Articles by Practice Area
Corporate & Commercial
By Consultant, Adelina Wong
Financial technology (fintech), the use of new technology by financial institutions, has shaken up the banking industry in areas such as foreign exchange, mobile payments and peer-to-peer (P2P) lending. Similarly, the use of technology in the insurance sector is accelerating and will have a potentially transformative effect on the development, marketing, sale, underwriting and administration of insurance products in the near future. The term “Insurtech” has been coined to describe the application and use of technology in insurance.
In the insurance area, technological advancement is being used to create a more direct and efficient relationship between insurance companies and their retail customers. Potentially, this will lead to a better customer experience. Customers can benefit from lower premiums and greater product choice as insurers use big data to improve risk pricing and offer products (including online sales of insurance) customized to individual needs. Automation of policy administration and claims handling processes using blockchain technology can lead to smoother and quicker processing of insurance claims, a primary concern for policyholders. At the same time, insurers can benefit from the greater reach and lower cost of a digital sales platform. Digital record keeping and settlements can also increase efficiency and reduce costs and fraud risk.
Current notable developments in InsurTech include the following:
1. Application of blockchain technology in record keeping and policy administration;
2. Marketing and sale of insurance on digital platforms; and
3. Application of telematics technology and big data to underwriting and loss prevention.
Blockchain is the technology underpinning the cryptocurrency Bitcoin, and allows the creation of a distributed ledger that records transactions on a permanent global database on computer servers around the world. These servers work as nodes, with each node holding a complete copy of the data which is stored in tamper-proof blocks (joined in unbroken chains) on the common ledger. In this way, each member of the network has a complete, traceable record of all transactions and information stored in the ledger, which cannot be changed or added to without the consent of everyone on the network.
In insurance, an industry which heavily relies on documentation and databases, blockchain has the potential to increase efficiency and improve transparency by allowing parties to insurance and reinsurance transactions to share data and documentation with each other in real time.
Applications or programs can also be built on blockchain to allow automatic execution of contracts composed in computer code (so-called “smart contracts’) which are stored on the shared ledger. Such smart contracts have the potential to greatly increase the speed and efficiency of claims processing, as well as alleviating fraud risk since the blockchain ledger provides immutable records and tracking. As an example, life insurance smart contracts can be programmed in future to automatically transfer life insurance proceeds to the beneficiary’s bank account on the policyholder’s death, verified by an automatic real-time check of the online death register.
Online Marketing & Sales
Going beyond policy administration, new digital platforms are being launched for the marketing and sale of insurance products. Price comparison websites are already common, particularly in the automobile insurance area. Taking digital distribution a step further, pure online insurance sales platforms are emerging with insurers directly selling to consumers with no intermediary or human interface. In particular, online-only insurance companies are starting to take off in China, with the launch of Zhong An, an online-only property and casualty insurer, in 2013. Backed by Chinese tech giants Alibaba Group and Tencent Holdings, Zhong An is the first and only company in China to date with an internet insurance license. It has used its digital platform to sell tailored insurance for particular products/services to the mass market, such as shipping return insurance for online purchases on Taobao and flight delay insurance for online bookings on CTrip via links embedded on the platforms of its online market partners. From inception through to the end of 2016, Zhong An has sold over 7.2 billion policies and serviced some 492 million customers. It just raised US$1.5 billion in September 2017 by listing on the Hong Kong Stock Exchange in the city’s biggest fintech offering to date.
Telematics & Big Data
Technology is also being used to inform underwriting decisions, including both risk assessment and pricing. In particular, telematics, the “Internet of Things” (IoT) technology that collects, stores and transmits data about the location, usage, performance and operating status of devices, machines and products, is being used by insurers for ongoing risk profiling and monitoring of customers, allowing them to customize premiums and improve risk pricing. For example, many auto insurers in the U.S. and Europe now offer premium discounts to customers for installing telematics devices in their cars (which track factors such as speed, braking, acceleration etc.) and then driving in a certain manner. Similarly, some health insurers are giving customers free fitness tracking devices and then offering to lower their premiums if they meet certain exercise requirements. Home insurers are likewise offering premium discounts to customers who install cameras, sensors, smoke detectors, leak detectors and other IoT devices in their homes. In this way, customers are incentivized to reduce their health and accident risks and avoid claims under their insurance.
Risks and Challenges
In the area of telematics, the primary challenges relate to privacy and security. Even with the incentive of premium discounts, customers may be reluctant to share private information with IoT device manufacturers and insurance providers, particularly given security and hacking concerns. To encourage broader customer take-up of IoT devices, better security will have to be built both into the devices themselves and the software applications and network connections linking the devices. There is also concern about what companies will do with the information collected, much of which constitutes personal data subject to regulation. For example, collected data could potentially be used to decline insurance altogether to high-risk customers. Thus, regulators will no doubt closely monitor how insurers collect and use IoT data in underwriting having regard to the fair treatment of customers.
Online marketing and sales of insurance will likewise be subject to regulatory scrutiny. While more straightforward products such as car and property insurance may quite easily be sold online, life insurance is a different proposition. There are stringent regulatory requirements in most jurisdictions (including Hong Kong) regarding steps which must be taken by manufacturers and distributors of long-term insurance products in the marketing and sales of such products in order to ensure protection of the best interests of customers. Requirements regarding undertaking a thorough suitability assessment of the customer’s insurance needs and financial circumstances and clear communication of complex product features and risks may be hard to meet via an online platform.
Turning to the use of blockchain technology for policy administration, insurers can only take advantage of it after they digitalize and consolidate all of their contracts and data. The technology itself also presents regulatory challenges since the blockchain is not located in any one jurisdiction making it difficult to regulate. On the other hand, the transparent nature of blockchain makes the data available to those on the network and risk monitoring presumably more straightforward.
Where is Hong Kong?
Following in the footsteps of Singapore and the UK, the Hong Kong Insurance Authority (IA) launched an “Insurtech Sandbox” on September 29, 2017. This Sandbox will allow authorized insurers in Hong Kong to undertake pilot runs of new Insurtech products/applications without the need to get full regulatory approval provided that the initiatives in question meet certain criteria (which include having adequate safeguards to protect customers’ interests during the trial). A similar pilot scheme was launched by the Hong Kong Monetary Authority over a year ago under which banks in Hong Kong have been running trials of their new fintech products. It is expected that insurers will follow suit now that they potentially have a safe space try out new technologies without taking on the full cost and regulatory burden of IA supervisory requirements.
At the same time as launching the Sandbox, the IA introduced a pilot scheme “Fast Track” for applications for authorization from applicants who will carry on insurance business in or from Hong Kong using solely digital distribution channels – i.e. without the use of conventional channels involving agents, brokers or banks. The intention is to promote direct digital distribution of insurance which it is envisaged will bring benefits to customers in terms of new products and cost efficiency.
Insurtech has been slow to take off in Hong Kong, partly due to wariness from insurers and their traditional reliance on middlemen (agents and brokers) for distribution of insurance products. Hong Kong currently has approximately 100,000 individuals who are registered either as individual insurance agents, or responsible officers/technical representatives undertaking insurance agency or brokerage business in Hong Kong. However, increased online sales of insurance by both traditional and newly authorized online-only insurers will allow insurers to interact directly with customers, allowing them to save on agency/brokerage commissions and reduce operating and distribution costs. Reduction of the need for middlemen in the industry will likely lead to restructuring and redundancies.
On the other hand, and as warned by the IA in relation to the Fast Track scheme, not all insurance products are suitable to be sold online, and the IA’s expectation is that all of its existing “policyholder protection measures should remain intact”. Stringent regulatory requirements in relation to the marketing and sale of long-term insurance may be a significant barrier to online distribution of life insurance.
Nonetheless, the advent of the Insurtech Sandbox and Fast Track application process for online insurers will likely draw more technology firms into the insurance sector, following the lead of Alibaba Group and Tencent Holdings which collaborated to set up Zhong An. Traditional insurers will face competition from the new Insurtech startups and have already begun developing and investing in technology so as not to be left behind. In this changing Insurtech landscape, the challenge for regulators such as the IA will be to develop a regulatory culture which protects customers but at the same time is flexible enough to support new Insurtech products and services.
In 2012, Bill Ackman, founder and CEO of U.S. hedge fund, Pershing Square, made a US$1 billion trade “against” Herbalife, a global multi-level marketing (“MLM”) company, listed on the New York Stock Exchange, by “shorting” its shares.
He also alleged that Herbalife’s market practices effectively made it a global pyramid scheme, where distributors were misled by illusions of great returns, but where the reality was a product that would not sell on the open market and distributors who regularly lost money.
Herbalife’s response was to restate the fact that they offered healthy products and an opportunity to “change one’s life” by becoming a distributor.
Herbalife’s “distribution” structure had already attracted investigation by many entities, most recently by the U.S. Federal Trade Commission (“FTC”). That resulted in a 2016 settlement, with Herbalife being fined US$200 million and agreeing to change its business model.
After the “short” on Herbalife, several other investors, notably Carl Icahn went “long” on Herbalife stock, attacking Ackman’s short position, showing that Herbalife had much support, not only from its investors, but also self-servingly from its own distributors.
MLMs tend to do well where there are minority communities, with people within a community selling to each other and trying to recruit each other.
It seems that in an MLM structure, it is only the top-level that gets huge profits, and such a structure disturbs “normal” economic order and affects social stability. This is the rationale from the Chinese government as to why MLMs were banned in China, in 2005.
The visible enforcement of this prohibition in China is shown by the fact that only recently have there been large-scale coordinated raids by Chinese police and local government officials, where over 1200 people have been arrested on suspicion of having links to a pyramid scheme in southern China, involving over US$50 million.
In Hong Kong, MLMs do legally exist and conduct business, but consumer protection comes from the Pyramid Schemes Prohibition Ordinance (Cap. 617) (the “Ordinance”). The Ordinance provides a legal definition of a “pyramid scheme”, such a scheme requiring the following characteristics:
i) New participants must make a payment to existing participants or promoters of the scheme;
ii) New participants are being represented regarding the prospects of receiving payment once they join the scheme (the “recruitment payment”); and
iii) The “recruitment payment”, as its name suggests, is entirely or substantially derived from the new participants finding further new participants to join the scheme.
Typically, the practical difficulty will be in deciding whether a “legitimate” MLM actually has “pyramid” scheme elements.
Section 5(2)(a) of the Ordinance provides the offence of “participating” in a pyramid scheme, so the risk is to identify whether each MLM business model is actually legitimate.
In various common law jurisdictions, there have been investigations and prosecutions for involvement in pyramid schemes, but as yet no one has targeted any listed MLM claiming that it is a pyramid scheme, although self-servingly people who lose money in those MLMs often make such claims.
Caution needs to be exercised when making any investment, and when deciding to participate in any marketing scheme.
OLN’s Corporate and Commercial Department regularly offer legal advice regarding investment decisions. If you have any specific questions, please do not hesitate to contact Christopher Hooley at firstname.lastname@example.org.
By Chris Hooley
In my Article of 8th February 2017 “Transparency and Beneficial Ownership of Hong Kong Companies”, I raised the likelihood of a Companies (Amendment) Bill 2017 (the "Bill") being published.
The Bill has indeed now been published and it does aim to introduce new legislation in Hong Kong, to improve transparency in the beneficial ownership of Hong Kong incorporated companies; this is to enhance Hong Kong's regulatory regime on combating money laundering and terrorist financing.
The Bill now requires that:
- Applicable Companies maintain a register of Significant Controllers.
- Applicable Companies carry out investigations, obtain information about its Significant Controllers and keep that information accurate and updated at all times.
Set out below are details of these practical changes:
Significant Controllers Register
Each Applicable Company will be required to keep and maintain a register (the "Significant Controllers Register") for any person who has significant control over an Applicable Company (the "Significant Controllers").
The Significant Controllers Register must contain the prescribed contents and be kept at the registered office of the Applicable Company, or at another prescribed place.
What is an “Applicable Company”
An Applicable Company is a Hong Kong incorporated company, that is NOT:
- a listed company; or
- a type of company, or class of companies, that is exempted from keeping and maintaining a Significant Controllers Register by regulations made by the Financial Secretary of Hong Kong.
An Applicable Company also does not include a non-Hong Kong company which has registered branches or representative offices in Hong Kong under Part 16 of the Companies Ordinance.
Who is a “Significant Controller”?
A Significant Controller means either:
a natural person or specified entity that has significant control over that company (a "Registrable Person"); or
a legal entity that is a member of and has significant control over that company (a "Registrable Legal Entity").
What constitutes Significant Control?
A person has “significant control” over an Applicable Company if the person fulfills one or more of the following criteria:
- the person holds, directly or indirectly, more than 25% of: either the issued shares in that company if it has a share capital; or the right or rights to share in the capital or profits of that company if it does not have a share capital;
- the person holds, directly or indirectly, more than 25% of the voting rights in that company;
- the person holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of that company;
- the person has the right to exercise, or actually exercises, significant influence or control over that company; or
- the person has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm, not being a legal person under the relevant governing law, whose trustee(s) or member(s) meet(s) one or more of the conditions specified above.
Duties and obligations of Applicable Companies
- Keep a Significant Controllers Register whether or not that company in fact has any Significant Controllers.
- Carry out investigation and obtain information about its Significant Controllers.
- Keep information on the Significant Controllers Register up to date including recording any registrable change arising from: (a) any person ceasing to be a Significant Controller; (b) any other change which results in any particulars for any person entered in the Significant Controllers Register being incorrect or incomplete; or (c) any required update on the prescribed additional matters noted in the register.
- Notify the Registrar of Companies of the place at which the Significant Controllers Register is kept and any change in the place at which the register is kept, subject to certain exceptions.
In fulfilling those duties to investigate, obtain information and keep information updated about its Significant Controllers, each Applicable Company must give notice to the relevant persons (the "Notice") if it knows, or has reasonable cause to believe that:
- that person is a Significant Controller;
- that person knows the identity of another person who is a Significant Controller; or
- there is a registrable change with respect to that person, the details of which are required to be contained in the Significant Controllers Register.
There are certain exempt circumstances where a Notice may be not required.
Inspection of Significant Controllers Register – Not available to the general public
The following persons have the right to inspect the Significant Controllers Register and obtain copies of the Register:
- Any Significant Controller whose name is entered in the Significant Controllers Register.
- Any law enforcement officer of various statutory bodies including the Companies Registry, the Hong Kong Monetary Authority, the Hong Kong Police Force, the Inland Revenue Department, the Independent Commission Against Corruption, and the Securities and Futures Commission.
If an Applicable Company fails to meet the demand for inspection or for making copies by a law enforcement officer, that officer may apply to the Hong Kong Court for an order to compel the Applicable Company to do so.
An Applicable Company must designate at least one representative who has the required qualification, to facilitate and assist it to comply with its duties in relation to the Significant Controllers Register under the new law, including the provision of assistance to any law enforcement officer for the purposes of performing his function relating to the prevention, detection or investigation of money laundering, or terrorist financing.
It is expected that the Bill, if passed, will come into force on the commencement date, indicated in the Bill as being 1st March 2018 .
It is unclear whether the Companies Registry will issue guidelines to help Applicable Companies comply with the new requirements after the Bill is passed, and in particular whether an Applicable Company will be given any transitional period to set up the Significant Controllers Register and to take all necessary actions required to comply with the new law after it comes into force as of the proposed commencement date.
After the Bill is passed, each Applicable Company must start to formulate compliance steps and give itself sufficient time to implement and complete these steps so that as of the proposed commencement date, it will have in place an accurate and up to date Significant Controllers Register. An Applicable Company should also at the same time establish a set of compliance rules in relation to the keeping and maintenance of the Significant Controllers Register to ensure that it will comply with its ongoing obligations under the new law to keep the Significant Controllers Register up to date at all times.
How OLN can help
- OLN can help you create the Significant Controllers Register, advise on the compliance steps and help establish compliance rules for all ongoing compliance now need.
- OLN is available to advise you on any questions you may have on the Bill, the proposed new law or any of the above concepts.
Please contact me, Chris Hooley, email@example.com, if you have questions or issues on any of the above.
Oldham, Li & Nie
24th July 2017
In October 2014, a paper entitled “Transparency and Beneficial Ownership” was published by the Financial Action Task Force (“FATF”).
Although that paper did not mention Hong Kong by name, the relevant recommendations stated were expressed to be “recognised as the global anti money laundering and counter-terrorist financial standard”.
FATF has consistently stated that that there must be adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed by the competent authorities and attaches considerable importance to this in the ongoing and highly publicized international fight against money laundering and against other unlawful activities.
In order to achieve such a statutory regime, the Hong Kong Government now intends to amend the Companies Ordinance (Cap 622 of the Laws of Hong Kong) so as to require all Hong Kong companies to obtain and hold up to date beneficial ownership information available for public inspection. Listed companies will be exempted from this requirement as they are already subject to other strict disclosure requirements under the Securities and Futures Ordinance.
As a result of the October 2014 FATF paper, Hong Kong’s Financial Services and Treasury Bureau (the “Bureau”) issue, in early January this year, a “Consultation Paper” to enhance the transparency of the beneficial ownership of Hong Kong companies, including requiring Hong Kong companies to maintain a register of persons with significant control (a “PSC Register”) for each company. Such a register would be open to the general public for inspection.
What does beneficial ownership actually mean
Any person who satisfies one or more of the following will be affected:
(a) directly or indirectly holds more than 25% of the shares;
(b) directly or indirectly holds more than 25% of the voting rights;
(c) directly or indirectly holds the right to appoint or remove a majority of directors;
(d) otherwise has the right to exercise, or actually exercising, significant influence or control; or
(e) has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm whose trustees or members satisfy any of the first four conditions.
The Bureau proposes that each Hong Kong company be required to identify and keep a register of people falling into one or more the above categories. This requirement will extend to legal entities with significant control over the company. This is intended for individuals who exercise control through a holding company or other structures. To enable a Hong Kong company to maintain its PSC Register, each company will be obliged to take reasonable steps to ascertain its registerable individuals and legal entities.
Companies will also have to enter on their individual PSC Register details of an authorised person responsible for providing such information and for providing further assistance to law enforcement agencies, as and when required.
Public Inspection of PSC Register
Each Hong Kong company will be required to make its PSC Register available for inspection by any shareholder without charge or by any member of the public on payment of a fee.
A company must notify the Registrar of Companies where its PSC Register is kept, if not kept, at its registered office.
The consultation period ends on 5th March 2017.
Assuming that the Hong Kong Government does introduce legislation into the Legislative Council, it is likely that the Hong Kong Government will want to enact legislation prior to the next FATF evaluation visit to Hong Kong, which is scheduled for October and November 2018.
Oldham, Li & Nie
Does Hong Kong need more protective consumer legislation in respect of Fitness Centres and Beauty Salons?Tuesday, 17 January 2017 12:56
By Christopher Hooley and Matthew Lo
Nowadays walking past a Hong Kong Fitness Centre or Beauty Salon puts you at risk of encountering a salesperson, aggressively selling memberships or beauty treatments.
However, did you ever wonder whether such sales techniques are actually a breach of the law and does not current Hong Kong law already provide adequate protection for consumers interested in such products/services?
Separately, is there still a need for a statutory cooling-off period to protect consumers?
Hong Kong Current Law - Trade Descriptions (Amendment) Ordinance
Current consumer protection is provided in part through the Trade Descriptions (Unfair Trade Practices) (“Amendment Ordinance”) which amended the Trade Descriptions Ordinance (Cap 362) and which now expressly prohibits six specific “trade practices”.
Those six trade practices are now express offences under the Amendment Ordinance, being (1) false trade descriptions of services, (2) misleading omissions, (3) aggressive commercial practices (ie the aggressive sales techniques referred to above), (4) bait advertising, (5) bait-and-switch, and (6) wrongly accepting payment.
Enforcement of the Amendment Ordinance is through the Hong Kong Consumer Council, with whom a consumer may lodge a complaint. So it is the Consumer Council that decides whether or not to take legal action against an offending business.
If a business is found guilty of engaging in any one of these six trade practices, it may be subject to criminal sanctions; on conviction on indictment, with fines of $500,000 and imprisonment of 5 years. On a summary conviction, fines of $100,000 and imprisonment of 2 years may be imposed.
In addition to the consumer protection through the Hong Kong Consumer Council, consumers could choose to institute a private action based on contract law or tort, although costs may be prohibitive.
Protection of Consumers under the Amendment Ordinance
The Consumer Council does provide consumers with a practical channel to take action against Fitness Centres and Beauty Salons, as shown below:
In April 2016, California Fitness was publicly named and criticized by the Consumer Council for aggressive sales practices deployed in the sale of gym memberships and services to consumers, such practices being deemed intimidating, pressuring and misleading consumers into signing for such memberships, while failing to explain key contractual terms during the sale process, often involving long-term contracts valued at tens of thousands of dollars.
California Fitness itself continued to receive an increasingly large number of complaints from consumers (227 in 2013, 296 in 2015), representing over half the number of total complaints against Fitness Centres in 2015 (577) before it went out of business last year.
In another instance, staff of a Beauty Salon were convicted for engaging in aggressive commercial practices, after having continuously pressured a consumer for one and a half hours, urging that customer, on the basis that there were lumps on the consumer’s chest, to purchase a body treatment package of HK$140,000. The customer yielded despite initially expressing reluctance.
In a third case, a Beauty Salon director and sales manager were given a suspended sentence for misleading customers into believing that the customers would be obtaining a diploma from an Australian vocational institution, although that vocational institution no longer had the right to issue the qualification. The director and sales manager were found liable for engaging in a commercial practice that was a misleading omission.
The particular problem with Fitness Centres and Beauty Salons
Despite the implementation of the Amendment Ordinance, there is still evidence that some Fitness Centres and Beauty Salons breach the Amendment Ordinance by engaging in one or more of the six above prohibited trade practices.
Statistics recently published by the Consumer Council show that the number of consumer complaints against Fitness Centres and Beauty Salons for engaging in these six trade practices continue to rise year on year.
Additionally, statistics from the Hong Kong Customs and Excise Department, show that the number of complaints against Fitness Centres between January and March 2015 was substantially less than in the period between January and March 2016. Similarly, the number of complaints against Beauty Salons during the period between January and March 2015 was far less than in the period between January and March 2016.
Does Current Legislation Adequately Protect Consumers dealing with Fitness Centres and or Beauty Salons?
Hong Kong’s current consumer protection legislation is consistent with the United Nations Guidelines for Consumer Protection, as it provides consumers with a channel, the Consumer Council, to take action against any businesses who are in breach of the provisions of the Amendment Ordinance.
However, even the Consumer Council agrees that aggressive sales practices, and other potentially “unfair trade practices” still remain widespread, especially in relation to Fitness Centres and Beauty Salons.
Lawmakers have long pushed for a statutory cooling-off period, allowing consumers who have been allegedly ‘forced’ into signing contracts to cancel such contracts and get their money back. Cooling-off periods were discussed by LegCo as long ago as 2007, when proposals were made to align Hong Kong’s statutory consumer protection with that of the European Union and the United States.
Statutory cooling-off periods were further debated by LegCo in 2011, and the Consumer Council made suggestions to the Fitness Centre industry last year about self-regulation.
There does remain strong support from lawmakers for statutory cooling-off periods to be implemented for the protection of consumers. In May last year, a motion was passed by the LegCo Panel of Economic Development to “urge the Government to introduce legislation on the imposition of mandatory cooling-off periods, and accord priority to implementing a statutory cooling-off period for pre-paid services involving a lot of complaints and large amount of payment, such as those provided by Fitness Centres and Beauty Salons.”
However, despite the above motion, the Government has failed to take any definitive action, stating that more deliberation and research is required before any action is taken.
Is it not now time for some action to be taken, rather than more deliberations? Should there not now be the implementation of a statutory cooling-off period?
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.