Hong Kong regulator guts insurance referral fees with 50% benchmark

Unlicensed third-party referrers previously captured up to 95% of commissions through hidden rebate structures.

Hong Kong regulators have capped referral fees for insurance brokers at 50% of commissions for long-term profit-sharing life policies, as it tries to curb unlicensed selling and hidden commission rebates that have long troubled the market.

The benchmark, set by the Insurance Authority (IA), targets arrangements where licensed brokers pay unlicensed third-party referrers large portions of their commission for introducing customers.

In some cases, these fees have reached 90% to 95% of the total commission, with portions sometimes returned to customers in the form of concealed rebates, said Andrew Carpenter, partner at Reynolds Porter Chamberlain LLP.

“The 50% benchmark has been on the regulator’s radar for some time,” he told Insurance Asia by telephone.

He noted that the Insurance Authority had observed broker business models heavily reliant on third-party referrers, raising concerns about governance and compliance.

Under the rules, a licensed broker should not normally pay more than half of its total commission from an authorised insurer to an unlicensed referrer for introducing a customer buying a participating, profit-sharing long-term policy.

Payments above this threshold are not explicitly banned but will attract regulatory scrutiny and require justification.

There are 803 licensed insurance broker companies in Hong Kong, IA data show, many of which may need to adjust referral arrangements that used to allow unlicensed parties to capture the majority of commissions.

Analysts said the cap is particularly significant for long-term life policies, which pay high commissions up front on products that last for years.

Etelka Bogardi, a partner at Reed Smith LLP, said that when a referrer receives most of the commission, it is unclear what value they add.

“The 50% rebate appears aimed at preventing a broker from effectively outsourcing the brokerage function to someone who receives almost all the financial benefit of the placement without being properly supervised,” she said by telephone.

The IA is concerned that unchecked referral payments weaken governance and blur the line between licensed and unlicensed activity.

Unlike licensed brokers, referrers are not subject to the same ethical or conduct rules, increasing the risk of misconduct throughout the distribution chain.

Carpenter noted that Hong Kong’s approach is more explicit and quantitative than other markets such as the UK, Singapore, or Australia, providing clarity on which arrangements require scrutiny. 

Richard Bates, Hong Kong managing partner at Kennedys Law LLP, said other jurisdictions rely on disclosure and conflict-of-interest rules or limits on up-front commissions but don’t impose a fixed percentage cap.

Whilst methods differ, the policy goals are similar, he said.

“[The benchmark] generally aligns with international best practices in protecting customers and ensuring fair treatment, although it is more prescriptive than measures adopted in other jurisdictions,” he said in an emailed reply to questions.

For brokers, the key question is whether paying most or all of a commission to a referrer is compatible with regulatory duties.

Bates added that using referral fees to disguise illegal kickbacks or unlicensed advice is a criminal offence in Hong Kong, punishable by fines or up to two years in prison.

The IA has signalled it would monitor market developments and might consider extending similar measures to other distribution channels, including bancassurance.

Carpenter said bancassurance is a likely candidate for benchmarks or disclosure requirements, although any expansion would need coordination with other regulators.

Bates noted that bank-led channels are exempted to avoid overlapping supervision, but warned that tighter rules could apply in the future to long-term products or other distribution networks.