The Hong Kong Insurance Authority has published the new Code of Conduct for Licensed Insurance Agents (Agents' Code) and Code of Conduct for Licensed Insurance Brokers (Brokers' Code) (collectively, the Codes). A two-month public consultation on the Codes was conducted in early 2019 and the Insurance Authority has issued the Codes together with the consultation conclusions.
The Codes will take effect immediately upon commencement of the new statutory regulatory regime for insurance intermediaries on 23 September 2019. To allow sufficient time for transition, the Insurance Authority has said in the consultation conclusions that it will adopt a flexible approach in considering insurance intermediaries’ compliance with the Codes in the initial few months but expects licensees to be fully compliant with the Codes from 1 January 2020.
While the Codes will not have the force of law, they set out guidance on the practices and standards which licensed insurance agents and brokers will be expected to adopt in carrying on regulated activities under the new regime.
Key Features of the Codes
The Codes each contain eight general principles that are of universal application and broadly reflect the new statutory conduct requirements for intermediaries codified in section 90 of the Insurance Ordinance:
- General principle 1 - Honesty and integrity
- General principle 2- Acting fairly and in the client's best interests (Agents' Code)/ acting in the best interests of clients and treating clients fairly (Brokers' Code)
- General principle 3 - Exercising care, skill and diligence
- General principle 4 - Competence to advise
- General principle 5 - Disclosure of information
- General principle 6 - Suitability of advice
- General principle 7 - Conflicts of interest
- General principle 8 - Client assets.
The non-exhaustive standards and practices in the Codes provide further guidance on the application of the general principles. For example:
- A licensed insurance intermediary should act honestly, ethically and with integrity (general principle 1). Under the Brokers' Code, brokers are additionally required to act in good faith. Following feedback to the public consultation, the revised Codes clarify that all employees of insurance intermediaries should be familiar with and not contravene the Prevention of Bribery Ordinance.
- In relation to the exercise of care, skill and diligence (general principle 3), taking account of respondents' feedback, the Agents' Code has been extended to require a licensed insurance agency to ensure persons employed or engaged by it are competent to discharge their duties. Both Codes clarify the steps that a licensed insurance agent / broker should take when it comes to handling insurance applications. Feedback on limiting a broker's obligation to assist with claims to the insurance period of the insurance policy arranged by that broker has been taken into account in the Brokers' Code. An express requirement has also been added for licensed insurance intermediaries to comply with the Personal Data (Privacy) Ordinance and to follow related guidance, so as to protect clients' privacy and confidentiality.
- In relation to competence to advise (general principle 4), provisions in both Codes have been extended in the final-form Codes to require not only good understanding of the "nature and key features" of different types of insurance products, but also of the risks covered and associated with such products.
- For disclosure of information (general principle 5), the Insurance Authority notes in the consultation conclusions that the issue of referrals needs further consideration but, pending further engagement with industry, has made amendments in the Codes to ensure there are appropriate protections for policyholders in respect of referral practices in the meantime. Following support from respondents for the requirement for licensed insurance brokers to enter into written client agreements, this requirement is now of universal application under the Brokers' Code. Regulatory guidance on information disclosure requirements specifically relating to long term business will be separately published in the future.
Respondents to the public consultations generally supported the principles-based approach of the Codes, which gives insurance intermediaries the flexibility to formulate procedures suitable to their needs, and supported codifying the objective of treating clients fairly as fundamental to the regulated activities of licensed insurance intermediaries. Treating clients fairly is already a key principle which insurers are required to follow under the Guideline on the Corporate Governance of Authorized Insurers (GL10).
Some respondents suggested that the Codes should contain all requirements licensed insurance intermediaries have to satisfy. The Insurance Authority has taken on board these comments and the final-form Codes are now more specific about matters on which they are non-exhaustive: the general principles are of universal application and exhaustive but the standards and practices remain situation-specific and not exhaustive. The Insurance Authority noted in the consultation conclusions that the Codes cannot be exhaustive as insurance intermediaries also need to abide by relevant laws and guidelines with specific requirements for particular classes of business or insurance products.
Corporate governance and controls and procedures
Respondents generally agreed that the Codes should set out requirements for the governance, controls and procedures that a licensed insurance intermediary should adopt. Suggestions were made that requirements for licensed insurance agencies / broker companies should vary according to their size and / or scope of work. The Insurance Authority emphasised in the consultation conclusions that section IX in the final-form Codes sets the baseline standards and practices for corporate governance which all licensed insurance intermediaries should meet, irrespective of the regulated activities carried on. The Brokers' Code contains an additional requirement on controls and procedures relating to due diligence on insurance products and, as applicable, insurers, where the broker intends to provide advice on these. The Insurance Authority noted that such difference between the Codes does not mean "lower" standards but merely reflects the different roles which licensed insurance agencies and broker companies perform.
As the commencement of the new regulatory regime fast approaches, insurance intermediaries and insurers should be mindful of the requirements in the Codes and ensure they have proper controls and procedures in place as soon as possible to ensure compliance by 1 January 2020 at the latest.