What's New | October 12th, 2010 |

11 October 2010

Division 3, Financial Services Branch

Financial Services and the Treasury Bureau

Hong Kong

By email : [email protected] and fax 2529-1663

Dear Sirs,

We refer to the Financial Services and the Treasury Bureau’s (FSTB) Consultation Paper issued in July 2010 regarding the establishment of an Independent Insurance Authority (IIA). Our views are summarized below.

It is in the interest of existing and potential policyholders to enhance the regulatory regime on insurance products and insurance intermediaries.  The spin-off of the regulatory functions from a government department – i.e. the Office of the Insurance Commissioner (“COI”) to an independent statutory body is in line with international practice that all financial service providers should be regulated under an independent regime rather than by a government department or being self-regulated.  Indeed there has been criticism in the past that 1) the COI’s regulatory framework and practice (the COI is staffed by civil servants) is lagging behind developments in the financial markets and 2) the self regulatory regime on the insurance intermediaries including the insurance agents and insurance brokers has not been seen to be fair and transparent to the consumers.  We believe that the general direction of spinning off the regulatory functions from the COI is correct.  We believe that the new regulatory regime/entity should be vested with the power to regulate both insurance products and conducts of insurance intermediaries.

Though we support the spin off the regulatory functions on insurance activities from a government department, we have great reservations on the setting up of yet another regulatory authority.  We thought that the regulatory functions of the IIA could best be performed by enhancing the resources and extending the regulatory domain of one of the existing regulatory authorities – namely, either the Securities and Futures Commission (SFC) or the Mandatory Provident Fund Schemes Authority (MPFA).

1.     The incremental overhead costs for setting up a separate body could be drastically reduced if the insurance regulatory functions are taken by an existing regulatory body. Overheads on mid-office and back-office functions especially costs on administration, legal, accounting and IT etc could be saved.

2.     The more the regulatory regime is fragmented under the turf of various regulatory authorities the easier that a financial product could easily fall through the cracks of two or more regulatory bodies. The mini bond saga is such an example and we do not want to see such an unfortunate incident to repeat again.  The international trend is moving towards consolidating the functions of different regulatory authorities and unless there is an overriding reason to justify the setting up of a separate IIA (which we fail to see), we thought such functions should therefore be added to either the SFC or the MPFA.  In addition, currently insurance policies (other than investment linked insurance policies which have to be approved and vetted by the SFC) are unregulated, we would urge the Government to reconsider whether such position taken is entirely right for the policyholders.  At least we believe all policies (whether life or non-life) issued must at least comply with certain statutory guidelines – for example, fair and adequate disclosure, standard cool off period, use of projection examples and simple language etc., just to name a few.

3.     We also believe that the current existing enforcement experience of the SFC or the MPFA could be a transferrable skill set for the benefit of the future insurance regulatory regime.

4.     As between the SFC or the MPFA, we are quite indifferent at this stage on who should be picking up this function.  There are a few relevant considerations of course, the skill set, synergy effect and costs are all relevant factors.

5.     If persons other than insurance intermediaries are involved in the selling of insurance products (for example, employees of banks), such selling activities should be primarily regulated by the HKMA with oversight from the new insurance regulatory regime.

That said, we also believe that apart from the setting up of an independent regulatory function (whether as an IIA or by expanding the functions of an existing regulatory body), we would suggest two independent boards (each of a tribunal status) to be set up to respectively deal with misconduct of insurance intermediaries and disputes on insurance policies.

We would be grateful if the FSTB would take into account the above concerns before moving into the next stage of consultation.  Thank you.

Yours faithfully,

Kenneth Leung

Frankie Yan

Convenors, Public Finance and Economic Policy Group

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