The Judge, Mr Justice Reyes, came to the very firm conclusion that s.9 of the PBO did not apply to broker commissions. He held that there is "lawful authority" (consisting of a long line of judicial pronouncements stretching from the 19th century to the present) for the commercial practice that an insurance broker acts as an agent of the insured and not of the insurance company. As a result, it has long been settled at common law that commission paid to a broker by an insurer does not constitute an illegal secret profit unless it is in excess of what is normally paid in the insurance market. He went on to consider s.19 of the PBO (which states customary industry practice is no defence) but held that it was more than just customary practice in the insurance brokerage industry for commission to be paid. It was a practice validated by over a century of judicial authority. He also held that a broker clearly had a duty to disclose to its client it would be paid a commission.
He noted that duty might extend to the broker being required to disclose the amount of that commission but that:
"Would be to impose a standard which would be at odds with case law on the prevailing commercial practice among insurance brokers."
He then summed up by saying:
"The practice of insurers paying commission to insurance brokers may or may not be unsound. It ought possibly to be strictly regulated or even prohibited altogether. I express no view on the matter. That is a question best left to the legislature, not the Court to tackle."
Commentary
This judgement has been welcomed by the insurance industry in Hong Kong. Mr Justice Reyes is to be congratulated for recognising the specialised way the insurance industry works and that the intention of the PBO was not to overturn:
"A commercial practice ... sanctioned by nearly a century of case law ... in a highly oblique and casual manner."
The clear message to regulators is that if they want to criminalise the payment of broker commissions without policyholder permission they should lobby the legislature to introduce a specific law to this effect rather than trying to 'push a square peg into a round hole'.
It is disappointing to hear the Office of the Commissioner of Insurance (OCI) seems to have taken the view that because Hobbins is a commercial case it has little to say about the application of s.9 in a criminal context and that it does not change the OCI's view that s.9 of the PBO applies to broker commissions. We understand it is still requiring insurers comply with the Broker Commission Circular. Following Hobbins, the Professional Insurance Brokers Association (PIBA) has written to a number of insurers asking them to delay introducing the new broker commission arrangements until 30 June 2012 by which time it hopes to have revisited the issue of commission disclosure with the Confederation of Insurance Brokers (CIB) and the Hong Kong Federation of Insurers (HKFI).
That leaves insurers in a difficult position. On the one hand the OCI says the Broker Commission Circular still stands. On the other they have brokers questioning why they should comply with the new arrangements if there is now a case saying s.9 of the PBO doesn’t apply to broker commissions and refusing to sign up to those new arrangements. Even if a criminal judge is not bound by Hobbins as it is a commercial case, in our view, the risk of prosecution under s.9 of the PBO must be reduced; certainly the risk of a successful prosecution. Insurers still need to be sure the commission they pay to brokers does not exceed what is normally paid within the insurance market but subject to that they have a strong argument that the HKFI needs to review the Broker Commission Circular in the light of this new case.