1. The Chairman reminded members that the next regular meeting would be held on Monday, 3 March 1997, at 8:30 am and the following items would be discussed:

Management of Government reserves;
Supervision of stock brokers; and
The Securities and Futures Commissions budget for 1997/98.

I. Verification of directors list with regard to property fraud

(LegCo Paper No. CB(1) 753/96-97)

2. The Chairman apologised on behalf of the Panel to the Registrar of Companies (R of C) for having to defer this item from the last meeting.

3. Members noted from the discussion of a fraud case at a meeting of the Housing Panel on 7 May 1996, the culprit succeeded in adding a false name to the list of directors of a company and obtained a re-mortgage loan from a financial institution. Members felt that the Companies Registry (CR) did not have sufficient control over the changing of the directorships of a company, and considered a need to refer the subject to the Panel. At the Chairmans invitation, R of C briefed members on the role of the Companies Registry (CR) in the context of this case.

4. On the standard procedures for checking the authenticity and validity of documents submitted to the CR, R of C advised that as long as the documents were in order and complied with the Companies Ordinance, the CR would accept documents on their face value as its counterparts in other common law countries.

5. Concerning the suggestion to require a lawyer or an accountant to certify the validity of documents before they were submitted to the CR, R of C remarked that such a requirement would involve legislative amendments. Besides, it might not be effective in dealing with the problem in hand as there might be collusion between parties.

6. Regarding the particular fraud case which gave rise to the issue, members were of the view that if the financial institution had verified the authority for the mortgage application, the culprit could not have been successful. They agreed with CRs stance in this regard.

II.Insurance Companies (Amendment) Bill 1997

(LegCo Brief Ref No. C2/2/35C(96))

7. The Chairman said that the purpose of the ensuing meeting was for the Administration to brief the Panel on the policy aspects of the Insurance Companies (Amendment) Bill 1997 (the Bill), so that the Panel could advise the House Committee on whether it was necessary to set up a Bills Committee to scrutinize the Bill.

8. The Deputy Secretary for Financial Services (DSFS) briefed members on the five objectives of the Bill as follows :

to provide regulatory concessions for the operation of captive insurance in Hong Kong;
to preserve the present legal position regarding the requirements for an insurable interest in an insurance contract which is currently applicable in Hong Kong by virtue of the Application of English Law Ordinance (Cap. 88);
to recognise that a parent or guardian has an insurable interest in the life of his/her child or ward;
to empower the Insurance Authority, with the approval of the Secretary for Financial Services, to prescribe standards for actuaries appointed under the Insurance Companies Ordinance (Cap.41) ("the Ordinance") to observe; and
to monitor the compliance by such actuaries of the standards prescribed by the Insurance Authority.

Captive Insurance

9. On the merits of having captive insurance companies in Hong Kong, the Commissioner of Insurance (C of I) said that the introduction of captive insurance companies would widen the range of insurance activities in Hong Kong which, in turn, would promote competition in the market and enhance the status of Hong Kong as a regional insurance centre. Moreover, there would be an inflow of capital and additional job opportunities. There were presently about 3,000 captive insurance companies worldwide, which were registered mainly in Bermuda, Cayman Islands and Guernsey.

10. C of I further advised that due to the special nature of the captive insurance business (i.e. no third party policy holders were involved), there was scope for relaxing, within the limits of prudent regulation, some of the regulatory requirements in order to encourage the setting up of captive insurers in Hong Kong. Specifically, the Administration proposed that:

the requirements for minimum paid-up capital and solvency margin should be reduced to about 20% of those applicable to ordinary insurance companies;
they should not be required to maintain assets in Hong Kong in an amount not less than their Hong Kong liabilities; and
their assets and liabilities might be determined in accordance with the Generally Acceptable Accounting Principles, instead of with any applicable regulations made under the Ordinance.

These proposals were generally in line with the concessions offered by Singapore, which had successfully attracted in the last decade or so 48 multinational firms to set up captive insurance companies there.

11. On the reason for granting such concessions to a specific trade, C of I explained that this was in line with the Governments overall policy of attracting foreign investment and promoting service industries in Hong Kong. DSFS added that given the special nature of captive insurance companies, it would be too harsh to require them to follow the requirements for ordinary insurance companies. The aim of the Bill was to lay down reasonable requirements for the setting up of captive insurance companies in Hong Kong regardless of where the parent companies were registered.

12. Concerning whether banning captive insurance companies from underwriting compulsory insurance businesses, i.e. employees compensation, motor and vessel liabilities insurance, would undermine incentives for setting up captive insurance companies in Hong Kong, C of I pointed out that the restrictions were necessary to protect the interests of the third party claimants under those compulsory insurance businesses as captive insurance companies would be given regulatory concessions. Singapore also imposed similar restrictions on captive insurance companies. In addition, Hong Kong offered other attractive concessionary terms, such as waiving the need for a captive insurance company to maintain a certain percentage of its assets in Hong Kong.

Admin

13. After discussion, the Administration undertook to provide the following information for members consideration:

the effect of recent court cases in US regarding the denial of tax concession to parent companies of captive insurers on those US companies which might be attracted to setting up captive insurance in Hong Kong;
clarification regarding whether the Bill was applicable to a group of companies or a single company, or both;
whether insurance companies themselves were allowed to set up captive insurance companies and, if so, the implications of such a provision; and
details of the requirements for minimum paid-up capital and solvency margin of captive insurance companies in other countries which also offered special regulatory concessions for the establishment of these companies.

(Post-meeting note: The above information has been circulated to members vide LegCo Paper No. CB(1) 988/96-97 dated 4 March 1997.)

14. Regarding point (a) above, C of I advised that the Bill did not include tax concession for companies as the tax rate in Hong Kong was already very low and thus should not deter companies from setting up captive insurance locally.

Implementation of an Appointed Actuary System

15. On the professional qualification of an Appointed Actuary, C of I advised that at the moment acturial qualifications acquired in UK, Australia, Canada and US were recognised in Hong Kong and qualifications obtained from other countries would be considered by the Insurance Authority on a case-by-case basis. The Acturial Society of Hong Kong was not a licensing body and it was not necessary for an Appointed Actuary to be a member of the society. He further advised that in order to facilitate the implementation of a full-fledged Appointed Actuary system, the Administration proposed to amend the Ordinance to empower the Insurance Authority, with the approval of the Secretary for Financial Services, to specify by regulation, the standards to be observed by Appointed Actuaries. This would help to upkeep the professional standard of Appointed Actuaries and allow flexibility for the Insurance Authority to recognize relevant qualifications obtained in other countries.

Committee stage amendment

16. In reply to the Chairmans enquiry about the restriction on the scope of business of a captive insurer, C of I confirmed that "any Ordinance" in clause 2, section 7(a)(i) only referred to any Ordinance in Hong Kong and not overseas. He agreed to consider the suggestion of amending the clause by adding "Hong Kong" before the word "Ordinance" to avoid ambiguity.

Admin

Other issues

17. Regarding the policy on the extent of C of Is power over non-financial aspects of the insurance industry, C of I advised that the Administrations policy was to encourage and assist the trade in setting up self-regulatory measures such as a registration system of agents, introduction of code of practice and a redress system. In fact, most complaints and disputes in the trade had been resolved within the self-regulatory system.

18. As to the disputes between insurance companies and their agents, C of I pointed out that disputes between employers and employees should be more appropriately dealt with by the Labour Tribunal. Disputes arising from contractual agreements between insurance companies and their agents should be settled in court.

Conclusion

19. The Chairman urged the Administration to provide the information detailed in paragraphs 13 and 16 above for circulation to members as soon as possible. If members did not raise any objection after studying the papers, the Panel would suggest to the House Committee that it might not be necessary to set up a Bills Committee on the Bill.

III. Any other business

Allocation of Funds for Members Overseas Duty Visits

20. Members considered it unnecessary to bid funds for overseas visits for the months of April, May and June 1997.

21. The meeting ended at 10:10 am.

Legislative Council Secretariat
13 March 1997

Last Updated on 18 August 1998

LegCo Panel on Financial Affairs

Minutes of Meeting held on Monday, 24 February 1997, at 8:30 a.m. in Conference Room A of the Legislative Council Building

I. Verification of directors list with regard to property fraud