September 2026
Let’s talk about referrals…again!
Regular readers of Conduct in Focus and the IA’s circulars will know that “referral business” has been at the centre of the regulatory radar screen for some time now.
By “referral business”, we normally mean an arrangement where a licensed insurance intermediary – usually a broker company – relies on unlicensed third parties to introduce potential customers to the intermediary. In return the intermediary pays the third party a referral fee from the commission earned, if the customer introduced by the third party subsequently buys an insurance policy via the intermediary.
There’s nothing inherently wrong with referral business, if it is carried on compliantly. That means (a) the unlicensed third party referrer must only introduce the customer to intermediary (and perform no regulated activities in doing this); (b) the intermediary must carry on all the necessary regulated activities with the customer to the regulatory standards demanded; and (c) the referral payment must not incentivize the unlicensed referrer to carry on any regulated activities.
This was not, however, how the referral arrangement was operating in practice for some broker companies. Rather, unlicensed referrers were blatantly carrying on virtually all the substantive regulated activities – dealing with the customer, recommending a specific insurance product and explaining its benefits to entice them to buy. The referrers were incentivized by certain broker companies to do exactly this, through the payment of inordinately high referral fees. At the same time, the offending brokers were not carrying on any substantive regulated activities themselves, thereby leaving customers exposed to adverse consequences of unlicensed selling.
Another adverse consequence of such type of non-compliant referral business, was the way it drove undocumented rebating, which is prohibited under the insurance regulatory framework. This occurs where – in order to hook a customer into buying – a “rebate” payment is offered to the customer. This by-passes the purpose of proper regulated activities (a process designed to ensure that a customer buys an insurance policy that is appropriate for their circumstances) by essentially incentivizing the customer into buying whatever policy is being offered, regardless of suitability.
Such undocumented rebating is prohibited. Instead, if an insurer or intermediary wishes to convey such a benefit to a customer, it should be properly documented in the terms and conditions of the insurance contract, reflecting the rebate in the premium amount. This transforms the rebate into a transparent discount of premium, and will not distract from the substance of the regulated activities, thereby helping the policyholder in considering whether the insurance policy meets their particular circumstances.
Unfortunately, unlicensed referrers ignored the prohibition on unchecked rebates and, as part of their sales pitch, used rebates to distract and incentivize customers to enter into insurance policies, irrespective of whether the policies met their needs.
The IA has taken decisive steps to address this dark episode in the life insurance industry’s history. We have set clear regulatory expectations on the controls and governance required on referral business for life insurance in our circular of 22 May 2024, with a view to eliminating the illegal referral business model described above. To give further clarity, we have publicized our acceptable benchmark for referral fees for participating policies in our circular of 1 September 2025, aimed at preventing over-incentivization that could encourage unlicensed referrers to carry out sales activities. We have also introduced a commission spreading mechanism on participating policies for insurance intermediaries effective from 1 January 2026, to ensure selling of insurance policies is not overprioritized as the expense of ongoing servicing of policies (and as a secondary effect, to restrain the amount of upfront commission available to pay referral fees to tempt unlicensed referrers into carrying on regulated activities).
Through our ongoing supervisory work, the IA continues to ensure these expectations are satisfied and that there is no regression to the unacceptable practices previously witnessed.
As with every new set of regulatory requirements, there are those (the vast majority) in the market who embrace them and implement them in a way that results in substantial improvement, thereby serving customer interests. And then there are, however, those (a small minority) who seek to find a business model that circumvents the regulatory requirements, not caring if they drag the reputation of the industry back down into the mud again - provided they can extract money from customers. Where we see such attempts, we take action. In fact, in the past few months we imposed licence renewal conditions on three insurance broker companies for failing to effectively control their referral activities, including requirements to prohibit them from accepting any referral business. These actions are not isolated moves and if similar irregularities are identified elsewhere in the market, we will respond promptly with proportionate and decisive regulatory action to restore market order.
Another attempted circumvention we have seen in the market recently is an arrangement termed "self-referral", or “self-purchase from website / Guānwǎng zì gòu / 「官網自購」” which – for the sake of this article – we shall call “self-referral arrangements”.
Here’s how it might work:
Intermediary, “So what do you think of that participating insurance policy?”
Customer, “I’m not sure if it’s for me, as i didn’t really understand such product entirely. And that referrer just kept telling me how wonderful it was without pointing out any risks. It just didn’t sound right, nothing is that good. I see the benefits aren’t guaranteed. Can I ask you about…”
Intermediary, “I’ll tell you what, let’s seize this opportunity. If you buy the policy now, I can arrange for you to enjoy a rebate on your premium…that way, it becomes such a good deal for you, you don’t even have to think about it.”
Customer, “What? Is that even legal?”
Intermediary, “Well, I can’t pay you directly. But get your family member to enter into a referral agreement with me - the IA has governance requirements which say we cannot rebate commission to the customers. However, I’ll say, your family member referred you to me and I’ll pay them a referral fee. They can then pass that referral fee onto you. Simple!”
Customer, “What if I don’t have a trusted family member for assistance?”
Intermediary, “I can try my best to treat you as the referrer first - so you “self-refer” and then receive the referral fee in return. But of course, the first method is “safer” because it involves a third party and theoretically is harder to detect.”
Of course, in two years time when the customer realizes the insurance policy is totally unsuitable for his circumstances, he is going to wish he obtained proper advice from the intermediary at the time of sale, instead of being distracted by the rebate via the suggested “self-referral arrangement”.
And the intermediary? Well, he’s also going to regret what he did. The IA’s enforcement team will make sure of that.
James Whitcomb Riley, a poet, once wrote: “When I see a bird that walks like a duck and swims like a duck and quacks like a duck. I call that bird a duck.”
And that, ladies and gentlemen, is the Duck Test. You identify what something is, by its true substance and characteristics – not by the label given to it.
In other words, if it looks like an under-table rebate, operates like an under-table rebate, and results in the same poor policyholder outcome that come from an under-table rebate, you can call it a “self-referral arrangements” all you like – but in law and regulation, it’s an under-table rebate. And that’s illegal.
So those operating these “self-referral arrangements” might want to stop it – before it gets them into trouble.
As for the Duck Test – well, it’s just one of many simple tools of analysis we use as a regulator to assess standards of conduct in the market. You’ll see the concept reflected in our circulars, when we always say that we take a “substance over form” approach to view the matter.
If you are involved in keeping your company compliant, we recommend you to also adopt the Duck Test as a tool of analysis. It is, after all, just a matter of common sense.
And at the end of the day, “treating customers fairly” – the principle on which insurance regulation is founded – is exactly that - a matter of common sense.