Brokers and the new Corruption Prevention Guide for Insurance Companies

Introduction

The Corruption Prevention Department of the Hong Kong ICAC has issued a guide (“Guide“) to assist licensed insurance companies in Hong Kong to comply with the Prevention of Bribery Ordinance (Cap.201) (“PBO“) and to provide practical anti-corruption guidance to insurers on instituting appropriate policies and safeguards.

Chapters 4 and 5 of the Guide deal with, respectively, the management of insurance intermediaries and the sales process. Whilst the content applicable to intermediaries is predominantly directed at agents (and some elements that are targeted at all intermediaries appear somewhat inapt to brokers), there are significant sections focused on, or relevant to, insurance broker companies.

Key takeaways

1. Although insurance broker companies are subject to comprehensive regulation by the Insurance Authority (“IA“), it is clear that the ICAC (and IA) is seeking a second line of defence to potential corruption by encouraging insurers to take a more active role in the compliance of insurance broker companies.
2. The provisions that are applicable / relevant to insurance broker companies are most pertinent to an insurer’s dealings with smaller brokers that do not have significant compliance functions. As the Guide has no formal legal or regulatory effect, it is open to insurers to take a proportionate and risk-based approach to its implementation of any of the recommendations. For example, the risk of corruption is clearly lower at an international broker with its own comprehensive legal and compliance infrastructure.
3. The recommendations can likely be largely accommodated for insurance broker companies by:
   • The preparation (and maintenance of) internal processes and procedures documentation;
   • The assignment of responsibilities to specific persons to be responsible for compliance in these matters;
   • The preparation of a notice to brokers:
     • referring to, and providing a link to, the insurer’s anti-corruption policy together with a warning against offering advantages to the insurer’s staff.
     • setting out the threshold requirements to be eligible to partner with the insurer (this may be by reference to the Code of Conduct for Licensed Insurance Brokers)
     • requiring a declaration of any disciplinary findings by the IA or other regulators.
     • encouraging the adoption of similar requirements and processes with regard to their own technical representatives.
   • Periodic monitoring of any regulatory action taken against the broker by the IA.

Status of the Guide

The Guide is a practical reference guide only. It does not have the status of a regulation, guideline or code of practice and therefore it is not mandatory to implement its provisions. However, the relevant provisions in the PBO are (criminal) legal requirements, and the ICAC is the prosecuting authority for any contraventions of them. In addition, a failure of an insurer to follow good anti-corruption practice as set out in the Guide, could be a factor for the IA in considering whether an insurer’s representatives are fit and proper. Accordingly, insurers would be well advised to consider the recommendations and whether any changes should be made to its policies and procedures.

Provisions relevant to insurance broker companies

Section 4.5 addresses corruption prevention safeguards. The following requirements are the most relevant to an insurer’s dealings with insurance broker companies:

Risk management / compliance processes

• Lay down rules on procedures for management of insurance intermediaries, including the handling of applications for partnership.
• Make known to insurance broker companies the insurer’s anti-bribery provisions and warn against offering any advantages to its staff or agents when considering the “applications for…partnership“.
• Include a warning in relevant documents, e.g. “insurance intermediary application forms”, to warn insurance broker companies from providing false information / submitting bogus documents for partnership, and require declarations of truth and accuracy on forms.
• Impose requirement on insurance broker companies when considering forming partnership to declare they have not been disciplined by the IA or other regulatory or professional body).
• Lay down criteria for partnering with insurance intermediaries with objective benchmarks e.g. “the controls over confidentiality and proper sales process”.
• Have a rotating vetting staff with out-of-turn applications approved and documented by a designated authority (query how practicable this is for insurance broker companies).
• Remind vetting staff to disclose any personal conflicts of interest e.g. applications from friends and family.
• Devise a “fit and proper” checklist covering items to be verified.

Performance monitoring of insurance broker companies

• Define duties and authorities of directors and staff in respect of Distribution Channel Departments for evaluating performance of intermediaries.
• As far as practicable, devise a performance appraisal form covering the pre-determined criteria.
• Set objective criteria for the termination of the partnership with insurance broker companies.
• Record any decisions and justifications for terminating partner with an insurance broker companies.
• Establish an effective disciplinary system (query how practicable this is for insurance broker companies).
• Ensure fairness and consistency in the disciplinary process e.g. by maintaining a dossier of cases (query how practicable this is for insurance broker companies).

Management oversight and supervision

• Monitor the disciplinary action taken against intermediaries by regulators and take appropriate follow up action.
• Conduct random supervisory checks e.g. by internal audit, on the operation of these requirements.

Broker technical representatives

• Insurers are advised to encourage insurance broker companies to adopt similar policies and procedures with regard to their own technical representatives.