In Hong Kong concerns have been raised that this breaches the Prevention of Bribery Ordinance (PBO) unless the policyholder has agreed to the payment of the commission. However, a recent Hong Kong case, Hobbins v Royal Skandia Life Assurance Ltd and Clearwater International Ltd, says it doesn't as a result of this long standing and judicially accepted practice in the insurance industry an insurer has lawful authority to pay broker commission.
Prevention of bribery
Section 9 of the PBO makes it a criminal offence for an agent to solicit or accept an advantage, and for anyone to offer that advantage, to an agent as an inducement to or reward for the agent doing anything in relation to its principal’s affairs or business. This section applies unless either:
- The agent or person offering the advantage has lawful authority or reasonable excuse
- The agent has the prior permission of its principal (or obtains that permission as soon as reasonably possible after the solicitation, offer or acceptance of the advantage)
Since the broker is the agent of the policyholder it is therefore a criminal offence in Hong Kong for a broker to solicit or accept a commission from an insurer and the insurer to pay that commission unless the broker or the insurer, as the case may be, has lawful authority or reasonable excuse or unless the broker has the permission of the policyholder.
Unfortunately, the PBO does not define "lawful authority" or "reasonable excuse". What it does say is that it is no defence to show that the advantage (the broker commission in this case) is customary in the relevant industry.
Regulatory position
Growing concerns about the mis-selling of investment products in Hong Kong, including those packaged as insurance policies, led to the Independent Commission Against Corruption (ICAC) and the Office of the Commissioner of Insurance (OCI), turning their attention to broker commissions. These regulators would clearly like there to be a law requiring a broker to disclose its commission arrangements to its client so the client knows the broker might have an ulterior motive for recommending a particular policy.
The ICAC and OCI put increasing pressure on the self-regulatory bodies in Hong Kong - the Hong Kong Federation of Insurers (HKFI) for the insurers, the Confederation of Insurance Brokers (CIB) and the Professional Insurance Brokers Association (PIBA) for the brokers - to require their members to make sure the policyholder knows their broker will be paid a commission by the insurer. These regulators have also pushed hard for brokers to have to disclose exactly how much commission they will be paid. The brokers pushed back saying they are fully aware of their duties to their client and there is no need for specific commission disclosure rules. For their part insurers argue that they should not be forced to police whether the broker has obtained their client’s consent before paying the broker a commission. The counter punch from the regulators has been that there is no need for new legislation because broker commissions are caught by the PBO and if a commission is paid without the permission of the policyholder then both the insurer and the broker commit a criminal offence.
Broker approach
As a result of pressure from the ICAC and OCI both the CIB and PIBA now recommend that their members tell their client they will be paid a commission. Larger brokers in Hong Kong do this as a matter of course. They usually state in their terms and conditions they will be paid a commission and obtain their client’s permission in their client engagement letter or agreement. PIBA recommends the broker give their client a percentage range of commissions that might be payable and the CIB recommends telling the client the maximum amount of commission payable. However, both broker organisations have stopped short of making commission disclosure a specific requirement of their professional code of conduct. Neither body has accepted that the payment of broker commission without the consent of the policyholder is a breach of s.9 of the PBO.
HKFI requirements
The HKFI wrote to all its member companies in October 2011 advising them that because of the risk of a breach of s.9 of the PBO and:
"In order to protect insurers’ interests, it is suggested that as a precondition to the grant of any commission to brokers, the broker must himself sign a declaration to the insurer that he has advised the customer that the broker will receive a commission if the customer takes up the insurance policy."
This circular (the Broker Commission Circular) advises insurers to require the broker to:
- Disclose to its client that it will receive a commission from the insurer as a result of the client taking up the policy issued by the insurer
- If the client specifically asks how much commission will be paid, to tell the client and obtain their permission to the payment of that commission
The HKFI provides a sample clause for the insurer to include in their broker contract and a suggested form for the broker declaration. We understand compliance is patchy although many insurers are setting deadlines by which the brokers they deal with must comply. Meanwhile the OCI has been chasing insurers to confirm they are following the HKFI circular for each of the brokers they pay a commission.
The recent Hong Kong case, Hobbins v Royal Skandia Life Assurance Ltd and Clearwater International Ltd, now says s.9 of the PBO doesn't apply to broker commissions, at least where the amount of that commission is normal for the industry, leaving insurers unsure if they still need to comply.