelmed with industry body representatives as this would undermine the effectiveness of the advisory committee.
     
32. In respect of the proposed checks and balances, the Council considers that the proposed Appeals Tribunal and Process Review Panel, to ensure consistency and equity in the regulation of insurers and insurance intermediaries, are appropriate to oversee the proper exercise of the powers to be vested in the IIA.
     

Q10.    Do you agree that the Government should provide a lump sum to support the independent IA in its initial years of operation and the independent IA should seek to reach full cost recovery in six years?

33. Yes, the Council believes it is important for the Government to provide adequate resources, both for financing and supporting services, to back up the IIA in its initial years of operation. Adequate resources are prerequisite to enable the IIA to recruit, train and retain a cadre of experienced professional staff.
     
34. If the IIA were to have only limited resources at hand and lacked staff experienced and skillful enough to ably fulfill the regulatory tasks in question for the protection of policyholders' interests, it would be very difficult if not infeasible for the IIA to render adequate regulation and supervision.
     

Q11.    Do you agree with the proposed fee structure as set out in paragraphs 8.2 and 8.6?

35. It is noted in the consultation paper that the proposed fee structure requires funding by a combination of levy, various licence and users fees. However, it is not clear from the consultation paper whether the proposed 0.1% levy on insurance premiums for all insurance policies will be charged from insurers or insurance policyholders. Clarification of how the levy would be raised is required.
     
36. In the consultation paper, SFC is quoted as an example to illustrate funding source can be contributed by market levy from investors. However, as far as the Council is aware, many regulators or industry associations tasked with supervision roles for protection of public interests in Hong Kong, such as HKMA, the Mandatory Provident Fund Authority, the Hong Kong Deposit Protection Board, the Estate Agents Authority, etc are not funded (or directly funded) by levy collected from consumers.
     
37. With respect to other jurisdictions, the Council understands that financial regulators (e.g. the Financial Services Authority of the UK, the Office of the Superintendent for Financial Institutions of Canada, the Federal Deposit Insurance Corporation of the US) raise funding from industries (or through industry levy paid to the government which in turn allots funding to regulators) instead of from consumers.
     
38. The Council is of the view that in determining the appropriate funding arrangement, there should be a means of recovering from the insurance industry the costs of the prudential supervision and regulation of that sector and for the market integrity maintenance functions to be performed by the IIA.
     
39. If the market levy is to be raised from policyholders, the Council believes it is necessary to make clear to the public which part of the IIA's work relates directly to policyholders which would require raising of a substantial portion (70%) of the IIA's expenditure from the consuming public. The Council considers that the proposed establishment of the IIA should serve to instill public confidence in the insurance industry and not to shift regulatory cost to policyholders.
     
40. Notwithstanding that policyholders may eventually take on the cost indirectly, the Council feels strongly that the cost of regulation should be borne by the insurance industry as part of its operational cost, instead of by policyholders.
     
41. In relation to the proposed mitigating measures to reduce the impact on the insurance industry, it is noted that a waiver of licence fee for insurance intermediaries will be provided in the first 5 years after the establishment of the IIA. The Council is of the view that if any levy is to be raised directly from policyholders, a waiver should also be considered for policyholders.
     
42. As to the funding ratio (i.e. 70% from market levy, 30% from various licence fee and users fees), the Council is of the view that the direct cost of regulation in terms of market levy should be reasonable and not pose an undue burden. This is especially important where, as is usually the case, costs are ultimately passed on to policyholders. It is therefore important for the amounts raised and how they are utilized to be transparently disclosed and accounted for to the public.
     
43. Apart from annual charges by reference to the type of license and volume of business of a regulated entity, the Council considers it possible to introduce other fees for demand-driven services e.g. charging regulated entities for complaints handling to reflect regulatory effort.
     

Other comments

44. From the long term, the Council would like to take this opportunity to put forward its view on the need for the Government to carry out reviews to assess the effectiveness of having separate financial regulators to take on supervisory responsibilities in regulating the financial sector, from the perspectives of consumers and the economy as a whole.
     
45. Traditional distinctions between different types of financial institutions, financial products and distribution channels have become extremely blurred. This could make sectoral supervision less meaningful (as reflected in the proposal of empowering HKMA to take on powers similar to those of the IIA in supervising bank staff selling insurance products) or at least more complicated (as a result of the presence of financial conglomerates engaging in banking, insurance and securities activities which makes it difficult for a regulator for a particular sector to form a view of the overall risks facing the entire conglomerate). It is therefore important for the Government to conduct periodical reviews to assess the appropriateness of the existing regulatory models to suit the changing needs of Hong Kong.

Footnotes:

1.    In the period January 2000 - August 2010, the Council received a total of 4,155 insurance complaints (see Table 1 ) which might only represent the tip of the iceberg.

Table 1: Consumer Council's insurance complaint statistics