official record of proceedings friday, 10 …...official record of proceedings friday, 10 july 2015...

LEGISLATIVE COUNCIL ─ 10 July 2015

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OFFICIAL RECORD OF PROCEEDINGS

Friday, 10 July 2015

The Council continued to meet at Nine o'clock

MEMBERS PRESENT: THE PRESIDENT THE HONOURABLE JASPER TSANG YOK-SING, G.B.M., G.B.S., J.P. THE HONOURABLE LEE CHEUK-YAN THE HONOURABLE JAMES TO KUN-SUN THE HONOURABLE CHAN KAM-LAM, S.B.S., J.P. THE HONOURABLE LEUNG YIU-CHUNG THE HONOURABLE EMILY LAU WAI-HING, J.P. THE HONOURABLE TAM YIU-CHUNG, G.B.S., J.P. THE HONOURABLE ABRAHAM SHEK LAI-HIM, G.B.S., J.P. THE HONOURABLE TOMMY CHEUNG YU-YAN, G.B.S., J.P. THE HONOURABLE FREDERICK FUNG KIN-KEE, S.B.S., J.P. THE HONOURABLE WONG KWOK-HING, B.B.S., M.H. PROF THE HONOURABLE JOSEPH LEE KOK-LONG, S.B.S., J.P., Ph.D., R.N. THE HONOURABLE JEFFREY LAM KIN-FUNG, G.B.S., J.P.

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THE HONOURABLE ANDREW LEUNG KWAN-YUEN, G.B.S., J.P. THE HONOURABLE WONG TING-KWONG, S.B.S., J.P. THE HONOURABLE CYD HO SAU-LAN, J.P. THE HONOURABLE STARRY LEE WAI-KING, J.P. DR THE HONOURABLE LAM TAI-FAI, S.B.S., J.P. THE HONOURABLE CHAN KIN-POR, B.B.S., J.P. DR THE HONOURABLE PRISCILLA LEUNG MEI-FUN, S.B.S., J.P. DR THE HONOURABLE LEUNG KA-LAU THE HONOURABLE WONG KWOK-KIN, S.B.S. THE HONOURABLE IP KWOK-HIM, G.B.S., J.P. THE HONOURABLE MRS REGINA IP LAU SUK-YEE, G.B.S., J.P. THE HONOURABLE PAUL TSE WAI-CHUN, J.P. THE HONOURABLE ALAN LEONG KAH-KIT, S.C. THE HONOURABLE LEUNG KWOK-HUNG THE HONOURABLE ALBERT CHAN WAI-YIP THE HONOURABLE WONG YUK-MAN THE HONOURABLE MICHAEL TIEN PUK-SUN, B.B.S., J.P. THE HONOURABLE JAMES TIEN PEI-CHUN, G.B.S., J.P. THE HONOURABLE NG LEUNG-SING, S.B.S., J.P.


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THE HONOURABLE STEVEN HO CHUN-YIN, B.B.S. THE HONOURABLE FRANKIE YICK CHI-MING, J.P. THE HONOURABLE WU CHI-WAI, M.H. THE HONOURABLE YIU SI-WING, B.B.S. THE HONOURABLE GARY FAN KWOK-WAI THE HONOURABLE MA FUNG-KWOK, S.B.S., J.P. THE HONOURABLE CHARLES PETER MOK, J.P. THE HONOURABLE CHAN HAN-PAN, J.P. DR THE HONOURABLE KENNETH CHAN KA-LOK THE HONOURABLE CHAN YUEN-HAN, S.B.S., J.P. THE HONOURABLE LEUNG CHE-CHEUNG, B.B.S., M.H., J.P. THE HONOURABLE KENNETH LEUNG THE HONOURABLE ALICE MAK MEI-KUEN, B.B.S., J.P. DR THE HONOURABLE KWOK KA-KI THE HONOURABLE KWOK WAI-KEUNG THE HONOURABLE DENNIS KWOK THE HONOURABLE CHRISTOPHER CHEUNG WAH-FUNG, S.B.S., J.P. DR THE HONOURABLE FERNANDO CHEUNG CHIU-HUNG THE HONOURABLE SIN CHUNG-KAI, S.B.S., J.P. DR THE HONOURABLE HELENA WONG PIK-WAN


THE HONOURABLE IP KIN-YUEN DR THE HONOURABLE ELIZABETH QUAT, J.P. THE HONOURABLE MARTIN LIAO CHEUNG-KONG, S.B.S., J.P. THE HONOURABLE POON SIU-PING, B.B.S., M.H. THE HONOURABLE TANG KA-PIU, J.P. DR THE HONOURABLE CHIANG LAI-WAN, J.P. IR DR THE HONOURABLE LO WAI-KWOK, S.B.S., M.H., J.P. THE HONOURABLE CHUNG KWOK-PAN THE HONOURABLE CHRISTOPHER CHUNG SHU-KUN, B.B.S., M.H., J.P. THE HONOURABLE TONY TSE WAI-CHUEN, B.B.S. MEMBERS ABSENT: THE HONOURABLE ALBERT HO CHUN-YAN DR THE HONOURABLE LAU WONG-FAT, G.B.M., G.B.S., J.P. THE HONOURABLE VINCENT FANG KANG, S.B.S., J.P. THE HONOURABLE RONNY TONG KA-WAH, S.C. THE HONOURABLE CHAN HAK-KAN, J.P. THE HONOURABLE CHEUNG KWOK-CHE THE HONOURABLE CLAUDIA MO THE HONOURABLE CHAN CHI-CHUEN


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PUBLIC OFFICERS ATTENDING: PROF THE HONOURABLE K C CHAN, G.B.S., J.P. SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY MR LAU KONG-WAH, J.P. SECRETARY FOR CONSTITUTIONAL AND MAINLAND AFFAIRS CLERKS IN ATTENDANCE: MISS FLORA TAI YIN-PING, ASSISTANT SECRETARY GENERAL MR MATTHEW LOO, ASSISTANT SECRETARY GENERAL


BILLS Second Reading of Bills Resumption of Second Reading Debate on Bills PRESIDENT (in Cantonese): Good morning everyone. We will now resume the Second Reading debate on the Insurance Companies (Amendment) Bill 2014. INSURANCE COMPANIES (AMENDMENT) BILL 2014 Resumption of debate on Second Reading which was moved on 30 April 2014 MR NG LEUNG-SING (in Cantonese): President, insurance is closely related to people's life, and as a representative of the financial sector, I would like to first indicate my support for the Insurance Companies (Amendment) Bill 2014 (the Bill). The Bill seeks to provide the legal framework for the establishment of the independent Insurance Authority (the Authority) and a statutory licensing regime for insurance intermediaries. This is the most important regulatory reform in the insurance sector since the enactment of the Insurance Companies Ordinance (the Ordinance) in the early 80s. The reform has several important and far-reaching meanings, which include ensuring that the insurance industry regulatory infrastructure is modernized to facilitate the stable development of the industry, providing better protection for policy holders and potential policy holders and complying with the requirement of the International Association of Insurance Supervisors. Over the years, the industry self-regulatory organizations and insurance practitioners have contributed a lot to facilitating the stable development of the industry. With the growing importance of Hong Kong as an international financial centre, the insurance industry has become an essential element of the local financial sector and in protecting various sectors of the community. From my observation during the past years of work in the banking sector, the Hong Kong Monetary Authority has all along played a very important role in safeguarding the operation and stable development of the local banking industry, I therefore have reason to believe that the proposed Authority may consider this as a reference and take an equally proactive role in the future. It is also hoped that the relevant regulators will help boost the development of the insurance industry through collaborative actions and regulatory co-operation.


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As a member of the Bills Committee, I would like to thank government officials and staff members of the Secretariat for their hard work, but at the same time, I have to condemn certain Members for filibustering at meetings of the Legislative Council, which has caused negative impacts of varied degrees on different committees during this period of time. With these remarks, I support the Second Reading of the Bill. MR ANDREW LEUNG (in Cantonese): President, on behalf of the Business and Professionals Alliance for Hong Kong, I speak in support of the resumption of the Second Reading debate on the Insurance Companies (Amendment) Bill 2014 (the Bill). Many Hong Kong people will not be unfamiliar with insurance. There are, for example, accident insurance, medical insurance for medical consultation, travel insurance for visitors, third-party insurance for newly purchased vehicles, motor vehicle insurance, home insurance, savings insurance, life insurance and even insurance for pets. As more people take out insurance, they become more concerned about the insurance coverage, sales practices, procedures for claiming compensation and relevant regulations. Whether the conduct of the insurance practitioners measures up to their expectation is also a matter of concern. Given that the insurance industry is an essential element of the financial sector in Hong Kong, it is imperative to assist its development. The major objective of the Bill is to establish an independent Insurance Authority (the Authority) and a licensing regime for insurance intermediaries to replace the existing self-regulatory system administered by the three self-regulatory organizations. The focus of the Bills Committee's discussion is how to strike a balance among protecting consumers, regulating insurance practitioners and insurers as well as facilitating the sustainable and healthy development of the industry. The composition of the Authority is the most discussed topic by the Bills Committee. While the public hopes that the Authority will not conduct regulation by peers, the industry is worried that without sufficient number of industry players in the Authority, the lay members may not fully understand the actual operation of the industry, thus regulation will impede the development of the industry. Therefore, it has all along requested that no less than 25% of the members of the Authority should come from the industry. While I appreciate the request of the industry, I find that, after some researches, other countries such


as the United Kingdom, Australia and Singapore, do not have the relevant requirement. Instead, there are express provisions prohibiting any person subject to regulation from joining the regulatory body. According to the amendment proposed by the Government, the Authority "should have at least two non-executive directors with industry knowledge and experience". It has, in my opinion, responded to the request of the insurance industry by appointing people with the relevant expertise to the Authority without prejudicing its impartiality, and at the same time maintained its flexibility by not giving any number or percentage, thereby enabling the Government to appoint fit and proper persons in the light of the actual situation. With regard to the functions of the Authority, I agree with the Government's amendment that the Authority is not only the regulator, but is also tasked to facilitate the sustainable development of the insurance industry, promote the competitiveness of the insurance industry in the global insurance market and assist the Financial Secretary in maintaining the financial stability of Hong Kong. Let me quote the words of a government official at the meeting: "Stay focused on selling, rest assured in buying and instill confidence in the public". To achieve this, regulation and support of the development of the industry are inseparable, and the combined effect will create greater room for the development of the industry. At present, the Commissioner of Insurance also gets involved in the deliberations of the Financial Stability Committee and the Council of Financial Regulators, I therefore consider it appropriate for the Authority to take over the relevant work and assist the Financial Secretary in maintaining the financial stability of Hong Kong. Amidst the serious concern of the industry that the Authority may not fully understand the operation of the insurance sector, the Government has incorporated in its amendment the establishment of at least two Industry Advisory Committees, one for long-term business and the other for general business, to advise the Authority on industry-related issues and policies. I hope that the Government will make good use of these advisory committees and tap industry expertise by all means in appointing their members, so that they can directly express their views to the Authority. If it is considered that two committees are inadequate, the Government should establish more advisory committees in a timely manner, so as to better meet the needs of the development of the industry, thereby achieving the policy objectives of promoting the sustainable development and competitiveness of the insurance industry.


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"Best interests" is another topic that lengthy discussions have been held during the deliberation of the Bills Committee. As we have said at the meetings, the best interest criterion varies with different people and is both abstract and ambiguous, therefore making the insurance agents susceptible to clients' complaints and even litigations. Given the different roles of insurance agents and insurance brokers, the so-called "best interest" will also differ, which may give rise to many problems. In response, the Administration envisaged that the Authority will adopt the practice of the Mandatory Provident Fund Schemes Authority in issuing the guideline on conduct requirement for intermediaries and issue a similar code of conduct. The Administration will also propose an amendment to clarify that, under the principle that it is not intended to affect a person's any other rights under the common law, a breach of the conduct requirements would not on its own render any insurance intermediary or insurance company liable to judicial proceedings. I consider this approach acceptable. Furthermore, as advised by the Administration, the Blue Bill will be amended to further provide that the code of conduct will be admissible in evidence before a court, and that if a provision in the code appears to the Court to be relevant to a question arising in the proceedings, the Court must, in determining the question, take into account any compliance or non-compliance of the provision. This seeks to address the difference in "best interests" between insurance agents and insurance brokers. Given the importance of the code of conduct and guidelines, I hope that the Administration will consult the industry before issuance. President, the Bill is the most important regulatory reform of the insurance industry in 30 years. Prior to the setting up of the Bills Committee and throughout the course of deliberation, many organizations and representatives of the insurance industry had met with us to relay their concerns and worries about the Bill, which include the lack of representation of trade members in the Authority's governing board and disciplinary committee, ambiguous definition of "best interest", transitional arrangements for licences and a director shall not hold office in more than one insurer. During the entire communication process, I have come to understand why the industry is concerned about the present amendment and I have relayed the industry's views to government officials. I also learnt that the latter, the Commissioner of Insurance in particular, have met with the insurance sector several times to explain the amendments and addressed many of their concerns. I believe the efforts of the government officials have not only helped allay the industry's concerns, but have also indirectly shortened the deliberation process of the Bills Committee. I hope that when the SAR


Government deal with other legislative amendments and consultations in the future, it will adopt the same proactive attitude to liaise with the industry concerned. President, I so submit. PRESIDENT (in Cantonese): Does any other Member wish to speak? (No Member indicated a wish to speak) PRESIDENT (in Cantonese): If not, I now call upon the Secretary for Financial Services and the Treasury to reply. The debate will come to a close after the Secretary has replied. SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY (in Cantonese): President, the Government tabled the Insurance Companies (Amendment) Bill 2014 (the Bill) to the Legislative Council in April 2014, and a Bills Committee was subsequently set up to scrutinize the Bill. First of all, I wish to express my heartfelt thanks to Mr WONG Ting-kwong, Chairman of the Bills Committee and other members, as well as the Legislative Council Secretariat and the Legal Adviser for their hard work, which have facilitated the smooth completion of the scrutiny work. I would also like to thank the deputations and individuals who have expressed views to the Bills Committee. The Bills Committee has conducted 24 meetings to thoroughly discuss the policy objectives and provisions of the Bill, and put forth precious views. In response to the views of members and stakeholders, the Government has proposed a number of amendments to improve the Bill as far as possible and the amendments have been endorsed by the Bills Committee. I will move them at the Committee stage later. Hong Kong is one of the most open insurance centres in the world. At present, there are a total of 158 authorized insurers and more than 80 000 insurance intermediaries and organizations in Hong Kong. In the past five years, Hong Kong's insurance sector has recorded an annual growth of 12.3% on average. In 2014, the total gross premiums of the insurance sector amounted to $329.7 billion and contributed 2.9% of Gross Domestic Product in value added.


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At present, the Office of the Commissioner of Insurance (the Office) is a government department mainly responsible for regulating the insurers. Insurance intermediaries, namely insurance agents and insurance brokers, are currently regulated by three self-regulatory organizations. The object of the Bill is to amend the Insurance Companies Ordinance (the Ordinance) for establishing an independent Insurance Authority (the Authority) and a statutory licensing regime for insurance intermediaries to replace the existing self-regulatory regime. To the insurance sector, the establishment of the Authority is the most important regulatory reform since the passage of the Ordinance in 1983. The objectives of setting up the Authority are to modernize the insurance industry regulatory infrastructure to facilitate the stable development of the industry, and provide better protection for policy holders. Since launching the first consultation in 2010, we have been actively engaging the industry and other stakeholders to formulate the content of the Bill. In my view, the Bill and various amendments have sufficiently balanced the interests of policy holders and the industry. Under the new regime, the Authority will not only take up the existing functions of the Office, but will also be tasked to promote the competitiveness of the insurance industry and people's understanding of insurance, and conduct studies into matters affecting the insurance industry. The Bill proposed that the Authority should comprise a chairperson, a chief executive officer and not less than six directors, and of these directors, at least two should have knowledge of or expertise in the insurance industry. This arrangement has not only struck a balance between the need to tap industry expertise and the consideration for ensuring the impartiality of the Authority, it is also in compliance with the requirement of the Insurance Core Principles promulgated by the International Association of Insurance Supervisors that insurance regulators must be independent of the industry and the Government. Furthermore, the Bill provides that the Authority should establish at least two Industry Advisory Committees, one for long-term business and the other for general business, to advise it on industry-related issues and policies. On the financial arrangements, the Authority has three major sources of income:

(a) licence fees payable by insurers and insurance intermediaries,


(b) fees for providing specific services, and (c) a levy on insurance premiums for all insurance policies.

The Government will prescribe the level of fees by way of subsidiary legislation for consideration by the Legislative Council. Under the new regime, a person has to obtain a licence from the Authority in order to carry on insurance intermediary activities, but professionals (such as lawyers and accountants) giving insurance-related advice in their professional capacities can be exempted. In response to the actual operational need of the industry, I will move the amendments on exemption later on. So far, some 80 000 insurance intermediaries have registered with the three self-regulatory organizations. To ensure smooth transition, the Bill provides that insurance intermediaries validly registered with the self-regulatory organizations before the new statutory licencing regime was put in place will be deemed to be licenced under the new regime for three years. And, their licence fees will also be waived for five years. A fair and credible regulatory system of the conduct of insurance intermediaries will enhance public confidence in insurance, which will in turn help promoting the sustainable development of the insurance industry. The Bill will provide for the basic principles of the conduct requirements on insurance intermediaries, and elaborate on the detailed requirements in subsidiary legislation, codes and guidelines. The consequence of breaching the conduct requirements is disciplinary sanctions. On this issue, the industry told us that while reckoning the need for insurance intermediaries to comply with the conduct requirements, specifying the proposed conduct requirements in the statutory provision to require insurance intermediaries to act in the best interests of their clients may have implications that go beyond the policy intent. To address the industry's concern, we have proposed an amendment to clearly prescribe that a breach of the conduct requirements would not on its own render any person liable to any judicial proceedings, so as to reflect the original policy intent. This amendment will not affect the existing legal rights of the policy holders. I will give a detailed explanation on this amendment when I speak on it later on. Similar to other financial regulators in Hong Kong, the Authority will be vested with appropriate powers of inspection, investigation and imposing disciplinary sanctions. At the Bills Committee meetings, some members opined


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that the statutory maximum fine of $10 million was too high and might be too stringent on insurance intermediaries with less financial means. I wish to point out that insurance intermediaries can be individuals, banks or established international brokerage firms, therefore the maximum fine level must have adequate regulatory effect. The Bill also provides that the Authority has to publish guidelines on fines and its disciplinary decisions will be appealable to an independent quasi-judicial body, that is, the Insurance Appeals Tribunal. It should be noted that, in addition to the regulatory regime for insurance intermediaries, the Bill has also updated the regulatory requirements of insurers to bring our regulatory regime in line with international practices. The proposals include stipulating that the appointment of directors, key persons in control functions and actuaries by an authorized insurer is subject to the approval of the Authority. Furthermore, an insurer should maintain separate accounts for each class of its long-term business, and that assets maintained by the insurer in respect of its long-term business should be applicable only for the purposes of that part of business. These measures will provide further protection for policy holders. We have attached great importance to the accountability of the Authority. From the perspective of corporate governance, the legislation requires that the number of non-executive directors must exceed the number of executive directors in order to ensure effective oversight of executive decisions. The powers of the Authority will be subject to appropriate checks and balances, for example, the independent Insurance Appeals Tribunal may review the decisions of the Authority. The Tribunal will be chaired by a former judge of the High Court or Court of the First Instance, or a person qualified for appointing as a High Court judge. The Chief Executive will appoint an independent Process Review Panel to review the internal operations and procedures of the Authority in exercising its regulatory powers. Furthermore, the Bill also provides that the Authority must consult the industry before imposing new regulatory requirements. In response to the views expressed by the Bills Committee, we have undertaken to consider briefing the Legislative Council Panel on Financial Affairs on the proposed budget before the Authority submits its annual estimates for approval by the Financial Secretary. After the passage of the Bill, we will work on the establishment of the Provisional Insurance Authority right away and deal with the transitional administrative arrangements. Subsequently, the Authority will take over, by phases, the work of the Office and the three self-regulatory organizations and thus the new Ordinance will also commence in phases. A Working Group on


Transition was set up last year to liaise with trade members about the detailed transitional arrangements, and so far it has conducted eight meetings and consensus on some important transitional arrangements has been reached. I am aware that Members are concerned about the regulation of Investment Linked Assurance Scheme products, we will therefore continue to monitor the latest development of the market and modernize the regulatory tools as appropriate. I believe with the establishment of the Authority and the introduction of a licensing regime for insurance intermediaries, the Authority will review the effectiveness of the regulatory tools from time to time for further improvements. President, insurance has intricate relationship with economic development and people's livelihood, and the insurance industry itself is an essential component of the financial services sector. The fact that Hong Kong has become an insurance centre in the region owes much to the efforts of the insurance sector. The establishment of the Authority will provide better protection for policy holders and further reinforce Hong Kong's status as an international financial centre, thereby enabling the development of the insurance industry in Hong Kong to turn a new page. I sincerely implore Members to support this Bill and the various amendments to be proposed in a while. President, I so submit. PRESIDENT (in Cantonese): I now put the question to you and that is: That the Insurance Companies (Amendment) Bill 2014 be read the Second time. Will those in favour please raise their hands? (Members raised their hands) PRESIDENT (in Cantonese): Those against please raise their hands. (No hands raised) PRESIDENT (in Cantonese): I think the question is agreed by a majority of the Members present. I declare the motion passed.


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CLERK (in Cantonese): Insurance Companies (Amendment) Bill 2014. Council went into Committee. Committee Stage CHAIRMAN (in Cantonese): Committee stage. Council is now in Committee. INSURANCE COMPANIES (AMENDMENT) BILL 2014 CHAIRMAN (in Cantonese): I will first deal with the clauses with no amendment. I now propose the question to you and that is: That the following clauses stand part of the Insurance Companies (Amendment) Bill 2014. CLERK (in Cantonese): Clauses 1 to 4, 6 to 10, 12, 13, 14, 16 to 22, 27, 28, 33, 35 to 50, 53, 54, 56 to 61, 63, 65, 67 to 70, 72, 75, 76, 77, 79 to 82, 85, 88, 90 to 93, 95 to 103, 105 to 122, 124, 128 to 140 and 142 to 165. CHAIRMAN (in Cantonese): Does any Member wish to speak? (No Member indicated a wish to speak) CHAIRMAN (in Cantonese): I now put the question to you and that is: That clauses read out just now stand part of the Bill. Will those in favour please raise their hands? (Members raised their hands) CHAIRMAN (in Cantonese): Those against please raise their hands. (No hands raised) CHAIRMAN (in Cantonese): I think the question is agreed by a majority of the Members present. I declare the motion passed.


CLERK (in Cantonese): Clauses 5, 11, 15, 23 to 26, 29 to 32, 34, 51, 52, 55, 62, 64, 66, 71, 73, 74, 78, 83, 84, 86, 87, 89, 94, the heading of Division 1 of Part 3, clauses 104, 123, 125, 126, 127 and 141. SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY (in Cantonese): Chairman, I move that the clauses and the heading read out just now be amended as set out in the paper circularized to Members. In the Financial System Stability Assessment report on Hong Kong, the International Monetary Fund commented that in light of the requirements promulgated by the International Association of Insurance Supervisors (IAIS), the suitability requirements under the existing Insurance Companies Ordinance (the Ordinance) should be extended to cover senior persons and key persons in control functions of insurers. Therefore, clause 25 has added a provision to require that an insurer should only appoint an individual as a key person in control function of that insurer if the individual is a fit and proper person approved by the Insurance Authority (the Authority). The Authority may also revoke the approval if it considers that the appointee is not, or is no longer, fit and proper. Clause 25 proposes an amendment to the proposed section 13AE(12), which seeks to provide for the coverage of the control functions, so as to be in line with the Insurance Core Principle promulgated by the IAIS. After the amendment, the definition of control functions should include risk management, financial control, compliance, internal audit, actuarial matters and intermediary management. As a check and balance, the Bill provides that before exercising its disciplinary powers on anyone, the Authority must give him a reasonable opportunity to be heard. In response to the industry's views, amendments have been made to proposed sections 41Q and 81 under clauses 55 and 84 respectively to clarify that a reference to "an opportunity of being heard" is a reference to an opportunity to "make written or oral representations", thereby unequivocally prescribing that the relevant person can make oral representations during the Authority's disciplinary proceedings. Insurance agents act on behalf of insurance companies whereas insurance brokers act on behalf of policy holders or potential policy holders. A conflict of interest will arise if a person acts as an insurance agent and an insurance broker concurrently. To avoid this situation, the existing Ordinance has imposed certain restrictions on insurance agents and brokers. We have retained these


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restrictions in the Bill and have made necessary updates in wordings in the light of the new licensing regime. However, the industry considers that the changes in the wordings might unnecessarily widen the scope of the restrictions and could hinder normal investment activities. To better reflect the original policy intent and avoid over-regulation, amendments have been made to proposed sections 64J and 64K under clause 71 to stipulate that the restrictions in relation to personnel only apply to a person who "manages or controls any matter relating to a regulated activity" of another insurance intermediary entity. Clause 73 seeks to amend section 68 of the Ordinance to make further amendment in the light of the developments in the law of agency, making it clear that an insurer is not liable for the act of an insurance agent if the client knows that the act is not within the scope of the insurance agent's authority but still relied on it. As suggested by the Bills Committee, we have proposed an amendment to provide that the Court may take into account other factors relevant in the circumstances in determining the liability of the insurer. Given that the conduct of insurance intermediaries has significant impact on the development of the insurance industry, the Bill has set out the broad principles of conduct requirements for licensed insurance intermediaries in carrying out regulated activities. The consequence of breaching the conduct requirements under the Bill is that disciplinary sanctions may be imposed by the Authority, and there is no intention to introduce a new statutory cause of action. Having considered the views of the Bills Committee and the industry, an amendment has been proposed under clause 84 to add section 91A to clarify that a breach of a conduct requirement specified under the Bill would not on its own render any person liable to any judicial proceedings. This is in line with the policy objectives as stated during the consultation period. Also, this amendment is not intended to affect a person's any other rights under the common law, or has any implications on whether a breach of provisions may give rise to a cause of action. Therefore, the amendment will not undermine the legal rights currently enjoyed by policy holders. The Bill provides that a person affected by the decision of the Authority may appeal to the Insurance Appeals Tribunal (the Tribunal), which may award costs to parties to a review according to the Rules of the High Court. As highlighted by members and the industry, since an appellant appealing to the Tribunal may be ordered to pay the successful party's legal costs if he loses, which may discourage less financially capable intermediaries from lodging


appeals, they have therefore suggested to cap the costs to be awarded by the Tribunal. The award of costs is the discretionary power conferred on the Tribunal to discourage abuse of the appeal process to delay a disciplinary action. As the same arrangement is adopted by other appeals tribunals established under other laws, we see no strong justifications to introduce a cap to the costs to be awarded. Nonetheless, considering the views of members and the industry, clause 84 seeks to amend section 100 to stipulate that, with the consent of both parties to the review, the Tribunal may determine the review on the basis of written submissions only. We believe this would provide potential appellants with an alternative which may involve lower legal costs. The Bill provides that persons who engage in regulated activities must be licensed. Some members pointed out that employees of insurers who discharge non-sales functions, such as those responsible for underwriting and claims handling, may carry on regulated activities when performing their jobs. Considering the actual operation of insurers, an amendment has been made under clause 84 to proposed section 121 to stipulate that employees of captive insurance companies and reinsurance companies as well as employees of insurers who incidentally carry on "regulated activities" when performing their jobs of underwriting and claims handling, will be exempted from the requirement to obtain insurance intermediary licences. At the meetings of the Bills Committee, some members have expressed concern about the provision which holds the senior management criminally liable for an offence committed by a body corporate that is attributable to his neglect or omission, thinking that it would impose onerous liability on the management of insurers and insurance intermediaries. We are of the view that if an offence is committed by a body corporate and it is proved that the offence is attributable to any neglect or omission on the part of an individual, the individual should not be allowed to hide behind the corporate veil and escape his criminal liability. We nonetheless agree that the definition of individual who would be held liable under the Bill may be too broad. Therefore, clause 84 seeks to amend section 122 to narrow down the scope of the relevant individuals to make it consistent with that of persons with statutory duties under the Bill. According to the Bill, if the Authority prosecutes minor offences in its own name, it may allow its employee who is not a qualified legal professional to act as a lay prosecutor. Although we envisage that the prosecution work would be taken up by the Authority's in-house lawyers, we will nonetheless move an


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amendment under clause 84 to proposed section 124 in response to the comments of the Bills Committee, to delete the provision for the prosecution work of the Authority to be taken up by lawyers. Apart from the abovementioned major amendments, we have also proposed some textual and technical amendments to help rationalize the provisions, ensure consistency and elaborate the policy intent. When drafting the amendments, we have carefully considered the comments of the Bills Committee and the relevant stakeholders. All the proposed amendments have been submitted to the Bills Committee, which has raised no objection. Chairman, I so submit. Proposed amendments Clause 5 (see Annex II) Clause 11 (see Annex II) Clause 15 (see Annex II) Clause 23 (see Annex II) Clause 24 (see Annex II) Clause 25 (see Annex II) Clause 26 (see Annex II) Clause 29 (see Annex II) Clause 30 (see Annex II) Clause 31 (see Annex II) Clause 32 (see Annex II) Clause 34 (see Annex II)


Clause 51 (see Annex II) Clause 52 (see Annex II) Clause 55 (see Annex II) Clause 62 (see Annex II) Clause 64 (see Annex II) Clause 66 (see Annex II) Clause 71 (see Annex II) Clause 73 (see Annex II) Clause 74 (see Annex II) Clause 78 (see Annex II) Clause 83 (see Annex II) Clause 84 (see Annex II) Clause 86 (see Annex II) Clause 87 (see Annex II) Clause 89 (see Annex II) Clause 94 (see Annex II) The heading of Division 1 of Part 3 (see Annex II) Clause 104 (see Annex II) Clause 123 (see Annex II)


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Clause 125 (see Annex II) Clause 126 (see Annex II) Clause 127 (see Annex II) Clause 141 (see Annex II) CHAIRMAN (in Cantonese): Does any Member wish to speak? MR WONG YUK-MAN (in Cantonese): Chairman, I failed to return in time to speak during the Second Reading debate on the Bill, but I do support the establishment of the Insurance Authority (the Authority). We have now come to the second debate on the amendments proposed by the Government, and I have some opinions on these amendments. I am a member of the Bills Committee, a number of amendments have been proposed by the Government in response to the requests or concerns of the industry. I would like to raise two points about clause 16 (section 5H). The first point is, section 5H(1) provides that "The Authority must keep a register of authorized insurers, in a form it thinks fit, containing …", but as stated in subsections (2)(a) and (2)(b), the register is kept in a documentary or non-documentary form. Why does subsection (1) use the vague term "fit" to provide for the form of the register instead of unequivocally prescribing that the register is kept in a documentary or non-documentary form, so that members of the public and the insurance sector can clearly understand the form of the register? Furthermore, while subsection (1)(c) stipulates that "if an authorized insurer ceases to effect contracts of insurance of any description, or a requirement is imposed under section 27 for the cessation of effecting contracts of insurance of a description by that insurer, a note to that effect", the Chinese text "如某獲授權保險人停止訂立某種類的保險合約，或保監局根據第 27條施加規定，規定該保險人停止訂立某種類的保險合約說明此事的備註 " carries a different meaning and fails to reflect the English text, thereby misunderstanding can easily be caused. This is a very common problem found in law drafting. While the Chinese text will make people think it is the


"authorized insurer" is a person who takes the initiative to cease the signing of contracts of insurance of any description with their clients, it is stated in the English text that the "authorized insurer" is a company which takes the initiative to cease the signing of contracts of insurance of any description with their clients. The two versions carry completely different meanings and there is no way we can ascertain which text reflects the original intent of this provision. Therefore, it is necessary to continue with the discussion of this provision. Furthermore, according to subsection (1)(e), "if an authorized insurer ceases because of a direction under section 40 to be authorized to carry on insurance business which is part of a class of insurance business, a note to that effect". While section 40 has set out five conditions but only one direction will be issued, the phrase "because of a direction under section 40" therein can lead to a misunderstanding that more than one direction will be issued under section 40. Subsection (2)(a) stipulates that "A person may, at all reasonable times ― if the register is kept in a documentary form ― inspect the register free of charge", but the term "reasonable times" therein is ambiguous. What is meant by "reasonable times"? Does it mean the office hours of government departments, or other reasonable time available for inspection? Also, under subsection (2)(b), "A person may, at all reasonable times ― if the register is kept otherwise than in a documentary form ― inspect a reproduction in a legible form of any information recorded in the register free of charge". Yet, given the advancements in technology, I find it very awkward to have the register being kept in a documentary form. Considering the Government's care about trees and the Earth and its awareness on environmental protection, why does it not simply upload the register for public inspection direct? In so doing, the term "reasonable times" will no longer be a cause of concern, nor is it necessary to include subsections (3)(a) and (3)(b) about obtaining copies of the register. The requirement to keep the register in a documentary or non-documentary form under subsection (2) is a logic question of "P or not P". Using a "crude and all-inclusive" interpretation, it means that the register, in whatever form it is kept, is available for public inspection free of charge at all reasonable times. It is therefore meaningless to highlight the form that the register is kept. While the Government has daringly requested the setting up of the Innovation and Technology Bureau, "689" talked nonsense yesterday about the consequences of not setting up the Bureau with the intention of stirring up struggle. The


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Government promotes e-services by uploading documents to its website on the one hand, but has failed to keep pace with technological advancements in law drafting on the other, so what else can we say? The fifth point that I am going to make is about subsection (4)(a). Chairman, I am going to read out the provision, so you may either flip to that part if you are quick enough or simply listen to me. There is no way you can stop me because I am speaking entirely on the amendments, but I doubt if I could do so during the Second Reading debate. This provision provides that "a document purporting to be a copy of an entry in, or extract of, the register, and purporting to be certified by an authorized officer of the Authority as a true copy of the entry or extract, is admissible in evidence on its production without further proof". Although members of the public do not seem to allow the authorized officers of the Authority to cut corners, the word "purporting" implies that a document is admissible in evidence without being certified by the authorized officer, who is not required to state in detail under what conditions the document is admissible either. In addition, with the absence of a common yardstick for the register, what is the point of enacting a legislation? If a document is not a true copy of the register, how can we hold the Authority responsible for not certifying the relevant document? The sixth point is also concerned with clause 16 (section 5H). According to subsection (5), "The Authority must, as far as practicable, make the register available to any person for inspection free of charge on the Internet." Is the term "as far as practicable" an excuse of the Authority to delay the process? The Secretary may clarify this point later on. As various government departments have already put in place very effective search systems, all the Authority has to do is to provide a timetable. On the other hand, subsections (5) and (3) are contradictory to each other. If subsection (5) allows for online inspection of the register, why does subsection (3) require the payment of fee for obtaining copies of the register? Will the application of the state-of-the-art information technology to download or capture of the image of the register for printing be construed as illegal downloading? According to the Copyright (Amendment) Bill 2014 currently under discussion, these practices are exempted and would not be construed as illegal downloading or infringement. Last of all, the entire section 5H has not accounted for when the register would be updated. All the abovementioned points are concerned with section 5H, and now I am going to talk about clause 55 (section 41). Although the objective of the Insurance Companies (Amendment) Bill 2014 (the Bill) is to enhance the


supervision of the insurance sector, thereby protecting the interests of policy holders, the provisions therein should not neglect the basic rights and interests of insurance practitioners. The Bill should not only protect policy holders, but should also protect insurance practitioners. Although the Bill is largely based on the Securities and Futures Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, the disciplinary actions taken or sanctions imposed by the Authority on insurers are worth reviewing and members have provided a lot of input in this regard during the Committee stage. Members are well aware that the Authority is the regulator supervising the insurance industry. Just as I have said, if I did have a chance to speak during the Second Reading debate, I would indicate right at the outset that I support the establishment of an independent Authority to govern insurance practitioners and protect policy holders, so as to perfect the legislation for the sake of protecting people's interests. However, with regard to powers, the proposed section 41P(1)(c) provides that the Authority has the power to revoke the authorization of an authorized insurer, including its directors and controllers. Thus, we are concerned that the power of the Authority is so excessive that the authorization of a director or controller to carry on insurance business may be arbitrarily revoked without any actual misconduct. For example, it is possible that the Authority may exercise its power to revoke the authorization of an insurer to seek revenge and pursue a private feud with its directors or controllers on the pretext that the insurer is guilty of misconduct. We are gravely concerned because there is no way to ensure that the Authority would not abuse its excessive power to revoke the authorization of insurers. Will the Government consider establishing an independent judicial body to provide check and balance against the Authority's decisions? Worse still, this power may also encourage insurers in the insurance sector to compete with one another, and even manipulate such power or relation to eliminate opponents. In the face of fierce competition, insurance practitioners would act in the interests of their respective insurers, thereby giving rise to struggles and backstabbing. If the Authority maintains a better relation with Insurer A than Insurer B, will it forcibly revoke the authorization of a certain director or controller of


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Insurer B in order to enhance its bond with Insurer A? The legislation fails to provide an answer to this kind of question. How can the Authority guarantee that such kind of situation will not arise? We therefore hope that the Government can convince the general public, insurance sector and all insurance practitioners that the Authority will conduct investigations in an impartial and objective manner. The focus of this provision is to demonstrate the impartiality and objectiveness of the Authority; yet people now have the impression that the Authority may abuse power. Therefore, it is necessary for the authorities to address the concerns of the general public and the insurance sector. Mr CHAN Kin-por is now present and Members can put questions to him. How can the Authority ensure that its directors would not be affected by their personal emotions and feelings when handling matters related to insurers? How can the Authority convince the public that it is a department that safeguards the rights and interests of Hong Kong people, and will not tilt towards the rich people and consortium to the neglect of the grassroots? The Bill also provides that the Authority consists of a chairperson, a chief executive officer and not less than six directors, and at least two directors will be persons with knowledge of and expertise in the insurance industry. As proposed, the Authority is vested with the power to arbitrarily revoke the authorization of an authorized insurer to carry on insurance business so long as two of its directors possess expertise and experience in the insurance industry. As the sole regulator of the insurance industry, the Authority only consists of two members of the trade. Members have brought up this issue at the Bills Committee meetings, and jokingly described the Authority as the "Paradise of retired senior officials". This is indeed a matter of serious concern. It is even more worrying that the Authority is now provided with unchecked power to revoke the authorization of authorized insurer to carry on insurance business, and this issue is still controversial. As such, the composition of the Authority must be more transparent and professional rather than working behind closed doors. With regard to the size, even if the proportion remains unchanged, the authorities must consider increasing the number of directors, in particular representatives from the industry, so as to increase the representativeness. The Authority must have a certain proportion of directors from the industry to ensure that it will cater for the needs of different strata of society with diversified thinking when dealing with different matters.


CHAIRMAN (in Cantonese): Does any other Member wish to speak? MR WONG YUK-MAN (in Cantonese): I have not yet finished … CHAIRMAN (in Cantonese): Mr WONG, while your earlier speech is relevant to the provisions under discussion, as a member of the Bills Committee, would it be better for you to elaborate the abovementioned views at the previous Bills Committee meetings for discussion with the Administration? MR WONG YUK-MAN (in Cantonese): Chairman, I am not filibustering. I have joined several bills committees at the same time and the Bills Committee on Copyright (Amendment) Bill 2014, which is one of the most important bills committee, always holds additional meetings. As a result, the meetings of the Bills Committee on Insurance Companies (Amendment) Bill 2014 very often clashed with other meetings. As such, I could only express my views in a slapdash manner and could not elaborate on some of them. There is no way we can attend all the meetings at the same time, right? This is why during the deliberation of the Bills Committee on Copyright (Amendment) Bill 2014, I have often raised written questions requesting replies from the Government, do you get it? Chairman, I will try to be concise and you need not worry about that. CHAIRMAN (in Cantonese): I wish to remind Members that the purpose of setting up bills committees and conducting meetings to scrutinize the bills is to enable Members to raise and settle a series of questions similar to those that have just been raised. MR WONG YUK-MAN (in Cantonese): Chairman, I must point out that the questions just raised by me were often left unanswered by the Secretary. He has not responded to the questions raised by members in many cases. You will come to understand that many questions have remained unanswered as we move on. While it is true that I have not presented those issues in the form of written questions and asked the Secretary to provide written replies, they are issues that I have doubts. As to what have been said by other members, I cannot recall entirely and I would be grateful if the Chairman can remind me.


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MR LEUNG KWOK-HUNG (in Cantonese): Chairman, morning, I want to remind you that a quorum is not present. CHAIRMAN (in Cantonese): Will the Clerk please ring the bell to summon Members back to the Chamber. (After the summoning bell had been rung, a number of Members returned to the Chamber) CHAIRMAN (in Cantonese): Mr WONG Yuk-man, please continue to speak. MR WONG YUK-MAN (in Cantonese): Chairman, I will continue to discuss clause 55 in the second debate, which is concerned with proposed section 41. I have talked about the composition and powers of the Insurance Authority (the Authority) earlier, and will now discuss proposed section 41P(2)(e) on penalty. Regarding this part, just now the Secretary … CHAIRMAN (in Cantonese): Mr WONG, as no amendment has been proposed to clause 41, it was included under the first debate earlier and now stands part of the Bill after voting. MR WONG YUK-MAN (in Cantonese): I was referring to the proposed new section 41 under clause 55. Section 41P(2)(e) is on penalty and I want to discuss the relevant amendments. Earlier, Secretary Prof K C CHAN mentioned penalty, which is an issue of serious concern to members of the Bills Committee. The provision clearly specifies that "to order the authorized insurer to pay a pecuniary penalty not exceeding the amount which is the greater of ― (i) $10,000,000; or (ii) 3 times the amount of the profit gained or loss avoided by the insurer as a result of the misconduct, or of the conduct of the director or controller of the insurer which leads the Authority to form the opinion referred to in subsection (1)(c) in relation to that director or controller." We have already discussed this part at previous meetings, but the Government has been obstinate and insisted to retain the provision and object to our opposing views.


Regarding the imposition of pecuniary penalty on insurers and insurance intermediaries, the proposed heavy pecuniary penalty limit of the greater of $10 million or otherwise for the misconduct of regulated persons (including all insurance practitioners) is an exploitation of the insurance practitioners. Undeniably, the heavy penalty will certainly have deterrent effect, but the ambiguous provisions have aroused the concern of the industry. The provisions have not specified that the amount of penalties would vary with the gravity of the misconduct. Not only are the provisions too general, the explanation given by Secretary Prof K C CHAN earlier is also unacceptable to us. The Government should set out the gravity and proportionality of the amount of penalties and misconduct, but it has not done so. It is also unfair for the Government to apply the heavy penalty to all misconduct. Worse still, the fact that all people guilty of misconduct are subject to the same penalty may encourage the insurers to take risk and commit more serious offences. Instead of committing minor offences, they may risk committing more serious offences. Furthermore, the relevant provision has broadly defined that insurers include insurance companies (regardless of whether they are limited companies or not) and insurance intermediaries, that is, insurance brokers and agents, but it has not distinguish insurance companies and insurance intermediaries. Therefore, the penalty concerned is unfair. To insurance companies, the $10 million pecuniary penalty is acceptable given their sound financial capability; but to insurance intermediaries, the $10 million pecuniary penalty is an astronomical sum. The $10 million punishment is too heavy and is not affordable to Hong Kong people at large. To avoid the heavy penalty, people who have contravened the law may apply for bankruptcy after committing more serious misconduct. Furthermore, as stated in the provision, the pecuniary penalty may be three times the amount of the profit gained or loss avoided by the insurer concerned, which will likely cause the intermediaries to go bankrupt. If an intermediary goes bankrupt, there is a slim chance of collecting the pecuniary penalty in many cases. Strictly speaking, this provision will mitigate the deterrent effect, and from another angle, arouse the concern of members of the trade. The authorities have imposed a pecuniary penalty of the greater of $10 million on insurance intermediaries, brokers and agents across the board. If people who cannot afford to pay can go bankrupt, they would be ready to risk everything. Will the provision have any actual deterrent effect then?


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Of course, the Government seeks to combat all misconduct in the insurance industry to minimize complaints, but it has neglected the sufferings of insurance practitioners. The fact that they are frequently taken to task and subject to a pecuniary penalty of $10 million is indeed very terrifying. This amendment could be drafted in a more comprehensive way, but the Government has taken a firm stance and left no room for discussion. During the Committee stage, only the Member representing the insurance industry, Mr CHAN Kin-por, has spoken. I hope other Members will also express their views on this issue. I have to admit my negligence in not relaying my views, and those of the industry in particular, to "Kin-por" for raising them at the Bills Committee meetings. In retrospect, I also consider this inappropriate. And yet, I have read through all the papers relevant to the Bills Committee and the amendments proposed by the Government, and I have also asked my assistant to identify the main points that require response from the Government. Regrettably, I must explain to the Chairman again that the excessive number of meetings has virtually tired us out and prioritization is therefore inevitable. The views that I expressed today in relation to the amendments were not raised at the Bills Committee meetings. In fact, I should have put these questions in writing for written replies by the Government in order to save some time. I will try to voice my views in brief for the Government to respond, and I will not talk at length about frivolous issues. I am basically not filibustering, the Chairman can therefore relax. I am prepared to present my views in this meeting and listen to the views of other Members. Regrettably, however, no one else has spoken and this is why I have to speak time and again in such a hoarse voice. Although the penalty issue is a matter of grave concern, the Government has remained obstinate. According to section 43 of Cap. 615, the Commissioner of Customs and Excise may order the licensee concerned to pay a pecuniary penalty not exceeding $10 million. Since the Government has included this as an amendment, why not make reference to the relevant practice and specify the respective penalties for insurers and insurance intermediaries? Given the inadequacy of section 41P, the Government should take into account the gravity of the offence in the light of the actual situation of the insurance industry.


Furthermore, the Government should refer to the provision on disciplinary actions under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance to alleviate the concern of the industry and enhance the enforceability of the relevant requirements. Considering that the relevant provision is still debatable, the Government cannot rule out the possibility that insurance brokers or agents may be influenced or abetted by their insurers or immediate supervisors to break the law. Who should be responsible for paying the pecuniary penalty if a front-line insurance intermediary commits an offence? There is a need to sort this out. In case the Government makes further amendments, I advise that there should be clear delineation of penalties between insurers and insurance intermediaries. The provision contains some pretty ambiguous words, such as "is likely to". I would certainly talk about it if the Bills Committee did mention this point. Another example is "the interests of potential policy holders", which is also ambiguous. What is meant by "is likely to"? We should avoid using such terms in laws. As for "the interests of potential policy holders", what is the meaning of "potential" therein? Given the heavy pecuniary penalty involved, the use of such ambiguous words … Legal provisions should be clear and precise, why is it that laws in English have a higher level of clarity? That is the reason. What is meant by "the interests of potential policy holders"? Should we use "the potential interests of policy holders"? What does the term "is likely to" mean? How about the meaning of "prejudicial to the interests of policy holders"? Chairman, the drafting of the provisions lacks clarity. What is the degree of harm referred to in "prejudicial or is likely to be prejudicial to the interests of policy holders"? If a provision cannot be explained in clear and precise words, there is a chance that its interpretation may be argued in court in the future. Even for "the interests of potential policy holders", it can be clearly defined as, for example, the expected return over a certain period of time. This is because interests of insurance policies include both pecuniary interests and service interests. For example, the fee incurred by a policy holder being accommodated in a private ward during the injury period may be paid by the insurer, but as stated in some insurance policies, a policy holder who has suffered injury to a certain part of his body will not only be reimbursed the hospital expenses incurred, but may also receive a certain amount of compensation for other financial losses. As


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compensation varies depending on the insurance policies, it is necessary for us to provide a clear definition of "the interests of potential policy holders". This is the provision of section 41P(5)(d). Regarding the requirement for an authorized insurer whose authorization has been suspended to give notices in writing to its policy holders, since the number of clients involved is not just one or two, but may be hundreds, we need to know if those clients have received the notices on the suspension of the insurer's authorization. For example, can we notify the clients by double registered air mail? In case the notification of policy holders by double registered air mail also fails, is it necessary for the insurer concerned to declare that it has duly performed the duty to notify its policy holders? The Government needs to unequivocally prescribe these scenarios. What if a policy holder does not receive the double registered air mail? E-mail is not an option either under this circumstance as there is no way for the insurer to ascertain whether the policy holders have read the e-mail concerned. We are aware that many clients are not Hong Kong people but Mainlanders, and some even do not live in Hong Kong. So, can the Government provide a clearer definition of "the time specified in the notice" and prescribe the method of notification? We are very concerned that some authorized insurers have exhausted all possible means but still failed to ascertain if the policy holders concerned are notified of the suspension of their authorization. Does this necessitates the inclusion of a clearer provision to specify that the insurer concerned must notify its policy holders in certain ways the suspension of its authorization within the specified time? Only in so doing can the interests of policy holders be protected. I think the amendments have neither addressed public concerns nor clearly set out the required information for our understanding. Chairman, we are well aware of the extensive coverage, which has necessitated the Government to propose so many amendments. MR ALAN LEONG (in Cantonese): Chairman, the Civic Party supports the Insurance Companies (Amendment) Bill 2014 (the Bill) because it can provide better protection for policy holders, systematize the management of insurance intermediaries and establish a regulatory regime.


In this second debate, I want to discuss, in particular, proposed new section 89, which has been thoroughly discussed time and again by the Bills Committee. Chairman, you are certainly aware that there are two types of insurance intermediaries, namely insurance agents who sell insurance, and insurance brokers who buy insurance on behalf of their clients. In other words, one sells and the other buys. For insurance agents selling insurance, their boss are companies offering insurance for sale; but for insurance brokers who buy insurance on behalf of their clients, their boss are certainly their clients, that is, potential policy holders. Although the two of them are referred as intermediaries under the Bill, they have different bosses and thus the proposed new section 89 has aroused their serious concern. Chairman, the proposed new section 89 stipulates that "When carrying on a regulated activity, a licensed insurance intermediary must act honestly, fairly, in the best interests of the policy holder concerned or the potential policy holder concerned, and with integrity." This has however created a big problem. Insurance agents who sell insurance for insurance companies are concerned about the provision requiring them to act in the best interests of the policy holder concerned. Will they be caught by the law if they fail to take into consideration the best interests of the policy holder concerned, which means the buyers, when selling insurance for the insurance companies? I trust that the Chairman would share their concern because these two types of intermediaries, though working for different bosses, are subject to the same requirement that they should act "in the best interests of the policy holder concerned". As a matter of fact, a number of members of the Bills Committee have highlighted this point during the deliberation, suggesting that the Government should refer to the practices of other countries and places and unequivocally prescribe the conduct of insurance agents and brokers, as well as the required professional standard or the criteria under which they are bound to act. After a series of discussions and a tug-of-war between the Member representing the insurance industry, Mr CHAN Kin-por, and the Administration, the latter has proposed an amendment as mentioned by the Secretary earlier to add a new section 91A. Chairman, how does the new section 91A address the industry's concern? Section 91A(1) provides that "A failure to comply with a requirement specified in section 89, 90 or 91 does not by itself render any person liable to any judicial proceedings." Chairman, the focus does not fall on sections 90 and 91 as they have not aroused any concern. The reason is simple because these two


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types of intermediaries, insurance agents and brokers, will be dealt with separately. It is section 89 that has aroused the gravest concern, as I have explained to the Chairman. In my opinion, though the proposed new section 91A is still not perfect, improvements have been made and the section is acceptable to us for the time being. I nonetheless wish to highlight one point. Though The Administration's explanation that a breach of section 89 would not give rise to a new statutory cause of action would certainly address the concern of insurance agents and brokers, it is the insurance agents, not brokers, who are deeply worried. As insurance brokers will always act in the best interests of policy holders in all circumstances, insurance agents are thus deeply worried. At present, even insurance agents can approach policy holders direct to sell insurance to them. If you walk into an established bank, many staff members would approach you to promote products that constitute an insurance element. If you are a consumer and walk into a bank, the staff will ask you to buy insurance or products that constitute an insurance element; unless you are going to take out policy with a large sum insured, you will not seek advice of insurance brokers. Thus, there may be grey areas in actual operations. Are bank staff promoting products that constitute an insurance element insurance agents or brokers? If a bank staff provided advice to a client who walked into the bank and told him how the bank's insurance products are better than those of other banks, was that staff promoting in the capacity of an insurance agent or broker? Of course, after adding the proposed new section 91A(1), people who may be perceived to sell, in the capacity of agents, insurance not in the best interests of the buyers (that is, policy holders) will no longer feel worried. This is because as stated in section 91A(1), even if he fails to comply with section 89, no policy holder would institute judicial proceedings against him for not acting in the best interests of the policy holders as prescribed under section 89, and will therefore not create a new cause of action. Chairman, however, this does not mean that the problem has been completely resolved. As the Secretary has briefly mentioned just now, the Administration will draw up a code of conduct in response to the request of the Bills Committee later on. Of course, the relevant code will only be published after the establishment of the Insurance Authority (the Authority), but I hope the Secretary will ensure that, upon establishment, the Authority will issue certain codes to unequivocally prescribe the conduct requirements of those two distinct


categories of insurance intermediaries, namely insurance agents and brokers, who are accountable to different bosses. Chairman, with clearly written codes, these intermediaries would be able to act in different capacities with relief in compliance with the requirements and spirits of the law. I am not going to repeat why they feel so uncomfortable about section 89, but if the Secretary does have an opportunity to draw up the codes via the Authority, I hope he will take into consideration the different roles of those two categories of intermediaries and the definition of the so-called "best interests", with a view to differentiating their acts in different capacities. Only in so doing can the problem be completely resolved. Chairman, for the sake of completeness, I will also mention in passing that members have, during the deliberation of the Bills Committee, requested the Administration to consider clearly specifying that, in addition to the proposed new section 91A, if a policy holder wants to initiate litigation when he discovers any problem with his insurance policy in the future, the Court must refer to the different codes published for these two categories of insurance intermediaries. However, after consideration, the Administration has not included this into the Bill and this is why the amendments proposed by the Secretary in the second debate have not covered this part. Accordingly, I also want to explain here why the Administration has not adopted members' proposal for record purpose. I vaguely remember that the explanation given by the Administration was: Once the codes are drawn up with clear definitions of insurance agents and brokers, the Court would definitely refer to them even if it is not so specified in the legislation. I do not totally disagree with this, but if a policy holder really initiates litigation for his insurance policy, which he considers not good enough, who would be the parties to the proceedings? The Court would refer to the codes. In other words, if the Authority, upon establishment, has formulated two different sets of codes for insurance agents and brokers, the Court should refer to them. I also hope that the Secretary will bear in mind that, the codes to be published by the Authority should clearly specify that as insurance agents and insurance brokers are accountable to different bosses, they should not be assessed against the same set of code of conduct in order to determine whether they have acted in the best interests of policy holders. To enable the insurance practitioners (especially the insurance agents mentioned by me) to rest assured, apart from adding the proposed new section 91A, the codes should also be clearly


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written to assure the insurance agents that, with the publication of two different sets of codes of conduct, the Court will not blindly apply the code for brokers to the agents. Therefore, I wish to remind the Secretary again in the Committee stage that when the Authority draws up the codes of conduct and guideline in the future, it should give a clear delineation of those two categories of intermediaries. I so submit. CHAIRMAN (in Cantonese): Does any other Member wish to speak? MR WONG YUK-MAN (in Cantonese): I wish to talk about proposed new sections 64U and 64T in Division 3 under clause 71. The Bill is basically modelled on the Securities and Futures Ordinance (SFO) and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO). As a matter of fact, since the nature of the insurance industry is very similar to that of the real estate industry, reference can be made to the Estate Agents (Licensing) Regulation in respect of licensing conditions, such as the validity of licence, as well as revocation and suspension of a licence. The Government sets the validity period for insurance agency licence and individual insurance agent licence at three years. It also points out that there is no validity period specified under SFO for relevant licences. However, a three-year validity period is longer than that stipulated in other ordinances that reference has been drawn. Take the Estate Agents (Licensing) Regulation as an example. An estate agent's licence is valid for 12 to 24 months or even shorter. Compared to this Regulation, the three-year validity period allows the Insurance Authority (the Authority) to relax its regulation. Given the similar work nature and licence requirements of an insurance agent and an estate agent, the validity period of their licences should be the same. In renewing their licence upon expiry, the licencees' eligibility, examination results or proof of work experience have to be reassessed. If the Government intends to amend the legislation to regulate the insurance industry and protect the interests of policy holders, should it not reconsider amending the licence validity period, instead of maintaining it at three years? I opine that the authorities should make reference to the real estate licensing regulation and shorten the validity period.


Although there will be a transitional period after the enactment of the Bill to help insurance practitioners adapt to the new legislation, the proposal to shorten the licence validity period from the original three years to one or two years can allow the authorities to effectively ensure the qualities of insurance intermediaries and insurance brokers. This can enhance the protection of policy holders and at the same time give due recognition to the capability and experience of insurance practitioners. The amendment of legislation aims at regulating the insurance industry and protecting the interests of policy holders. However, there are problems with the arrangement concerning the suspension of an insurance practitioner's licence. It is specified that an insurance broker is permitted to carry on business operations after his licence is revoked or suspended, and the relevant agreements will not be avoided or affected. That is to say, after an insurance broker has his licence revoked or suspended, he can continue to follow up the policies he has dealt with previously. The question is, if an insurance broker has his licence revoked or suspended, it implies that his practice or credibility is questionable, leading to his cessation of appointment by a licensed insurance agency as its agent. Hence, the approach of allowing insurance broker to carry on business operations after his licence is revoked or suspended will arouse the concern of the public or consumers that their interests in connection with their insurance policies would be compromised. Furthermore, if an insurance broker is allowed to follow up the policies after his licence has been revoked or suspended, why should the authorities revoke or suspend his licence in the first place? This does not make sense. The Government claims that it has made reference to the legislative spirit of the SFO in formulating this approach and the intent is to protect the interests of policy holders. On the face of it, if an insurance broker can continue to follow up the policies after his licence is revoked or suspended as if his licence has not been revoked or suspended, the policy holder's interests are protected, that is, the insurance broker can still carry on business operations and hence the policy holder's interests would not be affected. However, the policies can in fact be handed over to another insurance broker or insurance intermediary for follow-up. As there are many insurance brokers in an insurance company, if an insurance broker resigns or joins another company, the policies previously handled by him will naturally be handed over to others for follow-up. This is surely the way to handle the case. Now that an insurance broker has his licence revoked or suspended, but he can still follow up the policies, people would suspect … Of


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course, many insurance companies may no longer allow that broker to follow up the policies and arrange others to take over the work, but there is still a loophole in the legislation. The AMLO stipulates that a licensee who does not surrender the licence within the time specified is liable on conviction to a fine at level 5. Although the authorities said they had made reference to the AMLO when drafting the Bill, why did they not stipulate in the Bill the penalty and fine for not surrendering the licence? This reflects the Government's lack of thorough consideration when drafting the Bill. I hope that the Government will make adjustments when it reviews these provisions in the future, or if the situation we are concerned about really emerges after the ordinance has been implemented for some time, that is, problems that the industry or policy holders worry about have arisen resulting from insurance brokers being able to follow-up policies despite their licences being revoked or suspended, the Government should propose amendments in the light of its original legislative intent. Besides, the proposed new section 64O(1)(k) stipulates that the register must contain "a record of every disciplinary action (except a private reprimand) taken by a specified authority against any licensed insurance intermediary or responsible officer in the last 5 years, and if a suspension is involved, the period of the suspension". The phrase "except a private reprimand" means misconduct that has been privately reprimanded. If an insurance practitioner has never committed any misconduct that requires open reprimand but has repeatedly committed misconduct that requires private reprimand, policy holders may never find out. Conduct that requires open reprimands is certainly obvious, but for conduct that is only privately reprimanded, policy holders may never find out. This provision stipulates that every disciplinary action taken against any licensed insurance intermediary or responsible officer must be contained in the register, (except a private reprimand). Owing to this exception, policy holders may never know whether the insurance brokers who follow up their policies have committed any "misconduct". To put it more seriously, this somewhat involves an element of concealing or deceiving the consumers. Even though the aim of the provision is mainly to ensure that the operation of insurers would not be effected by misconduct, given the importance of credibility in this industry, if an insurer or an intermediary, who has committed misconduct that only requires private reprimand, is allowed to carry on business operations during the period when his licence is suspended for investigation, it is


possible that he will continue to defraud policy holders, engage in vile practices and jeopardize policy holders' interests. Hence, the operation of an insurer should be suspended during investigation and the authorization given should also be suspended. Public reprimand is also necessary to protect policy holders' interests. This should be the monitoring work of the Authority which serves to dispel public concerns. Moreover, restrictions have been imposed on licensed technical representatives. In proposed new section 64L(1), it is stipulated that "a person who is a licensed technical representative (agent) of a licensed insurance agency must not also be a licensed technical representative (agent) of another licensed insurance agency". Literally, the phrase "must not also be" seems specific, yet the meaning is actually very confusing and cannot be well understood. Owing to irregularities in the insurance industry, the authorities have to step up regulation, and this one of the objectives to establish the Authority. The legislative intent of this provision is to prevent an insurer from playing a double role. If an insurance broker who only sells life insurance policies has a well-acquainted client who wishes to buy other insurance products, such as travel insurance and medical insurance, since that broker is not the agent for such products and they are not within his ambit, he can ask his good friend who is an agent for travel insurance to help the client take out the travel insurance, and the two of them can privately make a deal to split the commission ― this is where the crux of the problem lies. In other words, an insurance broker introduces a client to another agent for the relevant products and they privately split the commission. Can the Secretary tell us that such cases will never happen? We may have to ask Mr CHAN Kin-por concerning this problem. Just now, I speak from the perspective of a policy holder or a consumer. We all know the targets to be monitored under this legislation. Are we going to monitor people who take out insurance? Although we have to monitor insurance institutions and insurance agents, I think some provisions are too stringent, such as penalties. From another perspective, however, we must also protect policy holders' interests. Hence, a balance must be struck and priorities set in formulating the provisions. When formulating the provisions, one must take into account that restrictions have to be imposed on licensed technical representatives but some restrictions may also jeopardize policy holders' interests. There are such cases. If two agents privately make a deal on the distribution of


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commission, will they be considered as engaging in two agencies? Even though this is forbidden, they can actually do so. This point warrants the authorities' consideration. In addition, the duration allowed in proposed new section 64P(3) to notify the Authority of the change in particulars is too short. The provision stipulates that an insurance intermediary must notify the Authority in writing of any change of particulars within 14 days. The phrase "as soon as practicable" is used. On what basis is the 14 day duration set? An insurance intermediary must notify the Authority of his basic personal particulars, and also other particulars specified in the rules made under section 127. If he omits certain information in the process and is unable to notify the Authority within the duration allowed, will he be fined immediately or will he have a chance to provide a reasonable excuse? This has to be spelt out clearly in the legislation. Under the AMLO, a licensee has the duty to notify the Commissioner of Customs and Excise of changes in particulars, that is, the licensee must notify the Commissioner in writing of the change within one month beginning on the date on which the change takes place. The nature of the AMLO is similar to that of the Bill under discussion now and the Government has also made reference to the AMLO. Why is there a difference in the length of the durations? In the AMLO, notification can be made within one month; but in the Bill, notification must be made within 14 days. How is the comparison made? Why is the duration set at 14 days in one legislation but one month in another? What is the difference between the two? There is no explanation for that. The Bill also stipulates that "as soon as practicable … amend any relevant particulars in the register kept under section 64O". Does "as soon as possible" mean the 14 days under discussion now? The time limit should be clearly spelt out. CHAIRMAN (in Cantonese): Does any other Member wish to speak? MR WONG YUK-MAN (in Cantonese): I have mentioned the literal interpretation in my speech earlier. As I have not submitted documents to the authorities, I will not discuss this issue here. Concerning this part, I wish to add a few points. Please allow me to speak for a few minutes more and then I will call it quits.


As regards the difference between 14 days and one month, proposed new section 64Q provides for the duty to notify the Insurance Authority (the Authority) of an appointment. It clearly stipulates that "At least one month … to carry on regulated activities in one or more lines of business …, the insurer must notify the Authority in writing of the intended appointment". This means the "intended appointment" applies to licensed broker, agent, individual insurance agent or insurance agency, but the term "intended" is vague and we do not know what it means or what criteria are involved. Will the Government give us some examples of rejected appointments? There must be specific definitions so that insurance intermediaries will understand the provisions clearly. At the same time, the Bill should also introduce a suitable penalty mechanism, setting the amount of fines according to the length of time delayed in making an intended appointment so as to remind the relevant persons the importance of their duty to make notification of the appointments. In this way, the Amendment Bill can be more comprehensive. There are also some controversies about proposed new section 64Q(7), which stipulates "A person who contravenes subsection (1), (2), (3) or (4) commits an offence and is liable to a fine at level 5". Under the Criminal Procedure Ordinance, a fine at level 5 only amounts to $50,000. A fine is important but to a listed insurance company or a well-capitalized financial institution, a fine of merely $50,000 is negligible. I really find such a penalty absurd. Just now, we have mentioned a fine of $10 million, but insurers are only fined $50,000 for violating the provisions in this regard. To them, such a fine has practically no deterrent effect. An insurance intermediary may earn well over $50,000 a month in commissions from the insurance policies. How will he take this provision seriously? I suggest that the authorities should consider increasing the amount of fine, or making it more difficult for the offenders to have his licence renewed, or even suspending the qualification of the offenders as the director of a company, so as to increase the deterrent effect of the legislation. To regulate the insurance industry, licensing is one of the most important aspects. As regards the validity period, revocation and suspension of the licence issued, the Government should make reference to the licensing requirements provided in other laws, such as the Estate Agents (Licensing) Regulation. The Government has mainly considered the Securities and Futures Ordinance (SFO)


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and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO), but I think the Estate Agents (Licensing) Regulation can provide a better comparison and reference to the Bill under discussion now. We can compare the relevant provisions of the two. For instance, the provision relating to the validity period of licence in the Estate Agents (Licensing) Regulation stipulates, "Subject to subsection (2), a licence shall be granted or renewed for a period of either 12 months or 24 months, as the applicant chooses, from the date on which it is granted or renewed (as the case may be). The Authority may in its discretion grant or renew a licence for a lesser period than that mentioned in subsection (1)." Under the Insurance Companies (Amendment) Bill 2014, the validity period of a licence is three years. We can make a comparison of that. Section 34 of the AMLO (Cap. 615) stipulates, "If a person whose licence is revoked does not surrender the licence to the Commissioner within the time specified in the notice given to the person under subsection (4), the person commits an offence and is liable on conviction to a fine at level 5." These provisions can be used for reference. There are many such provisions. Owing to the time constraint, I will not go into details. I hope that the authorities can consider other ordinances. The authorities said that they had made reference to the SFO and the AMLO when drafting the Bill. But they could actually also make reference to the provisions in the Regulation about the penalties or validity period of the licence. I hope that if any of the situations of our concern emerge when this ordinance is implemented in future, the Government will review the ordinance and make amendments accordingly. Thank you, Chairman. CHAIRMAN (in Cantonese): Does any other Member wish to speak? (No Member indicated a wish to speak) CHAIRMAN (in Cantonese): If not, I now call upon the Secretary to speak again.


SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY (in Cantonese): Chairman, I wish to reiterate that the proposed amendments are the fruit of our repeated discussions with the Bills Committee and the industry, and the Bills Committee has no objection to the amendments. I am grateful to the many points put forward by Mr WONG Yuk-man in his many speeches. Mr WONG has raised many points at the meetings of the Bills Committee concerning the drafting of the provisions. Having considered Mr WONG's views and the provisions in other similar ordinances, we have taken on board many points proposed by Mr WONG. We will review the drafting of the provisions from time to time in the hope of improving them. Mr Alan LEONG asked if we will take into account the different roles of insurance agents and insurance brokers in formulating the "best interests requirement" of conduct. The Bills Committee has thoroughly discussed this subject and has no objection to the proposal of the Bill. I must stress that the introduction of the "best interests requirement" of conduct will not affect the individual roles of these two kinds of insurance intermediaries. The Bill has already stipulated that an insurance agent acts on behalf of his appointing authorized insurance company whereas an insurance broker acts on behalf of his clients. The Insurance Authority (the Authority) will draw up a code of conduct to further elaborate on what constitutes the "best interests requirement" to facilitate the industry's compliance. In drawing up the code of conduct, the Authority will take into full consideration the different roles of insurance agents and insurance brokers. The code of conduct will be admissible in evidence in any proceedings under the relevant ordinance before a court. Proposed new section 93(7) stipulates that "if a provision in the code appears to the Court to be relevant to a question arising in the proceedings, the Court must, in determining the question, take into account any compliance or non-compliance of the provision". I so submit. (THE CHAIRMAN'S DEPUTY, MR ANDREW LEUNG, took the Chair)


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DEPUTY CHAIRMAN (in Cantonese): I now put the question to you and that is: That the amendments moved by Secretary for Financial Services and the Treasury be passed. Will those in favour please raise their hands? (Members raised their hands) DEPUTY CHAIRMAN (in Cantonese): Those against please raise their hands. (No hands raised) DEPUTY CHAIRMAN (in Cantonese): I think the question is agreed by a majority of the Members present. I declare the amendments passed. CLERK (in Cantonese): Clauses 5, 11, 15, 23 to 26, 29 to 32, 34, 51, 52, 55, 62, 64, 66, 71, 73, 74, 78, 83, 84, 86, 87, 89, 94, the heading of Division 1 of Part 3, clauses 104, 123, 125, 126, 127 and 141 as amended. DEPUTY CHAIRMAN (in Cantonese): I now put the question to you and that is: That clauses 5, 11, 15, 23 to 26, 29 to 32, 34, 51, 52, 55, 62, 64, 66, 71, 73, 74, 78, 83, 84, 86, 87, 89, 94, the heading of Division 1 of Part 3, clauses 104, 123, 125, 126, 127 and 141 as amended stand part of the Bill. Will those in favour please raise their hands? (Members raised their hands) DEPUTY CHAIRMAN (in Cantonese): Those against please raise their hands. (No hands raised) DEPUTY CHAIRMAN (in Cantonese): I think the question is agreed by a majority of the Members present. I declare the motion passed.


CLERK (in Cantonese): New clause 18A Section 9 amended (meaning of controller (控權人) in section 8(2))

New clause 52A Section 38D amended (duration of direction given under section 35(2))

New clause 52B Section 38E amended (Advisors and Managers)

New clause 83A Section 78A added

New division heading before new clause 166

Division 33 ― Amendments to Limited Liability Partnerships (Top-up Insurance) Rules (L.N. 103 of 2015)

New clause 166 Rule 3 amended (from whom top-up insurance should be obtained ― requirements under section 7AD(2)(b) and (4)(b) of Ordinance).

SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY (in Cantonese): Deputy Chairman, I move that the new clauses and the new division heading, as set out in the paper circularized to Members, read out just now be read the Second time. Technical amendments concerning "controller" Pursuant to the existing Insurance Companies Ordinance, an insurance company cannot appoint a person as its "controller" unless the Insurance Authority has indicated no objection. The Bill stipulates that the appointment of the "controller" of an insurance company must be approved by the Insurance


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Authority (the Authority). The new section 18A is a technical amendment, aiming to rationalize the application of the term "controller" in various provisions of the Ordinance. Technical amendments concerning appeals The new sections 52A and 52B are technical amendments. Under the new regime, appeals will be handled by the Insurance Appeals Tribunal instead of the Financial Secretary. The proposed new clauses 52A and 52B amend the provisions referring to the handling of appeals by the Financial Secretary which are no longer applicable. The power of the Authority to grant temporary exemptions The new section 83A allows the Authority to exempt temporarily a person from the provisions of Part X in relation to the licensing of insurance intermediaries to avoid technical breaches of the licensing requirement. Consequential amendments The new section 166 is a consequential amendment with an aim to amend the short title, references to the Authority, and so on in the recently gazetted Limited Liability Partnerships (Top-up Insurance) Rules. The Bills Committee has no objection to the addition of the new sections. I call upon Members to support the passing of the new provisions. Deputy Chairman, I so submit. DEPUTY CHAIRMAN (in Cantonese): I now propose the question to you and that is: That the new clauses 18A, 52A, 52B, 83A and 166, and the new division heading before new clause 166 be read the Second time. DEPUTY CHAIRMAN (in Cantonese): Does any Member wish to speak? (No Member indicated a wish to speak)


DEPUTY CHAIRMAN (in Cantonese): I now put the question to you and that is: That the new clauses 18A, 52A, 52B, 83A and 166, and the new division heading before new clause 166 be read the Second time. Will those in favour please raise their hands? (Members raised their hands) DEPUTY CHAIRMAN (in Cantonese): Those against please raise their hands. (No hands raised) DEPUTY CHAIRMAN (in Cantonese): I think the question is agreed by a majority of the Members present. I declare the motion passed. CLERK (in Cantonese): New clauses 18A, 52A, 52B, 83A and 166, and the new division heading before new clause 166. SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY (in Cantonese): Deputy Chairman, I move that the new clauses and the new division heading read out just now be added to the Bill. Proposed additions New clause 18A (see Annex II) New clause 52A (see Annex II) New clause 52B (see Annex II) New clause 83A (see Annex II) New division heading before new clause 166 (see Annex II) New clause 166 (see Annex II)


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DEPUTY CHAIRMAN (in Cantonese): I now propose the question to you and that is: That the new clauses 18A, 52A, 52B, 83A and 166, and the new division heading before new clause 166 be added to the Bill. DEPUTY CHAIRMAN (in Cantonese): I now put the question to you as stated. Will those in favour please raise their hands? (Members raised their hands) DEPUTY CHAIRMAN (in Cantonese): Those against please raise their hands. (No hands raised) DEPUTY CHAIRMAN (in Cantonese): I think the question is agreed by a majority of the Members present. I declare the motion passed. CLERK (in Cantonese): Schedules 1 and 2. SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY (in Cantonese): Deputy Chairman, I move that Schedules 1 and 2, as set out in the paper circularized to Members, be amended. The amendments are concerned with textual amendments. Proposed amendments Schedule 1 (see Annex II) Schedule 2 (see Annex II) DEPUTY CHAIRMAN (in Cantonese): Does any Member wish to speak? (No Member indicated a wish to speak)


DEPUTY CHAIRMAN (in Cantonese): I now put the question to you and that is: That the amendments moved by the Secretary for Financial Services and the Treasury be passed. Will those in favour please raise their hands? (Members raised their hands) DEPUTY CHAIRMAN (in Cantonese): Those against please raise their hands. (No hands raised) DEPUTY CHAIRMAN (in Cantonese): I think the question is agreed by a majority of the Members present. I declare the amendments passed. CLERK (in Cantonese): Schedules 1 and 2 as amended. DEPUTY CHAIRMAN (in Cantonese): I now put the question to you and that is: That Schedules 1 and 2 as amended stand part of the Bill. Will those in favour please raise their hands? (Members raised their hands) DEPUTY CHAIRMAN (in Cantonese): Those against please raise their hands. (No hands raised) DEPUTY CHAIRMAN (in Cantonese): I think the question is agreed by a majority of the Members present. I declare the motion passed. DEPUTY CHAIRMAN (in Cantonese): Council will now resume. Council then resumed.


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Third Reading of Bills DEPUTY PRESIDENT (in Cantonese): Bill: Third Reading. INSURANCE COMPANIES (AMENDMENT) BILL 2014 SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY (in Cantonese): Deputy President, the Insurance Companies (Amendment) Bill 2014 has passed through Committee with amendments. I move that this Bill be read the Third time and do pass. DEPUTY PRESIDENT (in Cantonese): I now propose the question to you and that is: That the Insurance Companies (Amendment) Bill 2014 be read the Third time and do pass. Does any Member wish to speak? MR WONG YUK-MAN (in Cantonese): Deputy President, I support the Government's proposal to establish the independent Insurance Authority (the Authority) and a statutory licensing regime for insurance intermediaries to improve the present so-called self-regulatory system, and enhance the protection of the interests of policy holders. The amended and newly added provisions of the Bill are mainly concerned with the functions, governance and funding mechanism of the Authority, licensing of insurance intermediaries and the regulatory requirements, as well as the regulatory arrangements of financial institutions. The provisions of the Bill should be well written, in particular, the wording should be concise, precise and readily understood by the general public. If the provisions are highly ambiguous, people will have difficulty in understanding the policy intent behind the provisions. Many members of the Bills Committee put forward views during the scrutiny of the Bill and some of their views have been taken on board


by the Government and incorporated into its proposed amendments. As I had not spoken at the Second Reading, I wish to draw the Secretary's attention to some of the points which in my opinion are rather important. I have brought up many points concerning the Committee stage amendments and I will try not to repeat as I can only speak for 15 minutes. As regards the whole Bill, our biggest concern is who will foot the bill. The operating costs and the mode of levying of the Authority are detailed in the proposed new sections 132 (Orders and regulations for levies) and 133 (Reduction of levies) and no amendment is proposed to the proposed new section 132. Before and after the amendments are made, the "user pays" principle applies. The relevant provision stipulates that the policy holder is to pay to the Authorities the levy specified in the relevant contract of insurance. Regarding this part … DEPUTY PRESIDENT (in Cantonese): I wish to remind Members that at this stage, they should concentrate on stating the reasons for their support of or opposition to the Third Reading of the Bill, rather than discussing individual provisions once again. MR WONG YUK-MAN (in Cantonese): Get it. I am stating my stance on the basis of the relevant provisions as that is very important too. I can also make general and vague comments without making reference to the provisions. You should not stop me once I talk about the provisions. You have not heard me speak earlier and do not know where the importance lies. Am I right? Big insurance companies can tap into the resources of their tremendous networks for lobbying, but smaller groups, consumers or policy holders do not have such resources. The voices of these groups will not be taken seriously because they have little collective bargaining power and thus charges are levied on them. Of course, at the Third Reading, we can talk about … I have already voiced my support for the Bill but I still wish to speak for two reasons. First, as I did not speak at the Second Reading, I wish to take this chance to raise the views that I wanted to raise at the Second Reading. But since the Deputy President does not allow me to do so, I will stop.


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Second, I wish to present my views on the entire Bill and suggest that the authorities should review in future some areas that can further improved. Though the Secretary proclaims that most of the amendments proposed are based on the views of members of the Bills Committee, and the Government has accepted their good advice, he has asked us not to propose amendments on our own. In every Bills Committee, members who have voiced most views are all faced with one problem, which is, the Government would ask them to hand in their amendments, and if the Government finds their amendments appropriate, it will propose them on their behalf. This is also the purpose of Bills Committees. We have to analyse the bills carefully and consider word by word. In the end, if the Government considers the amendment appropriate, it will propose them. Sometimes, however, the Government refuses to accept my amendments and hence I have to propose them on my own. Although my amendments will definitely be voted down under the separate voting system, I still have to propose them. Since the Government disallows me to put forward my amendments, shouldn't I tell it the areas where remedies are needed so that when it reviews the Bill in future, it will examine if people's worries can be dispelled? As the Government has kept certain provisions unchanged and has not addressed the problems put up by members, should it resolve those problems in the future? Deputy President, this is the spirit of legislation. Do not take me as a fool, Buddy. Although I have been a Member of this Council for seven years only and I am not so experienced as some other Members, I have spent much time studying this subject as it is a very serious matter. People must understand how important the insurance industry is to Hong Kong and the economy, how many people are employed in this industry, and how policy holders' interests are affected. When the Government planned to replace the Office of the Commissioner of Insurance by the independent Insurance Authority (the Authority), it goes without saying that we support it fully. But what is the Government's original intent when it formulated the relevant provisions and what objectives does it wish to achieve by enacting the legislation? All these were very important. We must, by means of proposing amendments to the provisions, discuss the Government's amendments at the resumption of the Second Reading debate and also at the Committee stage. Even at the Third Reading, we should still express our concern over the many problems that may arise in the implementation of the ordinance, in the hope that the Government will fully consider the views expressed by the industry, or the views or worries of the


insured and policy holders. Should the authorities respond to the arguments raised at meetings of the Bills Committee and give them more thoughts? This is the purpose of my speech now. Regarding the question raised just now, big insurance companies can make use of the extensive human resources network to lobby while the voices of individual consumers or policy holders are ignored. As they do not have bargaining power, charges are levied on them. Why should I bring up this point? That is because we are all gravely concerned about the issue of levies and all those who have no bargaining power also consider it a problem. The question is not whether the levies will lower the incentive of the public to take our insurance as the amount may be considered as negligible in the eyes of the authorities, but that the operating costs incurred by the Authority in regulating the insurance industry should not be totally transferred to policy holders. This is one of my concerns. Another problem is that the Authority's major function is to regulate the insurance companies and provide a licensing regime for insurance intermediaries. According to the papers submitted by the Government to the Bills Committee, the Government has added to it new functions, which include, first, "formulate effective regulatory strategies and facilitate the sustainable market development of the insurance industry, and promote the competitiveness of the insurance industry in the global insurance market"; second, "conduct studies into matters affecting the insurance industry", and third, "assist the Financial Secretary in maintaining the financial stability of Hong Kong by taking appropriate steps in relation to the insurance industry". It is evident from these points that the purpose of the Authority is not only to protect policy holders but also to promote market development of the entire insurance industry as well as conduct studies. That will have a positive impact on both the industry and Hong Kong's economic development. A better regulation of the insurance industry will enhance the image of the industry and increase people's confidence in it. Therefore, the establishment of the Authority is a win-win situation for both the public and the industry. It is not that when the public are protected, the industry will lose out. In the past, before the independent Authority was established, or before the insurance industry was well established in Hong Kong, insurance brokers and insurance agents were not licensed. They got their business purely through their relatives and friends. At that time, people would immediately run away as soon as they heard an insurance agent coming. It is


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different today. Insurance brokers and insurance agents play an important role in promoting Hong Kong's economic development. On account of this, we of course support establishing an independent Authority and enacting relevant laws at the same time to raise the standard of the industry, thereby promoting the economic development in Hong Kong, and this is a goal that the Government also wishes to achieve. As regards the fundamental principle, the establishment of the Authority is a win-win situation for both the public and the industry, not just for the protection of either the industry or the public. Take the regulation of fire escape in the kitchen of a restaurant as an example. If the restaurant meets the standard, can it attract more customers and at the same time protect the safety of the owner and workers of the restaurant? If so, how can the authorities transfer all the operating costs of the regulatory departments, like the Fire Services Department, the Environmental Protection Department or the Food and Environmental Hygiene Department, to the consumers? That is not possible. In the case of the insurance industry, if an increasing number of insurance intermediaries commit malpractice or misconduct which leads to the increase in the Authority's operating costs, should such additional costs be transferred to policy holders? Policy holders are the end users. Why should they foot the bill to promote the development of the insurance industry and conduct studies? The intent of the legislative amendments is good and such amendments are also necessary, but why should the charges levied on policy holders? This question about "who foots the bill" is also our biggest concern regarding the Bill. If the public are singled out to bear the financial burden, it will not only increase the costs of taking out insurance but also weaken the incentive for the industry to prudently manage the companies and ensure the conduct of the intermediaries. Of course if insurance companies are required to bear part of the Authority's administrative costs, they may very likely shift the costs to policy holders; by the same login, the Government can also transfer part of the Authority's administrative costs that it bears to members of the public by raising tax. But is this the right logic? As such, I think we should study the issue concerning "who foots the bill" more in depth in order to protect the people's interests. Moreover, we have also mentioned the Authority's composition at the Committee stage and I will not repeat. I wish to cite some examples to illustrate the issue about the removal of members of the Authority. We have also


discussed the relevant provisions while scrutinizing the Bill at meetings of the Bills Committee. Our greatest concern is that if the Chief Executive can depose or appoint members of the Authority according to his personal preference and the Legislative Council has no power to intervene, serious problems will arise when the Authority deliberates on some serious case. For instance, the incumbent Chief Executive is nepotistic and dismisses whoever he dislikes at will, as a result, many members of statutory bodies and Councils of universities have been removed by him and replaced by his followers. I am worried that the same will happen to the Authority. Therefore, we must discuss the Chief Executive's power to appoint all members of the Authority. Of course, in the past the appointment made by the Governor of Hong Kong was just a matter of formality as he acted on the advice of his aides or the relevant Policy Bureau. However, we have absolutely no confidence in "689". We all witnessed how he vengefully answered back and ridiculed Members at yesterday's Chief Executive's Question and Answer Session. That is how a person would react when facing his doomsday but there are two more years before his term is over. He intervenes in everything and this makes me scare. If he can depose anyone at will but the Legislative Council has no power to intervene, or he deliberately delays the appointment of someone and then asks some other people to leak information while the directors or members of certain council or committee are all appointed by the Chief Executive but the Chief Executive is not neutral, the appointment system will be ruined. The Chief Executive has caused the whole community to lose mutual trust. The same also happens to the appointment system. As the Authority is a non-government statutory institution, and its members who are responsible for monitoring, are appointed by the Chief Executive, will we not be frightened? Deputy President, I support the Third Reading of the Bill. DEPUTY PRESIDENT (in Cantonese): Does any other Member wish to speak? MR SIN CHUNG-KAI (in Cantonese): Deputy President, I have spoken earlier that we support all amendments proposed by the Government and hence we will support the passage of the Bill at the Third Reading.


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I wish to bring up a few points. We finally see the establishment of the independent Insurance Authority (the Authority) after over a decade. What the Government needs to do next is to establish the Authority after the transitional period. I look forward to seeing a good start of the Authority and I hope the entire set of regulatory standards to be imposed later will be on a par with international standards. Only in this way can our standards be lifted. However, I also wish to take this chance to talk about the difficulties faced by insurance intermediaries, even though I could be berated, I must still do so. After the establishment of the Authority, insurance intermediaries will unavoidably face stricter regulation and more inspections. Hence, they have to be more proactive to keep abreast of the times. However, while their future may look dim, they have to face many more difficulties to come, as their role may likely be taken over by future technological advancement. Or perhaps I should be more direct ― sitting on my right is Mr Charles Peter MOK who is responsible for promoting the development of technology. In future, it is possible that fewer and fewer people will rely on insurance intermediaries to take out insurance. For the existing 80 000-odd insurance intermediaries, their future may be filled with certain difficulties. I hope that the establishment of the Authority will not bring an end to their career but will be a measure that keeps everyone abreast of the times. The Authority must include two company directors who have the knowledge of the operation of the insurance industry. Regarding this proposal, the Bills Committee has had an in-depth discussion. We think a balance has been struck. But even so, I hope the Secretary or the Financial Secretary will ensure that the Authority will not, upon its establishment, become a "club of LEUNG's fans". We hope the Authority will be a regulatory institution that takes its work seriously and is up to par with international standards. We have talked about "the best interests requirement" many times and the latest amendment proposed by the Government can, in our opinion, strike a balance. Although it cannot completely dispel the industry's concerns, it preserves this spirit. This is certainly the result of the industry's efforts. People in the industry have consulted many legal experts to convince the Government to make the relevant arrangements. I hope that the Government will conduct a review after the Authority has been in operation for a period of time.


As regards the controller, I think no compromise should be made. Much work has to be done during the transitional period, in particular the insurance intermediaries, as they have to adapt to the transitional arrangements and prepare themselves to abide by the licensing requirements. I am particularly concerned about one point. In fact I have mentioned at meetings of the Bills Committee, and that is, the Authority's future financial arrangements. I learnt that a financial report was prepared by the Government some years ago, but the report was rather conservative. I hope the Government will review the financial situation again and if necessary, offer loans to the Authority, which I expect will run at a loss in the first few years. But after the Authority has operated for a longer period, the charges it levied will be able to cover the regulation costs. A case in point is the Securities and Futures Commission (SFC) which has a surplus amounting to four or five times of its annual operation expenditure. Hence, the SFC should lower its charges. Concerning regulatory expenses, objectively speaking, the Government should at least subsidize the Authority's regulatory costs at the initial stage. I agree that the Government should do so. However, in the long run, the regulatory cost should be financed by levies, rather than taxpayers' money. In the long run, I think the "user pays" principle should apply and hence it is reasonable to charge a levy. In the short run, however, I hope the Secretary will generously provide more money to meet the initial expenses. I hope the Authority will be established expeditiously after the Third Reading of the Bill today and the newly established Authority will start to work immediately. As regards the investment-linked assurance schemes (ILAS) products, I think a more specific division of work or mutual authorization between the Authority and the SFC should be drawn up. After the commencement of the relevant ordinance, I believe it still cannot deal with the ILAS products. The SFC issued a notice in 2009 but no revision has been made so far. Regarding the regulation of ILAS products, I think the Secretary should co-ordinate the relevant regulatory institutions and handle the complaints concerned. For example, one institution is responsible for vetting and approving the products, which another will draw up the "standards for sales practice", and so on. I have high expectations in these areas and I hope the Secretary will take the work in these areas forward after the Bill is passed. With these remarks, I support the Third Reading of the Bill.


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MR LEUNG KWOK-HUNG (in Cantonese): Deputy President, it is a global trend that anything can be turned into assets or securities for speculation and the insurance industry is also going through such a historic stage. In the past, the insurance industry was to serve honest businessmen. Worried that they would run into any misfortunes, they used part of their assets to take out insurance; in this way, they could honestly carry out their businesses and no problems would arise, just like people investing in futures. Let me give an example. Suppose I am engaged in garment production and have received an order. Fearing that the price of cotton will go up, I thus buy cotton futures to ensure, in an honest way, that I will have sufficient cotton for production and will not have to produce garments at a loss. In the beginning, these tools under the capitalist system were derived for the purpose of promoting production. But now, that is no longer the case. (THE PRESIDENT resumed the Chair) President, you have come back to chair the meeting in time. You had also experienced how this Council was deceived by the securities law. The situation today is certainly better than before. Therefore, LEUNG Chun-ying's existence serves no purpose. When he was the Convenor of the Executive Council, the honest looking TUNG Chee-hwa came to the Council and told us that with the bursting of the property bubble, banks had no business, so he suggested us to adopt the practice of other countries and enact a securities law to allow banks to engage in the trading of derivative products. Buddy, LEUNG had been involved in all things that happened in Hong Kong in the past, but he has the guts to say that other people's problems had nothing to do with the political reality in the HKSAR in the past 18 years. Am I not right? President, let me cite an example. Has the Government summed up its experience? Yes, I tell you, it has, because it used to submit a resolution in a slapdash manner. Frankly, I wonder if it was LEUNG Chun-ying who told TUNG Chee-hwa to take such actions because TUNG was rather stupid. LEUNG said, "You do not have to do so. Just introduce a resolution into the Legislative Council and ask it to rubber-stamp it; and then we can apply for funding or enactment of legislation later on." Owing to the securities law, many people suffered heavy losses during the financial tsunami in 2008 as a breakwater


had not been built. The authorities formulated the securities law first and then submitted it to the Legislative Council a year later for scrutiny by the foolish Members who were not allowed to make amendments. Improvements have now been made and the authorities finally submit a formal bill. I have heard many Members talk about their views on levies. Concerning the issue of levies, the first thing we must consider is who is duty-bound to protect the consumers and set them at ease or who is duty-bound to safeguard the consumers' interests when they use the products? I think the responsibility should not lie with the consumers, but those who create or sell the products. Hence they should be the ones to pay levies. Generally speaking, an industry has to bear the costs of competition, that is, for the sake of providing better protection to the consumers' interest, improvements have to be made, and if the industry cannot afford the additional costs incurred, it will go out of business. Isn't that a general rule of market economy, Secretary Prof K C CHAN? It should be so. Hence, the costs should be borne by the industry, not by the consumers. However, the problem is that the insurance industry in Hong Kong has been monopolized and no one can die. Honestly, this is exactly the problem faced by the insurance industry in Hong Kong today. President, I talked about "not attending to one's proper business" at the outset. Originally, the purpose of the insurance industry was that in a capitalist society, honest businessmen could entrust an organization to disperse the risks foreseen. Say, if 100 persons take out insurance and one of them suffers any losses, then the 100 persons will provide compensation to that person, and the insurance company will charge a fee for its service. However, the insurance industry in Hong Kong is doing more than that. It sells financial products. I have said many times that banks also sell insurance-related financial products. For those who are greedy, they can speculate on index futures. Why would they buy or speculate on insurance products that are linked to index futures? But the insurance policies simply will not reflect this problem. Let me tell K C CHAN seriously: if this situation continues, the great disaster in 2008 will very likely happen again. Fortunately, there are still some regulations. You can invent some derivative products and package them as insurance products to be sold to the public. But when we investigated the


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Lehman Incident, he made it very clear that after a financial product was sold, he would not do anything afterwards. Of course, this case is different from consumers taking out insurance as a relationship is still involved in the latter for the time being. For the Insurance Companies (Amendment) Bill 2014, the crux is to rigorously eliminate all products that would jeopardize consumers' interests, that is, the first declaration is … I tell you, K C CHAN, you may print the following words on a plague and ask insurance practitioners to read them out, "My name is CHAN Tai-man. I am now telling you, the product that I am selling to you carries extremely high risks. If you buy this product, you may get better returns but it is actually a financial product. If you truly wish to take out life insurance, fire insurance or marine insurances, and so on, you may consider whether to buy this product or not. If you decide to buy it, I have to tell you that it is not purely an insurance product in the traditional sense. It may increase in value but great risks are associated with the increased value. Please think very carefully." It is just that simple. President, please play the recording of this declaration statement. It will just take five minutes. If someone wants to gamble, why relies on others to gamble for him? Why make several detours to place the bet for them? If one truly wishes to gamble, it is not hard for him to do so. In the Lehman Incident, the authorities wanted to regulate banks. While Bank A was regulated, Bank B might enter the scene through the selling of other products, which were insurance products. Through this tactic, the derivative products that once caused people to suffer great losses re-emerged. Is it so hard to impose regulation? As the saying goes, "a swindler teaches his son ― not to jump at any easy baits", if one wishes to take out insurance, he should take out genuine insurance products. All insurance products that claim their value can increase are scams. If the authorities can publicize this message, it is enough, right? Therefore, when the authorities regulate the insurance industry, they have never addressed this issue. Frankly, I am not the one who found out this truth. The market is dominated by the American International Group, Inc. the sponsor of Manchester United. The company is not in the United States, but why does it have problems? Greed is the answer. Why do the authorities dare not impose regulation? Let me tell you. That is because Mainland insurance companies are entering the Hong Kong market. President, the Mainland uses force to rescue the stock market and only


permits buying but not selling. K C CHAN, let me ask you, if Ping An Property & Casualty Insurance Company of China has the chance to do business in Hong Kong, what would happen? Will you use our money to rescue the market? How should we regulate these companies? After listening to Members speaking in the Chamber, I cannot help but laugh. This Council is full of people with LEUNG Chun-ying's mindset, that is, according to this and that, problems do not exist. Is this the way you govern Hong Kong? That is, according to the history of the insurance industry and the past experience of the Office of the Commissioner of Insurance, there are no such problems. If that is the case, he does not need to answer us, right? As a matter of fact, the global economy is faced with crises resulting from the expansion of financial products, which is well manifested by the fact that the insurance industry is not attending to its proper business. President, we once criticized how the DBS Bank handled the Lehman bonds. When people deposited their money in the DBS Bank, the bank sold them products named bonds and told them they would surely gain a lot of money. We had already berated the banks for adopting such practices. If a person wishes to take out insurance, and an insurance practitioner tells him that a product will surely bring in more money in future, the person would certainly buy the product but has the insurance practitioner told him the risks involved? My view is very simple. To genuinely protect policy holders in general, we can borrow my mother's tactic, that is, to scold me as soon as I got out of bed and when I returned home, and eventually I became astute. For instance, she said, "Ah Hung, if a child trafficker talks to you and offers you candies, never take the candies." I have never taken their candies and hence I am still here. If I ate their candies, I might be gone. Therefore, regarding this issue, owing to the connivance of large insurance companies, insurance intermediaries and front-line brokers are forced to engage in activities against their conscience in order to survive. There is no reason why policy holders should bear the additional costs. This is the first point. Second, I believe people have noticed that this problem is related to the system of Hong Kong. It is very simple. Just look at the Honours List and you would know. LEUNG Chun-ying has the power to … Under "Division 4 ― Regulations and Rules", the first provision states that "Chief Executive in Council


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may make regulations". Only they have the say. Everyone knows that the Executive Council is actually the toy of "one single man", right? In other words, the Chief Executive dominates everything. President, you are one the four persons being conferred the highest honours, right? Because of your outstanding performance in chairing meetings of the Legislative Council, you are conferred the honours. After conferring you the honours, the Chief Executive challenged you yesterday for not berating Mr Albert CHAN for making too many gestures at meetings. He is such a sneaky and mean person. He felt compelled to confer you the honours and then he came to the Legislative Council to take advantage of you. Do you think he is mean? He said you normally perform well at chairing meetings but yesterday he criticized your performance … PRESIDENT (in Cantonese): Mr LEUNG, you have digressed. MR LEUNG KWOK-HUNG (in Cantonese): I am merely citing an example. The others being conferred the Grand Bauhinia Medal included CHENG Yiu-tong and HO Sai-chu. To be frank, the younger generation, the post 80s generation and the like, may not remember these two persons … PRESIDENT (in Cantonese): Mr LEUNG, you have digressed. MR LEUNG KWOK-HUNG (in Cantonese): … There was another person named LI Dak-sum. I am only citing examples to illustrate how corrupt the system is. Who is LI Dak-sum? Buddy, we are talking about the Grand Bauhinia Medal. Only a few persons have the privilege to be honoured with this medal each year but he hands them out rashly. Hence, in respect of this point, I will not criticize Secretary Prof K C CHAN. As a matter of fact, we have always proposed that members of the statutory institutions such as the Securities and Futures Commission and the Insurance Authority must undergo a public selection process. In other words, the Government can nominate 10 persons and another 10 persons can nominate themselves to challenge the Government. If the Government proposes to


appoint Andrew LIAO but I consider Mr Martin LIAO better, I can nominate the latter, even though the two are brothers. I can nominate others and I can also nominate myself. And then, the candidates should be selected according to certain clearly spelt out selection criteria. The United Kingdom has formulated specific selection criteria, which includes personal integrity and professional competence, and so on. We should have a selection process. President, do you understand? Now we keep making amendments, only to give the power to just a few persons. President, you also know that after the Communist Party of China had seized power, it said that 500 commonly used characters in the modern Chinese language were sufficient. Now it would suffice to have 50 members in the standing appointment committee. The appointment system has already lost its effect. But this has nothing to do with Secretary Prof K C CHAN. If a system is in place that allows nomination and self-nomination, and requires the Government's nomination list, the people's nomination list and the people's self-nomination list to be made public, and the selection process will be carried out openly in accordance with a set of established criteria, we can then ensure that suitable candidates will be appointed. However, this will never happen because LEUNG Chun-ying gains his fortune through such an appointment process. It totally stinks (The buzzer sounded) … PRESIDENT (in Cantonese): Does any other Member wish to speak? MR CHAN KIN-POR (in Cantonese): President, as the saying goes "there is a black sheep in every flock", any institutions or industries in the world are bound to have some bad elements. In this Council, there are also Members who keep speaking sophistry and talking nonsense. It is most unfortunate and saddening that no one is here to "deal with" him, and so he can keep speaking using sophistry. Mr LEUNG Kwok-hung has said just now that the insurance industry is not attending to its proper business, I think he has offended over 80 000 insurance intermediaries, many of whom serve their clients with great devotion, and this comment is an great insult … (Mr LEUNG Kwok-hung stood up and spoke loudly)


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PRESIDENT (in Cantonese): Mr CHAN, please hold on. Mr LEUNG Kwok-hung, what is your point? MR LEUNG KWOK-HUNG (in Cantonese): Has he the wisdom to listen to others' comments? I said as a trade and in the history of capitalism, the insurance industry … PRESIDENT (in Cantonese): Mr LEUNG Kwok-hung, this is not your turn to speak. Please do not interrupt another Member's speech. Sit down immediately. (Mr LEUNG Kwok-hung spoke loudly while walking out of the Chamber) PRESIDENT (in Cantonese): Mr LEUNG Kwok-hung, stop causing a hubbub. Mr CHAN Kin-por, please continue with your speech. MR CHAN KIN-POR (in Cantonese): President, Mr LEUNG Kwok-hung said the insurance industry was not attending to its proper business. Such a remark is a grave insult to the 80 000-odd insurance intermediaries as many of them work long hours to serve their clients whole-heartedly. I agree that some intermediaries may have committed misconduct but we will spare no efforts in cracking them down. I believe there are only a few black sheep, while most of the intermediaries are devoted in their work. How can Mr LEUNG Kwok-hung make such a comment, if he still has a little conscience, he should apologize to all insurance intermediaries in Hong Kong. President, I fully support the motion of having the Bill read the Third time. I hope the Government will, apart from doing the transitional work properly, sincerely make greater efforts in resolving the outstanding problems and properly addressing the concerns of the 80 000-odd intermediaries. The authorities should also conduct comprehensive consultations accordingly, so that the whole insurance industry would provide the best services and products for all clients in a professional manner. Thank you, President.


PRESIDENT (in Cantonese): Does any other Member wish to speak? (No Member indicated a wish to speak) PRESIDENT (in Cantonese): I now put the question to you and that is: That the Insurance Companies (Amendment) Bill 2014 be read the Third time and do pass. Will those in favour please raise their hands? (Members raised their hands) PRESIDENT (in Cantonese): Those against please raise their hands. (No hands raised) PRESIDENT (in Cantonese): I think the question is agreed by a majority of the Members present. I declare the motion passed. CLERK (in Cantonese): Insurance Companies (Amendment) Bill 2014. Resumption of Second Reading Debate on Bills PRESIDENT (in Cantonese): We now resume the Second Reading debate on the Inland Revenue (Amendment) Bill 2015. INLAND REVENUE (AMENDMENT) BILL 2015 Resumption of debate on Second Reading which was moved on 25 March 2015 PRESIDENT (in Cantonese): Mr Christopher CHEUNG, Chairman of the Bills Committee on the above Bill, will address the Council on the Committee's Report.


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MR CHRISTOPHER CHEUNG (in Cantonese): President, in my capacity as Chairman of the Bills Committee on Inland Revenue (Amendment) Bill 2015 (the Bills Committee), I submit to this Council the Report of the Bills Committee, and report on the major areas of work of the Bills Committee. Under the existing exemption provisions of the Inland Revenue Ordinance, offshore funds are exempt from profits tax for profits derived from transactions performed in Hong Kong, including transactions in securities. As the current definition of "securities" does not include securities of a private company, any transaction in the securities of a private company from which an offshore private equity fund made profits could be subject to profits tax. The purpose of the Inland Revenue (Amendment) Bill 2015 (the Bill) is to extend the existing profits tax exemption for offshore funds under the Inland Revenue Ordinance to offshore private equity funds. The Bills Committee has held two meetings to discuss the Bill with the Administration, and members generally support the proposal in the Bill. Some members have expressed concern about the justification for the proposed profits tax exemption for offshore private equity funds, and sought elaboration on the proposed tax exemption's implications for the public finances and economy of Hong Kong in terms of the cost (that is, tax revenue forgone) and benefits, whether actual or anticipated. The Administration has advised that the proposal seeks to provide the private equity industry with the tax certainty that the profits derived from transactions in securities of private companies outside Hong Kong will not be subject to tax liability in Hong Kong, so as to attract more private equity fund managers to set up or expand their business in Hong Kong. The Administration has also advised that since the inception of the offshore fund tax exemption regime in 2006, no profits tax assessment has been raised by the Inland Revenue Department to assess profits derived by offshore private equity funds from transactions in securities of private companies outside Hong Kong. On this basis, the Administration expects that the cost of the legislative proposal to Hong Kong in the form of tax revenue forgone should be minimal. On the other hand, according to the Administration, the legislative proposal, which provides clear tax exemption to transactions conducted by offshore private equity funds in respect of eligible private companies outside Hong Kong, will help attract more offshore private equity fund managers to set up or expand their business in Hong Kong. This would help foster the further development of the


financial services sector in Hong Kong and drive demand for other relevant professional services, such as business consulting, tax, accounting and legal services. On some members' concern about the risk of abuse of the proposed tax exemption by companies or individuals seeking to avoid tax, the Administration has advised that the relevant provisions in the Bill will prescribe qualifying conditions for the tax exemption to ensure that only bona fide offshore private equity funds will be eligible for the proposed tax exemption. Income received by local fund managers and other service providers will continue to be subject to Hong Kong tax. Some members have suggested that the Administration should consider further extending the exemption to private companies incorporated in Hong Kong, or relaxing the tax exemption conditions in respect of certain types of local portfolio companies, such as companies or start-ups related to the environmental, clean energy or high-technology businesses. In these members' view, this can attract those companies to use Hong Kong as a platform for corporate financing and asset management through private equity funds. The Administration holds that any further relaxation of the tax exemption conditions may create loopholes for tax avoidance as it would make it easier for local companies to simply convert their taxable profits to non-taxable income via an offshore fund structure, thereby affecting the Government's tax revenue. Regarding the suggestion to relax the tax exemption conditions specifically for certain types of portfolio companies, this would have wide-ranging read-across implications and need to be considered carefully from a fairness perspective. The Bills Committee supports the resumption of the Second Reading debate on the Bill, and will not propose any Committee Stage amendments to the Bill. President, the following is my personal opinion on the Bill. According to the rankings released in March this year in the Global Financial Centres Index compiled by a British consultancy, Hong Kong, with a score of 758, is the third major global financial centre after New York and London. But if we analyse the figures carefully, we will find that the increase in the score of Hong Kong is the smallest among the top nine, which goes to show that the gap between Hong Kong as a financial centre and other cities has been gradually narrowed.


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Given that Hong Kong is an international financial centre, it is necessary for us to extensively absorb different types of financial business. Hong Kong has a very well-developed stock market. In the first half of this year, the amount of funds raised through initial public offerings on the Stock Exchange of Hong Kong was the largest in the world. While this indicates that our stock market is booming, it also means there is a greater need for us to go further ahead in other financial areas before we can strengthen Hong Kong's status as an international financial centre. The Bill is precisely aimed at enabling us to take another step forward in the area of private equity funds. According to a survey by the Hong Kong Trade Development Council, Hong Kong is the second largest private equity centre in Asia, managing about 19% of the total capital pool in the region, trailing only the Mainland. At the end of 2013, there were a total of 376 Hong Kong-based private equity funds with capital under management amounting to approximately US$98.5 billion, representing a 23% growth from 2012. It is believed that on the back of the continuous economic improvement in the past couple of years, this figure will continue to rise. The proposal to allow profits tax exemption for transactions conducted by offshore private equity funds in respect of private companies outside Hong Kong will, I believe, entice more private equity funds to select Hong Kong as their base in the region, and they will hire more local financial talent, legal and accounting services, and so on, bringing substantial benefits to the financial industry and other related service industries in Hong Kong. That said, in my opinion, as the Bill only proposes to allow tax exemption for transactions conducted by offshore private equity funds in respect of private companies outside Hong Kong, it will be of little help or even no help in promoting the development of local innovative enterprises. The Government is unwilling to include local private equity funds in the scope of the Bill for fear of creating loopholes for tax avoidance, but is it really impossible to strike a balance between promoting venture capital activities and preventing tax avoidance? I hope that later on, the Government can give us some positive feedback after carefully studying the views expressed by members. Thank you, President. I support the passage of the Bill. MR NG LEUNG-SING (in Cantonese): President, as a representative of the financial sector and a member of the Bills Committee on Inland Revenue (Amendment) Bill 2015, I support the resumption of the Second Reading debate on the Inland Revenue (Amendment) Bill 2015 (the Bill). Given that the policy


objective of the Bill introduced by the authorities is to facilitate the development of the private equity industry, so as to strengthen Hong Kong's position as a premier international asset management centre, we can foresee that the initiative in question can foster the further development of our asset management industry and drive demand for other relevant professional services. Therefore, the sector generally welcomes the proposal and urges the Government to implement it as early as possible. The Government's supplementary information shows that in terms of the size of capital under management by private equity funds, Hong Kong ranks second, after the Mainland, in Asia. According to related reports, private equity funds have sprung up all over the Mainland in recent years, and after a period of rapid development last year, the number of private securities investment funds there has reached 6 000-odd, with assets under management amounting to over RMB 1 trillion yuan; moreover, as the system of mutual recognition of funds between the Mainland and Hong Kong was officially activated on 1 July this year, and given the rapid development of private equity funds on the Mainland, it is believed that this adjustment to our taxation policy can further enhance and fortify the co-operation between Hong Kong and the Mainland authorities. In addition, facing the opportunities brought by the growth of private equity funds, all relevant sectors of Hong Kong need more than ever to have an open mind and take the long view. In particular, as Hong Kong is set to vigorously develop innovation and technology, it is all the more necessary to attract private equity funds to Hong Kong, which will be conducive to increasing capital investments and opportunities for developing innovation and technology. This is expected to be beneficial to the future development of industries related to innovation and technology in the long run. President, all in all, the Bill is one of the important catalysts for promoting Hong Kong's status as an international financial centre, and will bring an all-win situation with long-term benefits to different stakeholders across regions. It deserves this Council's support. I so submit. MR WONG YUK-MAN (in Cantonese): President, to put it simply, the purpose of the Inland Revenue (Amendment) Bill 2015 (the Bill) is to extend the profits tax exemption for offshore funds to include transactions in securities in portfolio


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companies, that is, private companies which do not hold any Hong Kong properties or carry out any business in Hong Kong. First of all, I have to state that I am not a member of the Bills Committee on Inland Revenue (Amendment) Bill 2015 (the Bills Committee). According to paragraph 5 of the Report of the Bills Committee submitted at the House Committee meeting on 19 June 2015, in proposing the amendments, "the Administration hopes to attract more offshore private equity fund managers to set up or expand their business in Hong Kong, thereby generating demand for local asset management, investment and advisory services and other relevant professional services". On the cost and benefits of the above proposed tax exemption, it is mentioned in paragraph 11 of the Report of the Bills Committee that some members have requested the Administration to provide information. As far as the cost is concerned, although there is no data available, "the Administration expects that the cost of the proposal to Hong Kong in the form of tax revenue forgone should be minimal". The Government is unable to quantify the actual benefits, and the only information that it could provide is that "since the implementation of the profits tax exemption for offshore funds in 2006, Hong Kong's combined fund management business has grown by 2.6 times from $6,154 billion as at the end of 2006 to $16,007 billion as at the end of 2013". This information only concerns the previous change whereby offshore funds are exempt from profits tax, which is totally different in nature from the current proposal to exempt transactions in securities in private companies. In addition, as the growth referred to in the above information may have been affected by various factors, the tax exemption cannot be seen as the sole and necessary cause of such growth. Hence, the Government does not have any concrete information on either the cost or the benefits, so as to lend relatively solid support to its expectation. According to past experience, the construction expenditure on infrastructure projects, such as the Express Rail Link and the Hong Kong-Zhuhai-Macao Bridge, often turned out to be substantially higher than the original estimates. This is evident to all. To be frank, given that the Government has made a catalogue of errors before, when it now says it "expects that the cost of the proposal to Hong Kong in the form of tax revenue forgone should be minimal", buddy, how can I possibly believe its expectation that the cost "should be minimal"? Any responsible Member should adopt an extremely sceptical attitude towards this Government. In the olden days, when Mr HU Shih taught young people how to conduct themselves in scholarship and in interpersonal relationships, he told them that they should put aside doubt where there was doubt in interpersonal relationships. For stance, as far as my personal relationship with President Jasper TSANG is


concerned, if he does something that I find inappropriate, I will put aside doubt where there is doubt about it. This is how I conduct myself in interpersonal relationships. Yet in scholarship, one has to question what seems not a question, that is, to cast doubt on what is not in doubt at all. This was the spirit in which Mr HU Shih engaged in scholarship in his day, as well as what he preached to the young. I have also taken this attitude towards the work of the SAR Government, in respect of which we have to doubt what is not in doubt at all. What kind of expectation is that? What does the Government expect? Its expectation proved false every time. Needless to say, the Financial Secretary's prediction about the Government's surplus was false every time. All his estimates of expenditure on infrastructure were wrong. "689" only knows how to take advantage of the situation. He alleged that the filibustering by Members blocked the approval of funding for public works projects, resulting in cost overruns amounting to some $2 billion. But why has he not mentioned the cost overruns of over $100 billion in several major infrastructure projects currently in progress? Why has he not mentioned that? So, he is a scumbag. Anyway, we have to adopt an extremely sceptical attitude towards the Administration, and I am definitely sceptical of the Government's expectation. Regarding the cost and benefits envisaged by the Government for the proposed tax exemption this time around, I have grave reservations about them. I must make it clear that I oppose the Bill. The reason is very simple. Not only do we have no confidence in the Government on a practical level, but we also oppose the passage of the Bill in principle because the tax exemption proposed by the Government will give rise to several problems: first, a more polarized distribution of wealth; second, a more serious imbalance in the development of industries; and third, further damage to local interests. This is my stance. Of course, the Bill will be passed ritualistically all the same. While the majority of Members will support it and we may be the only ones against it, I still have to tell all of you in my speech my reasons for opposing it. As I mentioned just now, I have doubts about the calculations on which the Government's expectation is based, no matter how high-sounding its words are. In a preceding paragraph, it says words to the effect that it hopes to attract more offshore private equity fund managers to set up or expand their business in Hong Kong, and to increase local asset management, investment, advisory and other relevant professional services. These are all high-sounding words. Mr Christopher CHEUNG is now looking at me. As this proposal is relevant to his constituency, he certainly gives his full support to such a profits tax exemption. But I am certainly against it.


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It will give rise to a more polarized distribution of wealth. What is the Government's purpose in levying taxes? Its main function is to redistribute wealth, right? Why is estate duty not required? Why is red wine exempt from duty? There are more examples. Our tax regime is definitely aimed at wealth redistribution, which is precisely a function performed by the Government to promote the well-being of most people as much as possible, and to prevent an extreme disparity between the rich and the poor. At present, Hong Kong ranks first among developed regions/countries in terms of the disparity between the rich and the poor. Buddy, why is this the case? It is because there is something wrong with our wealth redistribution. The majority of Hong Kong people are unable to share the fruits of Hong Kong's economic development. How will the Government use its accumulated fiscal reserves of $800-odd billion? The Government only cares for the rich and the business sector. In the 30s, the United States was able to recuperate and build up strength because it did not take part in the Second World War, but as it was in the grip of the Great Depression at the time, President ROOSEVELT implemented the New Deal, the most important part of which was tax reform. This is an issue that we have raised countless times. The authorities often say that the tax base of Hong Kong is narrow, and that we only have a small number of taxpayers, but then where does the money come from? Has it fallen from the sky? What is the point of repeating these words? The fact remains that we now have $800-odd billion in fiscal reserves and some $3 trillion in the Exchange Fund. Have the authorities distributed this wealth properly? No. Worse still, they are seeking the passage of the Bill, which will give rise to a more polarized distribution of wealth. The authorities should pursue wealth redistribution through tax and social welfare policies, so as to provide relief for the needy classes or the poor, narrow the wealth gap, reduce social unrest, and create a genuinely harmonious and stable environment, thereby enabling the healthy development of society, or else people doing business will have no "luck". As President KENNEDY once said, if a free society cannot help the many who are poor, it cannot save the few who are rich. The distribution of wealth in our society is so polarized that some people have to live in "sub-divided units", and the rent for a unit with a bed right above a toilet is as high as some $2,000. In the circumstances, buddy, is it not ridiculous for the authorities to introduce such a tax exemption? Those who stand to benefit from this proposed tax exemption are obviously the wealthy classes of society. The only consequence is that the public policies or financial management approach of the Hong Kong Government will continue


to tilt in favour of large consortia and plutocrats, resulting in a more unequal society and a more serious imbalance in the development of industries. As we all know, the biggest problem with Hong Kong's economy at present is the imbalance in the development of industries as a whole. As to the "six major out-and-out damned industries" identified by Donald TSANG in his time, where are they now? Hong Kong's industries are dominated by the financial services and real estate sectors. The development of the whole economy is being affected by exorbitant property prices these days. How can individually-owned eateries possibly carry on their business? All such business has been taken over by large consortia which offer unpalatable food. This is the result of extortionate rents. Even the blind know this ― I may offend the blind in saying so ― I mean, everyone can see this clearly. Does Hong Kong have industry? Does Hong Kong have agriculture? We have nothing of the sort, and our overall development is very unhealthy. While this proposed tax exemption will, once again, make it more attractive for the financial investment industry to develop in Hong Kong, it will suppress the competitiveness of other industries at the same time, adding to the imbalance in the development of industries. The third reason, which is very important, is that further damage will be caused to local interests. Since the proposal seeks to exempt offshore private companies, the competitiveness of local investors will be reduced accordingly. If there is no guarantee that the proposed tax exemption will benefit related local businesses in Hong Kong, it is likely to result in more losses than gains, so why does it have to be done? Actually, the Government should have acted cautiously in this regard. Nonetheless, the Bill will surely have support in this Council today. This Council has a very important function, which is to allow minority dissenting voices to be heard by the public through the debates here, unlike the situation described by the President in asking, "Have all of you not performed enough in front of the television cameras?" President, those performances were pratfalls. As a representative of the people and a Member of this Council, I am not obliged to support everything proposed by the Government, right? So, to doubt what is not in doubt with a spirit of scepticism is to fulfil our bounden duty as Legislative Council Members to monitor the Government on behalf of the people. Recently I have published a book entitled 《比橡皮圖章更不堪香港立法機關崩壞實錄》 (Worse than a rubber stamp ― A true account of the Hong Kong legislature falling into decay), which will go on sale at the upcoming


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Book Fair. I have written all these in the book, I can tell you. To what extent has our legislature decayed? The answer is obvious to all who have seen what happened at the Question and Answer Session yesterday. The overbearing and arrogant attitude of the executive authorities spoke volumes. Is there any sanction against it? When the Government proposes a policy like this, I am certainly compelled to be all the more critical of it. As the Government's starting point is to put up a struggle, that is, to take a stance opposite to ours so as to make an impression on the public, I am compelled to take a stance opposite to that of the Government as well. Is this not detrimental to public interest? So, in the light of the latest political developments, we must remain highly sceptical of any bill or policy proposed by the Government, and we have to make our voices heard. With these remarks, President, I oppose the Bill. MR KENNETH LEUNG (in Cantonese): President, as a member of the Bills Committee on Inland Revenue (Amendment) Bill 2015 (the Bills Committee), I support the resumption of the Second Reading debate on the Inland Revenue (Amendment) Bill 2015 (the Bill). President, concerning the background to the Bill, since 2006, many offshore hedge funds domiciled outside Hong Kong have been exempt from profits tax in respect of specified transactions carried out by them through specified persons. President, in my view, it is too late to introduce the Bill, which is long overdue, and its coverage is too small. Just now Mr WONG Yuk-man raised two questions, one of which was whether the Bill, if passed, would reduce our tax revenue. President, the Bill seeks to regularize some instances that are rather ambiguous in law or to legislate in this regard, so that offshore private equity funds can be exempt from profits tax when investing in overseas private companies provided that certain conditions are met. Our tax regime has two very nice features. First, no offshore income is subject to profits tax. Second, capital gains are not subject to profits tax either. The purpose of the Bill is merely to clarify and regularize these instances that are rather ambiguous in law. In paragraph (b) on the first page of the Government's responses to the follow-up actions arising from the discussion at the Bills Committee meeting on 28 April 2015, it is clearly stated that according to the records of the Inland


Revenue Department (IRD), since the inception of the offshore fund tax exemption regime in 2006, no profits tax assessment has been raised to assess profits derived by private equity funds from the disposal of private companies outside Hong Kong. In other words, even if the Bill is passed, Hong Kong's tax base and tax revenue will not be affected. President, as I said, the features of Hong Kong's tax regime are that offshore income and capital gains are not subject to profits tax. President, the Bill is important to the asset management industry in Hong Kong. According to some information, Hong Kong as an international asset management centre is currently managing some $16 trillion worth of assets, and the amount of funds in the asset management business has risen by 24% since 2012. As regards the private equity industry, Hong Kong is currently managing some $893 billion worth of assets, with a 16% growth in asset value since 2013. Hong Kong is undoubtedly an international asset management centre. President, I think the coverage of the Bill is too small, and it is too late to introduce it. Why? The long title of the Bill reads: "to extend the profits tax exemption for non-resident persons to include transactions in securities of, or issued by, certain private companies incorporated outside Hong Kong; to exempt non-resident persons that are qualifying funds from profits tax". The long title indicates that the exemption will only apply to investments by funds incorporated overseas in certain private companies. The definition of "private company" is rather vague, as the Bill only states that a private company "means a company incorporated in or outside Hong Kong that is not allowed to issue any invitation to the public to subscribe for any shares or debentures of the company". The interpretation of this definition varies from one overseas jurisdiction to another, and every jurisdiction may have a different definition of "public". In this connection, I would like to make two points on a technical level. First, if the Bill is passed, I hope that the IRD will issue relatively clear guidelines on how we should interpret the definition of "the public" in the phrase "issue any invitation to the public to subscribe for any shares". Second, the conditions that a "private company" must meet under the Bill include that an overseas private company must not carry on any business through a permanent establishment in Hong Kong, and must not hold certain different products in Hong Kong. The rationale behind this requirement is that many companies might try to avoid tax through such an exemption. But, President, is this an undue worry? According to the information provided to us by the IRD, no profits tax assessment has been


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raised by the IRD since 2006 to assess profits derived by offshore private equity funds from investing in overseas private companies. Relaxing the tax exemption conditions will not result in any loss of profits tax. I wish to respond to the concern expressed by Mr WONG Yuk-man just now about local interests. As I said at a meeting of the Bills Committee, the extension of the profits tax exemption to offshore funds' investments in Hong Kong private companies will bring tons of benefits without doing any harm to Hong Kong, because many start-ups in Hong Kong are in need of capital, which can be provided by such offshore private equity funds. A private equity fund which has been holding the shares of a Hong Kong private company for as long as 10 years after acquiring them may file a defence with the IRD, pointing out that they are investments, and that any ultimate proceeds from the sale of these shares of the Hong Kong private company are capital gains. Under the existing Inland Revenue Ordinance of Hong Kong, capital gains are not subject to profits tax. If this exemption is extended to Hong Kong private companies, not only will there be additional investments in our industries, but the high value-added industries including the innovation and technology industry, which Mr Charles Peter MOK is going to express concern about in his speech later, will also be profoundly encouraged. If the IRD or the relevant authorities take the view that extending the exemption will result in some undesirable tax avoidance practices, they can apply the exemption on a targeted basis. For instance, if an investment in a new and advanced technology, environmental business or clean energy project has lasted for 10 years or 15 years, then any capital gains arising from it should be exempt from tax. This approach will not be unique to Hong Kong. Many countries have such exemptions in place. I hope that the Secretary or the Financial Secretary will, after the passage of the Bill, proceed to conduct a legislative consultation on further extending the exemption to allow qualifying offshore private equity funds investing in private companies incorporated in Hong Kong to be exempt from profits tax. I hope that we will not have to wait nine years for such an amendment to be introduced. The offshore fund tax exemption regime was implemented in 2006, and it is now 2015. It took a good nine years for this simple Bill to be drawn up. I hope that in the coming two or three years, the authorities can introduce a new profits tax exemption bill into the Legislative Council for its scrutiny.


In addition, I need to talk about another technical issue concerning the Bill. The authorities have now offered the profits tax exemption for ultimate profits derived from transactions in shares of private companies, but more often than not, many investors may, instead of purely purchasing equities, purchase some hybrid instruments which are half-equity, half-bond. The Bill does not clearly define whether such hybrid instruments will be covered. This is my first query. Moreover, other than hybrid instruments, there are bonds as well. Apart from issuing shares, a private company may also issue bonds to raise capital. Suppose a private equity fund invests in the bonds of a private company and meets the other conditions; upon maturity of the bonds in the future, when the private equity fund receives the repayment and makes profits, will these profits be chargeable to tax? In fact, in the initial stage of the consultation on the Bill, many members of the sector did express their views on this issue, but have the authorities taken those views on board? I do not think the authorities have done so at all. If the authorities want the Bill to be passed as soon as possible and thus brush aside the sector's considerations, this really does not make sense because it has taken them a very long time to introduce the Bill. I hope that the authorities will, as far as practicable, include in the scope of the next bill those other instruments that the sector is generally concerned about. With these remarks, President, I support the passage of the Bill. MR CHARLES PETER MOK (in Cantonese): President, I am a member of the Bills Committee. The Financial Services and the Treasury Bureau has introduced the Inland Revenue (Amendment) Bill 2015 into this Council. The amendments concerned seek to extend the profits tax exemption for non-resident persons to include transactions in securities of eligible private companies incorporated outside Hong Kong, so that these companies can also be exempt from profits tax. By virtue of these amendments, the profits tax exemption originally only applicable to offshore funds will be extended to offshore private equity funds. One of the reasons for the authorities to propose these amendments is that the current profits tax exemption regime for offshore funds has put Hong Kong in a relatively disadvantaged position for attracting private equity fund managers to Hong Kong. The authorities have thus put forth the proposed amendments in the hope that they can help expand Hong Kong's fund market and enhance its


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competitiveness amidst regional competition. In this connection, I support the amendments in principle. The Government also hopes to attract more offshore private equity fund managers to set up or expand their business in Hong Kong, thereby generating demand for local asset management, investment and advisory services and other relevant professional services. Yet some aspects of the amendments actually require further deliberation. Given that different Policy Bureaux are responsible for different areas of work, the Financial Services and the Treasury Bureau may only consider matters within its purview or the interests of the relevant sectors. That said, I still find that there are two points which merit further deliberation. The first one is the feasibility of extending the profits tax exemption to local fund companies. The proposed exemption will only apply to offshore private equity funds on condition that the investments involved must be overseas investments. Can the authorities extend this exemption to investments of local fund companies? The second point is about reforming the taxation policy on investments in start-ups. The proposed amendments should help attract offshore private equity funds to operate in Hong Kong, and this will have a positive effect on our financial industry or relevant professional services, such as the accounting, taxation and legal businesses. During the discussions of the Bills Committee, I did mention and ask about one thing. As the proposed exemption will only benefit offshore private equity funds, local fund investments (which are onshore investments) will not be able to benefit from the proposed tax exemption. In other words, the proposed amendments will only be advantageous to private equity funds making offshore investments, but may be unable to serve as an incentive for them to make local investments, and may even act as a disincentive to them. This apart, will the amendments cause any harm to the interests of local companies? For the fund industry, this legislative amendment exercise seems a logical step to take, and members of the industry render great support. However, as the exemption will only apply to companies making offshore investments, it may really encourage fund companies to focus on investments outside Hong Kong. If it merely encourages fund companies to operate in Hong Kong but fails to facilitate the promotion of local investments, the major beneficiaries will only be those sectors and fund managers providing relevant services, while the benefits for other people will be very limited. Admittedly, given Hong Kong's status as an international financial city, we should not demand that all the monies concerned must remain in Hong Kong, for the international mobility of capital in


Hong Kong is actually also a very important advantage for us. Nonetheless, if the amendments only encourage fund companies to make investments outside Hong Kong, I do not think this will do any good for the development of the fund industry or other industries. Secondly, in fact, the amendments do not encourage venture capital funds to invest in Hong Kong start-ups that are still at their early stage of development. Many private equity funds are actually inclined to invest in such ventures, that is, local companies which are still at their early stage of development, and these may even include companies that have yet to go public. While the Government has offered a good deal of assistance to many start-ups in recent years, they are still facing immense hardship. If the profits tax exemption under discussion is only selectively applicable to private equity funds making offshore investments, many start-ups in Hong Kong will not be able to benefit from it. On the one hand, the Government has rolled out many policies encouraging young people to start their own business, and local innovation and technology companies have received support from many research funds; in addition, the Government has introduced the Youth Development Fund, and even undertaken to promote financial technologies among other things. But on the other hand, thousands of start-ups in Hong Kong, be they in the Science Park, Cyberport or other places, will not be able to benefit from today's amendments. This is indicative of a typical situation where many government policies are implemented in a piecemeal manner, and there is simply no way for them to dovetail with one another. If the authorities really want to expand the local fund market and enhance Hong Kong's competitiveness, why not consider extending certain tax exemptions to start-ups, so that they can have the chance to seek financing at an early stage? President, at a meeting of the Bills Committee, I did raise the above two points, but the Government's response was that the current amendments were just the first step of change, and further changes would still be possible in the future. The authorities also assured the Bills Committee of their commitment to enhancing the support and ecosystem for local start-ups and technological enterprises, fostering the business diversification of local companies, and so on. However, from a practical point of view, I hope that the Government can take on board the above suggestions as soon as possible, instead of asking us to put forward the suggestions to the future Secretary for Innovation and Technology


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upon his assumption of office as per what the Chief Executive said yesterday. These two matters should be discussed separately. In my view, we should brook no further delay in some matters. I hope that the Government can take these suggestions seriously. As Mr Kenneth LEUNG said just now, Hong Kong should not have to wait for another decade or so before it can see a new reform in this regard. Only by realizing this can we facilitate the development of local enterprises, businesses in emerging high value-added industries and start-ups in Hong Kong, so as to further diversify Hong Kong's economic base. I so submit. Thank you, President. PRESIDENT (in Cantonese): Does any other Member wish to speak? MR SIN CHUNG-KAI (in Cantonese): President, this is a very technical Bill which is not easy to understand, but the Bills Committee only held two meetings, one in late April and the other in mid-May, and hurriedly finished the scrutiny of it within a limited time frame against a backdrop of constant filibustering in the Legislative Council. We have, of course, carefully considered whether this Bill will cause Hong Kong's public coffers to suffer a loss, and I have looked at it from this perspective as well. The Government has indicated that there is a precedent for this practice, as offshore funds have been exempt from profits tax since 2006. Objectively speaking, this is also in line with Hong Kong's existing taxation principle that profits made in Hong Kong are chargeable to tax while those made outside Hong Kong are not. Given that it has been almost nine years since the inception of the exemption in 2006, the authorities have accumulated quite a lot of experience and thus seek to make some technical revisions and adjustments. At the two meetings of the Bills Committee, our discussions were focused on whether it would create loopholes leading to the scenario mentioned by Mr WONG Yuk-man just now, that is, a greater wealth effect which aggravates the disparity between the rich and the poor, and so on. The Secretary should have a better understanding of that than I do, so he may give a detailed explanation later on. As the authorities will not tax the profits in question


regardless of whether they are exempt from tax or not, it is hard to say whether this is a loophole. If the Government does not exempt such profits from tax, the companies concerned will not engage in the relevant business in Hong Kong; if this exemption is offered, they will do business in Hong Kong and may bring us marginal benefits. The Government has said that it may make a further report to this Council after the amended ordinance has been implemented for a certain period of time. According to the information provided by the Government, the value of assets held by private equity funds in Hong Kong has grown by 2.6 times from $6,154 billion in 2006 to $16 trillion at present. From a macroscopic point of view, being one of the three international financial centres often referred to as "Nylonkong", Hong Kong has a sizeable stock market. But other than that, many Southeast Asian countries have actually outperformed us in terms of both fund management and asset management. For instance, to my knowledge, the fund management system in Singapore is larger than that in Hong Kong. This is, at least, reflected in the greater number of funds managed in Singapore than in Hong Kong. I wonder if there are funds bought in Hong Kong but managed in Singapore, where there are perhaps more people engaged in fund management. Hong Kong needs to deepen and broaden the dimensions of its financial industry. We certainly have to be careful about providing tax exemption, but then again, I agree with what Mr Charles Peter MOK said just now. Secretary, I have noticed that regarding the relevant matters handled in this Council over the past two years, such as this Bill on private equity funds under discussion today, and the Bill on reinsurance passed by us earlier, they are all about tax exemption. The current-term Government has introduced at least two bills venturing on the provision of tax exemptions, with a view to expanding our industry base. On this issue, I hope that the Secretary will give a response to Mr Charles Peter MOK's opinion. In fact, the technology sector has all along been seeking tax exemption, so as to attract talent to Hong Kong for scientific research and the like. Yet, as we all know, even if we will have a new Secretary for Innovation and Technology appointed in the future, he will only be responsible for managing matters relating to technology rather than taxation. We cannot look to him for providing tax exemption to attract technology companies to Hong Kong, or to attract investments from venture capitalists, angel investors, and so on.


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Can the Secretary, apart from dealing with financial and taxation matters, actually consider how to enhance Hong Kong's competitiveness on the technology front? After a review, it may be found that Hong Kong should uphold the basic principles of maintaining a simple tax system and keeping exemptions to a minimum. Such a result is also possible, but a relatively comprehensive study should be conducted. The Secretary should respond to this. This morning, I told a radio programme that we could not rely solely on a small Policy Bureau to promote innovation and technology, because it should be promoted by the Government as a whole. I know that the Secretary has set up a steering group on Fintech led by him personally. This is the right thing to do. The promotion of innovation and technology is not only a responsibility of the future Innovation and Technology Bureau, if established, but also a responsibility of all government departments or Policy Bureaux. It should not be like what happened a few years ago in this Council when I put a question to Eddie NG, our Secretary for Education, asking him whether he had considered the adoption of cloud computing to assist our primary and secondary schools. At that time, he just had his head in the clouds when he replied. In my opinion, given the passage of two relevant bills within the current term of the Government, it seems that the Government is not unwilling to make technical amendments to expand the scope of exemption for such specific areas as reinsurance, as well as private equity funds now under discussion. Can the Government, at an appropriate time, carry out a comprehensive review on how to entice Hong Kong technology companies to do scientific research, so as to enable such business to take root in Hong Kong? I hope that the Secretary can answer this question later on. As for this Bill, if the scenario mentioned by Mr WONG Yuk-man arises, thus creating tax loopholes, I cannot support it. The Secretary should give us an explanation later on. As I understand it, there is no way for the Government to receive such tax in the first place; but after this exemption is offered, while the Government will still be unable to receive such tax, business activities in Hong Kong may increase. Is my understanding correct? PRESIDENT (in Cantonese): Does any other Member wish to speak? (No Member indicated a wish to speak)


PRESIDENT (in Cantonese): If not, I now call upon the Secretary for Financial Services and the Treasury to reply. The debate will come to a close after the Secretary has replied. SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY (in Cantonese): President, I would like to thank Mr Christopher CHEUNG, Chairman of the Bills Committee on Inland Revenue (Amendment) Bill 2015 (the Bills Committee), other members of the Bills Committee, the Secretariat and the legal adviser for their efforts, which have enabled the scrutiny of the Inland Revenue (Amendment) Bill 2015 (the Bill) to be completed smoothly. I am also grateful to members of the sector for supporting and offering their views on the Bill. The Government amended the Inland Revenue Ordinance in 2006 to provide for a profits tax exemption regime applicable to offshore funds, so as to put Hong Kong on a par with other major financial centres, but the current regime does not apply to private equity funds. The policy objective of the Bill is to provide clear tax exemption to transactions conducted by offshore private equity funds in respect of eligible private companies outside Hong Kong, with a view to attracting more private equity fund managers to set up or expand their business in Hong Kong, thereby promoting the further development of Hong Kong's asset management industry. Noting that the Government amended the Inland Revenue Ordinance in 2006, an Honourable Member has just queried whether it is too late to introduce new amendments now, and whether it was necessary to spend nine years on the amendments. I can say that this was not the case, because after the Inland Revenue Ordinance was amended in 2006, we truly have to conduct a review of its application to the industry; and as we can see, since the Ordinance was amended in 2006, a lot of hedge fund firms have indeed been enticed to manage their funds in Hong Kong. We have been in constant discussion with the sector on how to refine the policy to support the asset management industry. Members of the sector have, since a few years ago, suggested to us that we may consider applying the exemption to private equity funds. In this regard, we do need to explore how to facilitate and support the development of the industry without losing tax revenue, and we have indeed done some work on this. I believe the sector will agree that the time taken by the Government to conduct consultations or work out the legislative amendments was not long.


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The Bill amends the relevant provisions in the Inland Revenue Ordinance to allow profits tax exemption for profits derived from transactions in securities of eligible portfolio companies conducted by offshore private equity funds through corporations licensed by the Securities and Futures Commission (SFC). As private equity funds are not necessarily managed by SFC-licensed corporations, the Bill further provides that offshore private equity funds carrying out relevant transactions also qualify for the exemption as long as the specified conditions are met. In order to be a qualifying fund, an offshore private equity fund must have more than four investors; the capital commitments made by investors must exceed 90% of the aggregate capital commitments; and the portion of the net proceeds arising out of the transactions of the fund to be received by the originator must not exceed 30% of the net proceeds. These conditions aim to ensure that a qualifying fund will not be majority-owned by the fund manager. The Bill also exempts profits derived by an offshore private equity fund from a transaction in securities in an eligible portfolio company through the disposal of securities in a special purpose vehicle, as well as profits derived by a special purpose vehicle from a transaction in securities in an interposed special purpose vehicle or an eligible offshore portfolio company. As for the definition of securities, according to the proposed definition of securities, profits derived by an offshore private equity fund from the disposal of shares, stocks, debentures, loan stocks, funds, bonds or notes of an overseas private company or its special purpose vehicle, or profits derived from rights, options or interests in, or in respect of, such shares, stocks, debentures, loan stocks, funds, bonds or notes, will be exempt from tax. To prevent abuse of the tax exemption by local companies by simply converting their taxable profits to non-taxable income via an offshore fund structure, an eligible portfolio company must not have any properties or business in Hong Kong. Taking into account the common practices of private equity funds, we propose to provide certain flexibility in the conditions by allowing portfolio companies to hold immovable property, or to hold share capital in other private companies with immovable property in Hong Kong, but the aggregate value of the holding of the property and capital should not exceed 10% of the value of the total assets of the private company, so that portfolio companies may carry on business activities of a purely preparatory or auxiliary character. Moreover, the existing deeming provisions will equally apply to offshore private


equity funds. That means a resident person holding a beneficial interest of 30% or more in a tax-exempt private equity fund will be deemed to have derived assessable profits in respect of profits earned by the fund. Some members of the Bills Committee have suggested that the exemption should be extended to local portfolio companies. Considering that any further relaxation of the conditions may create loopholes for tax avoidance as it would make it easier for local companies to simply convert their taxable profits to non-taxable income via an offshore fund structure, we take the view that the current legislative proposal has already struck a balance between promoting the development of the fund industry and preventing abuse of the exemption. While we understand that the members have made this suggestion in the hope of promoting the development of local enterprises, this requires much broader and in-depth policy considerations. The Bills Committee has also discussed the cost and benefits of providing profits tax exemption for offshore private equity funds. At present, offshore private equity funds normally use the asset management and professional services in other jurisdictions so as to minimize their exposure to Hong Kong tax liability. We therefore expect that the impact of the implementation of the proposal on Hong Kong's tax revenue will be very limited. This also serves as a response to a question raised by an Honourable Member just now on whether there is really no way to receive tax from such offshore companies. Basically, under the current framework, there is no way to receive tax from such offshore companies, and this is why we are of the opinion that any loss of tax revenue caused to us by the new legislative proposal will be minimal or very limited. On the contrary, the proposal will help attract more offshore private equity fund managers to expand their business in Hong Kong and drive demand for other relevant professional services, whereas income received by local fund managers and other service providers will continue to be subject to Hong Kong tax. In fact, since the implementation of the profits tax exemption for offshore funds in 2006, Hong Kong's combined fund management business has grown by 2.6 times from some $6.1 trillion as at the end of 2006 to $16 trillion as at the end of 2013. President, in sum, the legislative proposal to extend the profits tax exemption for offshore funds to private equity funds will help strengthen Hong Kong's position as an international asset management centre and foster the further development of our financial services sector as a whole. I earnestly request the Legislative Council to pass the Bill. Thank you, President.


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PRESIDENT (in Cantonese): I now put the question to you and that is: That the Inland Revenue (Amendment) Bill 2015 be read the Second time. Will those in favour please raise their hands? (Members raised their hands) PRESIDENT (in Cantonese): Those against please raise their hands. (Members raised their hands) Mr WONG Yuk-man rose to claim a division. PRESIDENT (in Cantonese): Mr WONG Yuk-man has claimed a division. The division bell will ring for five minutes. PRESIDENT (in Cantonese): Will Members please proceed to vote. PRESIDENT (in Cantonese): Will Members please check their votes. If there are no queries, voting shall now stop and the result will be displayed. Ms Emily LAU, Mr TAM Yiu-chung, Mr Tommy CHEUNG, Mr Frederick FUNG, Mr WONG Kwok-hing, Prof Joseph LEE, Mr Andrew LEUNG, Mr WONG Ting-kwong, Ms Starry LEE, Dr LAM Tai-fai, Mr CHAN Kin-por, Dr Priscilla LEUNG, Mr WONG Kwok-kin, Mr IP Kwok-him, Mrs Regina IP, Mr Alan LEONG, Mr NG Leung-sing, Mr Steven HO, Mr Frankie YICK, Mr WU Chi-wai, Mr YIU Si-wing, Mr Charles Peter MOK, Dr Kenneth CHAN, Mr LEUNG Che-cheung, Mr Kenneth LEUNG, Miss Alice MAK, Mr KWOK Wai-keung, Mr Christopher CHEUNG, Mr SIN Chung-kai, Mr IP Kin-yuen, Dr Elizabeth QUAT, Mr Martin LIAO, Mr POON Siu-ping, Mr TANG Ka-piu and Mr Tony TSE voted for the motion.


Mr LEUNG Yiu-chung, Mr LEUNG Kwok-hung and Mr WONG Yuk-man voted against the motion. THE PRESIDENT, Mr Jasper TSANG, did not cast any vote. THE PRESIDENT announced that there were 39 Members present, 35 were in favour of the motion and three against it. Since the question was agreed by a majority of the Members present, he therefore declared that the motion was passed. CLERK (in Cantonese): Inland Revenue (Amendment) Bill 2015. Council went into Committee. Committee Stage CHAIRMAN (in Cantonese): Committee stage. Council is now in Committee. INLAND REVENUE (AMENDMENT) BILL 2015 CHAIRMAN (in Cantonese): I now propose the question to you and that is: That the following clauses stand part of the Inland Revenue (Amendment) Bill 2015. CLERK (in Cantonese): Clauses 1 to 12. CHAIRMAN (in Cantonese): Does any Member wish to speak? (No Member indicated a wish to speak)


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CHAIRMAN (in Cantonese): I now put the question to you and that is: That clauses 1 to 12 stand part of the Bill. Will those in favour please raise their hands? (Members raised their hands) CHAIRMAN (in Cantonese): Those against please raise their hands. (Members raised their hands) Mr WONG Yuk-man rose to claim a division. CHAIRMAN (in Cantonese): Mr WONG Yuk-man has claimed a division. The division bell will ring for five minutes. CHAIRMAN (in Cantonese): Will Members please proceed to vote. CHAIRMAN (in Cantonese): Will Members please check their votes. If there are no queries, voting shall now stop and the result will be displayed. Mr TAM Yiu-chung, Mr Tommy CHEUNG, Mr Frederick FUNG, Mr WONG Kwok-hing, Prof Joseph LEE, Mr Andrew LEUNG, Mr WONG Ting-kwong, Ms Starry LEE, Dr LAM Tai-fai, Dr Priscilla LEUNG, Mr WONG Kwok-kin, Mr IP Kwok-him, Mrs Regina IP, Mr Alan LEONG, Mr Michael TIEN, Mr NG Leung-sing, Mr Steven HO, Mr WU Chi-wai, Mr YIU Si-wing, Mr Charles Peter MOK, Dr Kenneth CHAN, Mr LEUNG Che-cheung, Mr Kenneth LEUNG, Miss Alice MAK, Mr KWOK Wai-keung, Mr Christopher CHEUNG, Mr SIN Chung-kai, Dr Helena WONG, Mr IP Kin-yuen, Dr Elizabeth QUAT, Mr Martin LIAO, Mr POON Siu-ping, Mr TANG Ka-piu, Ir Dr LO Wai-kwok and Mr Tony TSE voted for the motion.


Mr LEUNG Yiu-chung, Mr LEUNG Kwok-hung and Mr WONG Yuk-man voted against the motion. THE CHAIRMAN, Mr Jasper TSANG, did not cast any vote. THE CHAIRMAN announced that there were 39 Members present, 35 were in favour of the motion and three against it. Since the question was agreed by a majority of the Members present, he therefore declared that the motion was passed. CHAIRMAN (in Cantonese): Council now resumes. Council then resumed. SUSPENSION OF MEETING PRESIDENT (in Cantonese): As a Member has just indicated a wish to speak at the Third Reading of the Bill, I believe that it will still take some time for the Third Reading process to be completed. I now suspend the meeting until 9 am next Monday, 13 July. Suspended accordingly at 12.59 pm.


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Annex II


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official record of proceedings friday, 10 …...official record of proceedings friday, 10 july 2015...

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