Insurance Authority tightens regulation on licensed insurance brokers providing specific services under investment-linked assurance scheme policies

The Hong Kong Insurance Authority (the “HKIA”), on 5 July 2024, issued the Practice Note on application of requirements in the insurance regulatory framework to specific services provided by licensed insurance brokers on investment choices and premium allocation under Investment-Linked Assurance Scheme Policies (the “ILAS Policies”) (the “Practice Note”). [1]

The Practice Note laid down new standards which licensed insurance broker companies (the “Broker Companies”) and technical representatives (brokers) (the “Technical Representatives”) offering or providing the following regulated services (the “Regulated Services”) to policyholders of ILAS Polices should meet:
 

1. Execution-only services: where the policyholder grants an execution-only authority to the Broker Company to, in accordance with the policyholder’s instructions, execute decisions made by the policyholder on investment fund choices, investment options or premium allocation under an ILAS Policy;
    
2. Advisory investment services: where the Broker Company, either by itself or by engaging a third party adviser, provides advice or recommendations to the policyholder on (i) selection or switching of funds/investment options to make and/or (ii) the premium allocation to make under an ILAS Policy; and
    
3. Discretionary investment management services: where the policyholder grants an authority to the Broker Company under a contract between the Technical Representative and the policyholder, allowing the Broker Company to, without the need to obtain prior consent from the policyholder, make and execute decisions as to paragraphs (2)(i) and/or (ii) above on the policyholder's behalf.

1. What are “ILAS Policies”?

“Linked long term business” refers to contracts of insurance in Class C (Linked long term) of Part 2 of Schedule 1 to the Insurance Ordinance (Cap. 41) (the “IO”), i.e. contracts of insurance on human life or contracts to pay annuities on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contracts) or by reference to fluctuations in, or in an index of, the value of property of any description (whether or not so specified).

More commonly, they are known as ILAS products, which are long term contracts of insurance issued by an insurance company which provide both life insurance protection and investment options. Typically, an ILAS Policy’s value is determined by the insurance company based on the performance of the “underlying or reference funds”, and its underlying assets is owned by the insurance company and not by the customer. Generally, ILAS Policies are designed for customers who have a long-term investment horizon and a dual objective of investment and estate planning, intend and are able to pay the premiums for the whole of the policy term and accept that their death benefits are subject to investment risks.

Insurance companies issuing the ILAS Policies and insurance intermediaries are regulated by the HKIA. Separately, as ILAS Policies fall within the definition of a “collective investment scheme” under the Securities and Futures Ordinance (Cap. 571) (the “SFO”), ILAS Policies and their offering documents, illustration documents and marketing materials must be authorised by the Securities and Futures Commission (the “SFC”) before they can be offered to the public in Hong Kong.

2. New Requirements under the Practice Note

Minimum Qualifications and Experience Required for Individuals Performing the Advisory Investment Services or the Discretionary Investment Management Services

Currently, individuals who intend to apply for or to renew a licence to be a Technical Representative under the IO must pass the “fit and proper” test as prescribed under the Guideline on “Fit and Proper” Criteria for Licensed Insurance Intermediaries under the Insurance Ordinance (the “GL 23”). To carry out regulated activities in relation to ILAS Policies (i.e. to be licensed to carry out regulated activities in Long Term Business (including Linked Long Term Business) (“L(I)”), an individual must also pass the qualifying examination papers in Long Term Insurance and Investment-linked Long Term Insurance (the “Qualifying Examination Papers”).

(A) Competence Requirements for Technical Representatives

Appreciating the insufficiency of the Qualifying Examination Papers in equipping the Technical Representatives with the knowledge and skills in providing advisory investment and/or discretionary investment management services in relation to ILAS Policies, the HKIA will only consider a Technical Representative fit and proper as well as competent to provide advisory investment and/or discretionary investment management services in relation to ILAS Policies if he/she is able to fulfil one of the following criteria:
 

1. The Technical Representative is actively licensed in L(I) and has the relevant SFC licence(s) under the SFO that demonstrate his/her competence to provide the relevant services (i.e. Type 4 (Advising on Securities) (“RA 4”) and Type 9 (Asset Management) (“RA 9”) licences under the SFO for advisory investment services, and RA 9 licence under the SFO for discretionary investment management services);
    
2. The Technical Representative is actively licensed in L(I) and holds one of the professional qualifications in insurance or investment as stated in the Practice Note that demonstrate his/her competence in providing the relevant services. Such professional qualifications include Chartered Life Underwriter (CLU) and has passed the elective paper “HS 328 Investments” of the CLU qualifying examination, Chartered Financial Consultant (ChFC) or Certified Financial Planner (CFP), etc.; or
    
3. The Broker Company provides advisory investment or discretionary investment management services by engaging a third party, which is actively licensed in RA 4 and/or RA 9 under the SFO, to give advice/recommendations or to make decisions. The Broker Company should concurrently have in place sufficient controls, oversight and monitoring of the third party’s performance and is ultimately responsible for the provision of such services.
    

(B) Competence Requirements for Responsible Officers

The HKIA requires at least one responsible officer of the Broker Company (the “Responsible Officer”) to meet the following minimum criteria in fulfilling the competence requirements for carrying on advisory investment services or discretionary investment management services in relation to ILAS Polices:
 

1. the Responsible Officer having attained the education or professional qualifications or experience listed in paragraphs 2(A)(1) and (2) above for Technical Representatives; and
    
2. the Responsible Officer possessing at least 5 years of relevant experience (including at least 2 years of management experience) (i) in the insurance industry providing advisory investment services or discretionary investment management services in relation to ILAS Policies, or (ii) in the investment industry providing investment advice or discretionary investment management.
    

Minimum Expectations on Corporate Governance and Controls and Procedures

For a Broker Company providing Regulated Services, the HKIA will be satisfied that it has met the controls and procedures requirements set out in the GL 23 and the Code of Conduct for Licensed Insurance Brokers if it satisfies the criteria set out in the Practice Note, which contains non-exhaustive lists of the type of governance, controls and procedures which the HKIA expects from the Broker Company to establish in relation to the Regulated Services (depending on the nature, scale and complexity of the particular services provided).
 

(C) Control measures in relation to Technical Representatives appointed by the Broker Company

A Broker Company should, among others:

1. set its own competence and experience requirements on qualifications and/or experience corresponding to the complexity of each specific type of services to be provided in relation to ILAS Policies and review or check regularly whether its Technical Representatives remain compliant with such requirements;
    
2. have terms and conditions, documented arrangement, contract or agreement entered into with the ILAS Policy issuing insurer that reflect clearly its scope of specific types of services to be provided; and
    
3. provide suitable and appropriate training to its Technical Representatives and maintain the training records.
    

(D) Control measures in relation to policyholders engaging a Broker Company for the Regulated Services

A Broker Company should, among others,

1. when engaged by a policyholder to provide any Regulated Services, (i) obtain confirmation from the policyholder of his/her understanding that the services are optional services, and (ii) enter into a separate client agreement with the policyholder setting out clearly the terms and conditions on which the services are to be provided, the authority given, the risks related to the services, the remuneration for the services, and allowing the policyholder to terminate the services at any time without any penalty being paid;
    
2. ensure any and all instructions submitted on behalf of the policyholder are legitimate and are strictly within the scope of the authority granted, and provide proof when requested; and
    
3. take reasonable steps to carry out client’s instructions accurately and promptly, and notify the client as soon as practicable (i) after execution of a switching or top-up instruction or (ii) in case of any delay or failure.

3. Effective Date and Grandfathering Arrangements

The Practice Note shall take effect from 1 October 2024 onwards (the “Effective Date”). Accordingly, Technical Representatives and Responsible Officers offering advisory investment services and/or discretionary investment management services for ILAS Policies issued on or after the Effective Date should comply with the new competence requirements set out in sections 2(A) and (B) above. All relevant corporate governance and controls and procedures for Broker Companies providing any Regulated Services set out in sections 2(C) and (D) should also be in place on the Effective Date.

For ILAS Policies issued before 1 October 2024 (the “Grandfathered ILAS Policies”), Technical Representatives and Responsible Officers may continue providing advisory investment services and/or discretionary investment management services in relation to the Grandfathered ILAS Policies if:
 

1. they comply with the new competence requirements set out above; or 
    
2. despite not meeting the new competence requirements, they complete 2 additional compulsory Continuing Professional Development (“CPD”) hours which focus on topics related to investment management and investment advice during the CPD assessment periods of 1 August 2024 to 31 July 2025, 1 August 2025 to 31 July 2026 and 1 August 2026 to 31 July 2027. From 1 August 2027 onwards, such Technical Representatives and Responsible Officers must comply with the new competence requirements and failing which, they must cease to provide/be responsible for such services.

4. Going Forward

Going forward, Broker Companies should start revamping its corporate governance and controls and procedures to ensure compliance with the Practice Note on the Effective Date. Broker Companies who wish to carry out advisory investment services and/or discretionary investment management services should also prepare their RA 4 and/or RA 9 licence applications together with their Technical Representatives and/or Responsible Officers, and/or consider engaging actively licensed third parties to provide such services for ILAS Policies issued on or after the Effective Date.

Separately, Technical Representatives and/or Responsible Officers should plan ahead and register for additional CPD sessions to benefit from the arrangement concerning Grandfathered ILAS Policies. Those who do not opt for the SFC licensing route should also obtain the requisite professional qualifications to continue to provide advisory investment services and/or discretionary investment management services.

If you have any questions or require legal services and/or advice in relation to any information set out in this newsletter, please get in touch with Joyce Chan or your usual Clyde & Co contact.

^[1] https://www.ia.org.hk/en/legislative_framework/files/PracticeNote_dd_05072024_Eng.pdf.