Turning Fake News into a Learning Opportunity

September 2026

How times have changed. Was it that long ago when we only consumed news through TV channels and newspapers? Those days are now long gone. Now, with today's digital tools, it seems easier than ever to set up a blog or social medial channel and build an audience.

That’s a good thing. Economics tells us that markets work best when information is widely and efficiently shared – because prices and products can adjust quickly to changes in demand, ultimately benefiting consumers. And we’ve never had such a wide choice of commentators and key opinion leaders to keep the insurance market instantly up to date on the latest information.

But when it comes to the dissemination of information, speed and availability aren’t the only things that matter. Accuracy is also vital - and when the information shared turns out to be wrong, it can have a widespread and instantaneous detrimental impact on the market.

Recently, certain disturbing rumours have been shared on social media. It’s said that multiple arrests had been made by the law enforcement agency at unnamed companies in the insurance market. The alleged crime? Deliberately falsifying information to classify customers as Professional Investors ("PIs"), in order to avoid the commission spreading requirements introduced by the Insurance Authority (“IA”).

After the story broke, the market was immediately ablaze with rumours as to which companies and personnel were involved in the scandal, leading those being speculated about to publicly assert their innocence within a short period of time in response to the unfounded rumours.

As it turned out, on this occasion, the juiciest part of the story from the news source was, in fact, WRONG. There were no such arrests or scandal. The story was – to use a phrase that has become commonly known to us all - FAKE news.

Lessons learned

One obvious lesson learned from this episode is the importance of accuracy. Any platform that has spent time building up a trusted audience through delivering genuine news and valid opinion, accepts an implicit duty to continue that trust through the truth of its reporting. After all, the news it reports can have very real-life consequences for those impacted.

Aside from this, however, there is another important lesson to learn from this episode and that is the focus of this article.

The reason the story had such an impact was because, although certain elements of it turned out to be false, the underlying allegation on which it was based was very much the type of non-compliance that could have happened. In other words, it was like the plot of a fiction novel set in the Hong Kong insurance market. The type of novel that you read and say to yourself “wow, this could actually happen one day”. And with the crime having been set out in fictional terms for us already, we now have a unique opportunity to prevent it from happening in reality. So let’s do exactly that.

Commission Spreading and the Professional Investor Exemption

First, let’s set out the Professional Investor exemptions on which the story was based.

Professional Investors – PIs – are not a concept that originated in insurance regulation. Rather, as their name suggests, they come from Hong Kong's investment regulatory framework, under the Securities and Futures Ordinance (Cap. 571) (“SFO”) and its Securities and Futures (Professional Investor) Rules (Cap. 571D) (“PI Rules”). This legislation introduced PIs as persons who qualify (through their investment knowledge, experience and/or net worth) as sophisticated market participants, as distinct from retail investors. Because of this special status, in dealing with PIs, SFC licensees are exempted from certain requirements aimed primarily at retail investor protection.

Many life insurance products also have savings and investment elements. In the past few years, therefore, as the IA has tightened up on policyholder protection requirements associated with those products, it has also adopted the concept of PIs to introduce exemptions from certain requirements, as they apply when insurers and insurance intermediaries deal with PIs (being sophisticated insurance buyers).

The two main examples of such exemptions introduced in recent years are as follows:

IUL Products - The exemption of Indexed Universal Life Insurance Products¹ from certain requirements that apply to Class C business, where such products are only offered to PIs (see the joint circular from the IA and HKMA of 13 March 2025).
Commission spreading for Participating Policies - The Practice Note on Remuneration Structures of Authorized Insurers for Licensed Insurance Intermediaries for Participating Policies ("Practice Note")², issued on 30 July 2025, set out the IA’s minimum expectations on remuneration structures for insurance intermediaries arranging participating policies, such that no more than 70% of the total commission should be paid during the first policy year, with the remaining commission being spread evenly over a minimum period of five years, or the premium payment term if shorter. However, if the participating policy is being arranged for a policyholder who qualifies as a PI, the insurer can choose not to follow the commission spreading requirement.

The second exemption mentioned - relating to commission spreading on participating policies - provided the plot-line for the fictional news story.

Allegedly, a broker company and insurer were conspiring to falsify information so that customers who were not, in fact, PIs would be classified as PIs. This allowed them to rely on the PI exemption to by-pass the commission spreading requirement and front-load the broker company’s commission in the first year.

Conditions for the PI Exemption to be Applied

In both examples where the PI exemption may be used, the insurer and insurance intermediary must have appropriate controls in place and must operate such controls in substance. For the PI exemption to apply in respect of the commission spreading requirements, for example, the Practice Note makes clear that the insurer:

(a) must establish and implement adequate and effective controls and processes to ascertain whether a potential policyholder qualifies as a PI during the on-boarding and know-your-client process;

(b) be satisfied that the policyholder, in accordance with such controls and processes, has been identified as a PI; and

(c) in structuring its commission payable to the license insurance intermediary, be satisfied that the overriding principles governing appropriate remuneration structures as stated in the Guideline on Underwriting Long Term Insurance Business (other than Class C Business) (GL16) continue to be satisfied.

In the case of (a) and (b), this means collecting objective evidence (e.g., bank/portfolio statements) to ascertain the customer qualifies as a PI. As regards (c), it requires the insurer to answer how it ensures that its remuneration structure for the intermediary concerned, does not create misaligned incentives (e.g. disproportionate over-prioritization of selling and de-prioritization of continued servicing) so that PI policyholders continue to be treated fairly, despite the departure from the spreading requirements.

Why the story was believable?

As the insurance regulator, we could immediately understand why the story (although fake) was believable. After all, it is not uncommon for us to see the following dynamic play out, whenever we bring in a new regulatory requirement.

The vast majority of practitioners in the market will implement substantive controls and procedures to bring themselves into compliance with the new requirement.
But some (a minority) of compliance personnel and practitioners will “play games” by searching for workarounds, so that on the surface, it looks like they are complying, when in reality they are not. Instead, they are simply trying to extract benefits from customers as quickly as possible, regardless of the consequences. This creates a dynamic at the margins of the market, where in order to compete for business, some companies compete by stretching regulatory exemptions well beyond their limit (and thereby act in blatant breach of the regulatory requirement), in the hope they will not get caught.

This dynamic explains why, when the fictious story broke, the reaction was not “did this really happen?” but, “who was it this time?”

Lesson 1: Implement controls that achieve the true objective of the PI exemption

The first lesson to take away from this episode, is to recognize that the PI exemption is a privilege that insurers and insurance intermediaries can rely on only if they have controls and processes in place to achieve the objective of the exemption (and not just tick a box).

The reason why these PI exemptions exist is to recognize that in dealing with sophisticated consumers, certain regulatory requirements that are designated primarily to protect retail consumers may not be necessary. This makes it imperative, however, that the exemption is only applied where the customer genuinely qualifies a PI, and the insurers’ and intermediaries’ processes actually achieve that outcome. If they do not, then vital regulatory protection is being removed from customers who are actually retail insurance buyers and that is not only unfair, it undermines the entire foundation of trust in the insurance market.

But that is not the only objective of the PI exemption. As a secondary objective, the insurer still has to be justify that, despite not applying the commission spreading requirement to the remuneration it pays the insurance intermediary, its remuneration structure still ensures there are no misalignment of incentives and that the customer – the PI – is still being treated fairly. When the IA asks for this justification, it is not enough for the insurer to inform the IA “we established the customer was a PI” – that does not answer the question of how the PI continues to be treated fairly, even though the commission spreading requirement is not applied. If this justification does not exist, then the exemption should not have been used.

Lesson 2: If you are doing what was alleged, then get out of the insurance market. We don’t want you!

The second lesson is simpler and more devastating. In the fictional news story, it was being alleged that a licensed insurance broker company and an insurer were working together, to rely on fake documentation to make customers look like PIs, when they were not, in order to by-pass the commission spreading requirement, front-load the commission to the insurance broker company.

If this had happened, then we can reasonably speculate that the consequences would have been as follows:

There would suggest mass mis-selling going on in the life insurance market through the falsification of PI status. The more people involved, the more likely it would be to surface in the market, and the more likely their business patterns would appear disproportionate compared with other wellbehaved market practitioners. All of this would make the misconduct easy to detect through the IA’s routine collection of regulatory financial and operational data, as well as through other intelligence-gathering and supervisory activities.
Falsifying PI status is not difficult for customers to detect on their own. They are likely to make followup enquiries and then turn those enquiries into complaints to the IA. Again, this makes the misconduct likely to be detected at an early stage.
The insurance intermediary responsible for this would lose its licence, face a significant regulatory penalty and public disgrace through the publication of an enforcement action naming them. In addition, the intermediary and those involved would also have the law enforcement agency to deal with for deliberately faking documents, and a long time to think about their actions when serving their prison sentence. They would certainly be kicked out of the insurance market.
The personnel in the insurer who conspired with the insurance intermediary would face similar disciplinary and/or criminal consequences. Further, if they were serving in any regulatory approved capacity as a Key Person, controller or director, they would also face the humiliation of having their approval removed and being publicly named and shamed in the IA’s enforcement news. Again, the offending personnel would (rightly) be kicked out of the insurance market.
Trust in the Hong Kong insurance market would be fundamentally undermined…and in all likelihood policyholders would look to insurance markets in other jurisdictions (or other kinds of financial services) to satisfy their demand.

So don’t even think about it!

Concluding Remarks

Key opinion leaders do wield significant influence in today's digital landscape. They serve an important role in promoting transparency and sharing informed commentary, rather than chasing clicks at the expense of accuracy. Yet when they get things wrong, the consequences can be very real, promoting readers second-guess every single post they publish thereafter.

That said, consider the erroneous story in question from another angle: It would have been far worse for the reputation of the insurance market if it had been true.

So let this episode serve as an advanced lesson. The PI exemption is a privilege. It is not there to be stretched beyond its limits to allow regulatory protections for retail insurance buyers, to be bypassed.

PI exemptions depend on insurers and insurance intermediaries having proper controls in place to identify genuine PIs when seeking to rely on the exemption, and being able to explain how PIs continue to be treated fairly despite certain protections not being applied. Do this properly, and it will build trust in the market.

If this is not done properly – thanks to the fictious news story - the market should now know what the consequences will be by reading this article.

Notes:

¹ See https://www.ia.org.hk/en/legislative_framework/circulars/reg_matters/files/Circular_20250313_IUL.pdf

² See https://www.ia.org.hk/en/legislative_framework/circulars/reg_matters/files/Cir_dd_30.7.2025_Practice_Note_for_Commission_Spreading_Eng.pdf