July 22, 2019

HKIA’s Guideline on Exercising Power to Impose Pecuniary Penalty on Regulated Persons

The Hong Kong Insurance Authority has published consultation conclusions (Consultation Conclusions) on the draft Guideline on Exercising Power to Impose Pecuniary Penalty in Respect of Regulated Persons under the Insurance Ordinance (Cap. 41) (the Guideline). A two-month public consultation on the draft Guideline was conducted in late 2018.

The Guideline will come into operation on 23 September 2019, the date the new statutory regulatory regime for insurance intermediaries comes into operation.

On that date, the Insurance Authority will take over the direct regulation of insurance intermediaries from the Insurance Agents Registration Board, Professional Insurance Brokers Association and the Hong Kong Confederation of Insurance Brokers (the self-regulatory organisations (SROs)). Intermediaries will be subject to statutory licensing and conduct requirements, supplemented by rules, codes, guidelines and circulars issued by the Insurance Authority.

Power to impose pecuniary penalties

Under section 81 of the Insurance Ordinance (the IO), which will come into effect on 23 September 2019, the Insurance Authority has a range of disciplinary powers it can take against regulated persons for misconduct or if they are not fit or proper, including imposing pecuniary penalties of up to the greater of HK$10 million or three times the amount of the profit gained or loss avoided.

Before the Insurance Authority can exercise its power to impose a pecuniary penalty against a regulated person, it is required to publish guidelines to indicate the way in which it proposes to exercise that power and to have regard to those guidelines in exercising that power.

Key Features of the Guideline

The draft Guideline is largely modelled on the existing Guideline on Exercising Power to Impose Pecuniary Penalty in Respect of Authorized Insurers under the Insurance Ordinance (Cap. 41) (GL18) which applies in respect of insurers.

The Guideline applies to "regulated persons", being licensed insurance intermediaries and responsible officers and persons concerned in the management of the regulated activities carried on by licensed insurance agencies/ licensed insurance broker companies.

According to the Guideline, the Insurance Authority considers a pecuniary penalty to be a more severe sanction than a reprimand, and the more serious the conduct or reason why a regulated person is determined not to be fit and proper, the more likely the Insurance Authority will impose a pecuniary penalty, and the higher it is likely to be.

The Guideline sets out the non-exhaustive factors that the Insurance Authority will consider when determining whether to impose a pecuniary penalty and the amount of the penalty, including, broadly:

  • the nature, seriousness and impact of the conduct
  • the behaviour of the regulated person since the conduct was identified
  • the previous disciplinary record and compliance history of the regulated person
  • other factors, such as the financial resources of the regulated person or the result of any civil or criminal actions against the regulated person.

To provide further guidance, the Guideline sets out non-exhaustive constituent elements of each of the above factors.

Consultation Conclusions

The SROs currently use a tariff-based approach; publishing types of misconduct and the corresponding maximum fine, and some respondents to the public consultation suggested this approach be taken under the new regime. The Insurance Authority had in the consultation paper proposed to adopt a non-tariff based approach in imposing pecuniary penalties and in the Consultation Conclusions stated that this continues to be its approach, and that the Guideline sets out overarching fining principles so individual circumstances can be taken into account.

Respondents to the public consultation generally agreed that it is important to introduce a set of unified penalty standards across the industry for the protection of policyholders, and supported the Insurance Authority’s policy that it may publicise its decisions to impose pecuniary penalties, as this would allow the industry to discern the kinds of penalties imposed on regulated persons for various types of non-compliance or misconduct, including acting as a deterrent for misconduct by other regulated persons.

In relation to the nature, seriousness and impact of the relevant conduct to be considered by the Insurance Authority, taking on board feedback to the public consultation, the Insurance Authority has included dishonesty as one of the factors relating to the nature of conduct to be considered by the Insurance Authority. In relation to loss or risk of loss caused to others, the Insurance Authority removed the proposed qualifying language "where the risk was known or ought to have been known by the regulated person". This limb now focuses on the end result of the conduct, not whether the risk of loss was, or should have been, known. This approach is to protect existing and potential policyholders.

The Insurance Authority noted that there were various queries relating to investigation/disciplinary proceedings and requesting more details about the review and appeal process/proceedings and in respect of checks and balances. According to the Consultation Conclusions, the Insurance Authority considers these to be procedural matters and that it will address many of them separately rather than in the Consultation Conclusions.  

The Consultation Conclusions confirm that the Guideline will not have retrospective effect. Alleged breaches of applicable requirements prior to 23 September 2019 will be considered and followed up by the Insurance Authority according to the applicable requirements in force at the time the breach occurred, and the Insurance Authority will be able to use the range of sanctions available to the SROs under the pre-23 September 2019 regime.

For advice on any compliance-related issues ahead of the regulatory regime change, please contact Joyce Chan, Gill Morrissey or your usual Clyde & Co contact.