1. The Consumer Council (the Council) is pleased to submit its views regarding the consultation document issued by the Financial Services and the Treasury Bureau (FSTB) on the key legislative proposals for the establishment of an Independent Insurance Authority (IIA) in Hong Kong.
2. The Council fully supports the establishment of the IIA to assume a direct supervisory role for rendering effective regulation of the insurance industry and protection of insurance policyholders' interests. The Council is glad to note from the proposals that the Government has taken into account a number of views [1] put forward by the Council in its previous submission.
3. With respect to the key legislative amendments proposed in the consultation document, the Council welcomes having provisions to enhance consumer protection, including the introduction of a licensing framework for insurance intermediaries to replace the existing self-regulatory regime, establishment of a register of insurance intermediaries for public inspection, requiring the appointment of a responsible officer (RO) by insurance companies to ensure compliance of their intermediaries, and introducing a stopgap damage control measure to suspend licensed insurance intermediaries (or an RO) from carrying on further damaging acts.
4. Whilst appreciating the positive aspects as mentioned above, the Council is of the view that there are areas which require further consideration to protect the interests of policyholders. These include:
- Composition of the Governing Board;
- Eligibility criteria for obtaining licenses;
- Funding principles;
- Regulatory arrangements with other financial regulators; and
- Disclosure of commission.
Composition of the Governing Board - Avoid conflict of interests
5. The Council supports establishing a Governing Board comprising a wide cross-section of the community to provide direction to the IIA.
6. Whilst recognizing the need for understanding and knowledge of the insurance industry, the Council considers that including representatives from the insurance industry on the Governing Board should be given more careful thoughts as this could undermine the purpose of setting up an independent regulator to oversee the insurance industry.
7. Despite that industry members may act on an ad personam basis, the general public may still perceive them to have substantial influence over the IIA and thereby cast doubt on the independence of the IIA.
8. In any case, the two proposed Industry Advisory Committees should provide adequate channels for the insurance industry to express their views and give advice to the IIA Governing Board.
9. If appointment of members with industry knowledge has to be made, the Council is of the view that consideration must be given to selecting people who are no longer insurance practitioners and who have no current link with any insurance associations and/or insurers.
Eligibility criteria for obtaining licenses - Demand for raising qualification / standard
10. It is noted from the consultation document that the IIA will adopt the existing eligibility criteria for licensing insurance intermediaries. However, it is not clear if such approach will apply to pre-existing licensed intermediaries only, or extend to all including existing and new intermediaries entering the insurance profession.
11. The Council urges the Government to consider raising the qualification required of insurance intermediaries, particularly for new entrants, in order to ensure that there are competent intermediaries to handle the more and more complicated insurance products emerging in the market. The Council believes it is very important for insurance intermediaries to be equipped with high academic qualification so that they will be capable to fully understand the relevant insurance products before they recommend them to consumers.
12. The Council is of the view that setting higher eligibility criteria will help enhance the professionalism of insurance intermediaries.
Funding principles - Justification for requiring insurance policyholders to bear most of the regulatory costs
13. In its 2010 consultation, the FSTB proposed that the Government would introduce legislation to impose a market levy a levy of 0.1% on premiums of all insurance policies to fund the IIA. The Council had expressed in its previous submission great concern as to who should be responsible for paying the levy.
14. Under the current proposal on funding of the IIA, the vast majority of the regulatory costs (70% of the funding cost of the IIA) will be rolled over to insurance policyholders, in the form of a 0.1% levy on premiums of all insurance policies. On the other hand, insurance intermediaries will be waived payment of licence fees for the first five years.
15. Notwithstanding that the Government may consider the amount of levy to be paid by policyholders as minimal, the Council believes that the proposed funding mechanism should be given adequate disclosure and deliberation at various consultations and be brought to the attention of the public.
16. Whilst the rate of 0.1% on the premium may seem minimal (a levy of $10 on a policy with annual premium of $10,000), one should not lose sight of the fact that an individual often has more than one insurance policy (e.g. medical, travel, household contents, life, investment-linked policies). And for a household of many members each covered by various policies, the financial impact on the household cannot be overlooked.
17. More fundamentally, there seems little justification for making policyholders bear the levy. The IIA will serve the primary objective of maintaining a healthy and stable development of the insurance market, but 70% of its cost is expected to come from policyholders. The Council is of the view that imposing the levy on policyholders is not substantiated and will not pose an incentive for the insurance industry to practise prudential management or to ensure insurance intermediaries will comply with the regulations.
18. On the contrary, if the levy is to be charged on the insurance industry using a risk-based approach, those who operate in a prudent/less-risky manner can save on regulatory cost.
19. Notwithstanding that policyholders may ultimately take on part of the cost indirectly, the Council is of the view that the cost of regulation should be charged on and borne by the insurance industry as part of its operational cost. The Council strongly urges the Government to commission research on using a risk-based approach in assessing the appropriate levy levels to be payable by industry participants.
20. If, however, it is considered that policyholders should fund the IIA, it is necessary to make clear to the public which part of the IIA's work relates directly to policyholders. The Council believes that the proposed establishment of the IIA should serve to instill public confidence in the insurance industry and the regulatory cost should not be seen to shift heavily onto policyholders. The Council urges that the levy to be imposed should be allocated to initiatives that of educational nature to strengthen the capability of policyholders and potential policyholders to understand the many insurance products available on the market.
Regulatory arrangements with other financial regulators - Need effective supervision
21. With regard to the proposed regulatory arrangements for banks' insurance intermediary activities, the Council is of the view that the regulatory framework should be comprehensive enough so as not to leave any unregulated areas or regulatory gaps. It would be unsatisfactory if activities (e.g. the sale of ILAS products) were left unregulated due to lack of clarity as to which regulator is responsible.
22. The Council considers that if the proposed regulatory arrangements are to be adopted, it will be important for the IIA and other financial regulators to take collaborative efforts to deal with issues such as regulatory gaps, regulatory overlaps, inconsistency of regulations and differences in operational standards, so as to achieve effective supervision of the insurance intermediaries.
23. 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.
Disclosure of commission - Enhance consumer confidence
24. To mitigate any potential conflicts of interest arising from the possibility that the level of commissions may encourage insurance companies to develop business strategies that inappropriately incentivize intermediaries to sell certain insurance products, the Council considers it important for the IIA to make a requirement for intermediaries to disclose to potential policyholders at the pre-sale stage the level of commission (or benefits) receivable from product issuers for the sale of the products concerned.
25. The Council believes that commission disclosure could enhance consumer confidence in the insurance industry and therefore should be required of the intermediaries.
Footnotes:
1. Including the establishment of the IIA should not be subject to political, governmental and industry interference (the current consultation proposes that there will be no government representative on the IIA Governing Board); the IIA should be empowered to direct insurers or insurance intermediaries to stop practices that are unsafe or unsound for the protection of policyholders (proposes the introduction of a stopgap damage control measure); the interests of policyholders would not be jeopardized as a result of lax regulation, for enhancing the competitiveness of the insurance industry (specifies that the IIA is to maintain competitiveness of the industry without undermining regulation); and introduction of other fees for demand-driven services to reflect regulatory effort (proposes service charges on insurers and licensees).
