IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 05 Advanced

I. Correct. According to the statutory definition, a material fact is any circumstance that would influence a prudent insurer’s judgment in setting the premium or deciding whether to accept the risk. This aligns with the principle of utmost good faith, requiring disclosure of relevant information.
II. Incorrect. While matters of common knowledge generally do not need to be disclosed, facts that diminish the risk also do not need to be disclosed in the absence of enquiry. This is because they would make the risk more acceptable to the insurer.
III. Correct. The duty of utmost good faith revives when a policy is being renewed. This ensures that the insurer has up-to-date information to assess the risk for the new policy period.
IV. Incorrect. At common law, material facts that come to the proposer’s knowledge after the insurance contract has been concluded do not have to be disclosed, assuming the policy terms are silent on this point. The insured is not obliged to disclose the malaria diagnosis in this scenario.

Therefore, statements I and III are correct.

A defective contract is one that is void, voidable, or unenforceable due to various reasons. A void contract is invalid from the beginning, as if it never existed. A voidable contract is valid but can be cancelled by one of the parties due to circumstances like misrepresentation or duress. An unenforceable contract is valid but cannot be enforced in court, often due to lack of proper documentation or legal requirements. Understanding the distinctions between these types of defective contracts is crucial in insurance to determine the rights and obligations of the parties involved. The agent’s duty to the principal requires them to act in the principal’s best interest, including ensuring the contracts they facilitate are sound and legally binding. The Electronic Transactions Ordinance allows for electronic submission of information, but does not validate contracts that are inherently defective.

Insurance intermediaries, whether agents or brokers, owe fundamental duties to policyholders. These include acting without fraud, behaving fairly and reasonably, avoiding unfair advantage, and refraining from undue influence. All actions must be legal, adhering to both the letter and spirit of the law. Insurance brokers, acting as agents of the policyholder, must provide impartial advice with the client’s interests paramount and are considered experts, potentially leading to professional negligence claims if they fail to exercise reasonable care. Insurance agents, primarily representing the insurer, still have legal and ethical obligations but are not typically held to the same standard of expertise as brokers, affecting their professional liability. The Personal Data (Privacy) Ordinance in Hong Kong safeguards personal data, applying to both automatic and manual data and binding all persons and the Government, overseen by the Office of the Privacy Commissioner for Personal Data (OPCPD). Statement I is correct because insurance brokers are generally considered experts in insurance matters and are expected to provide impartial advice to policyholders. Statement II is correct because insurance agents primarily represent the insurer, not the insured, and their responsibilities are primarily to the insurer. Statement III is correct because the Personal Data (Privacy) Ordinance applies to both automatic and manual personal data. Therefore, statements I, II, and III are correct.

To be licensed as an individual insurance agent under the Insurance Ordinance (IO), several conditions must be met. The applicant must be deemed a fit and proper person to conduct regulated activities. They must be appointed as an agent by at least one authorized insurer. Crucially, they cannot simultaneously hold or be applying for certain other licenses, specifically an insurance agency license, a technical representative (agent) license, or a technical representative (broker) license. This prevents conflicts of interest and ensures clarity in the agent’s role. The Insurance Authority (IA) assesses these criteria to ensure the integrity of the insurance market and protect policyholders. A ‘fit and proper’ assessment includes evaluating the applicant’s education, qualifications, experience, and their ability to conduct regulated activities competently, honestly, and fairly.

When a client is referred to a licensed insurance agent by another person (the referrer), the agent has specific obligations to ensure transparency and protect the client’s interests. According to the guidelines, the agent must inform the client that the agent is solely responsible for arranging the insurance policy and that the client should only deal directly with the agent for this purpose. The agent must also clarify that the referrer does not represent the agent and should not be involved in arranging the insurance. Furthermore, the agent should disclaim any liability for advice given by the referrer regarding the insurance policy. Finally, the agent must instruct the client to pay premiums directly to the insurer or, if permitted, to the agent, but never to the referrer. These requirements do not apply if the referral is from a licensed technical representative within the same agency or from a licensed insurance broker acting on behalf of the client. Understanding these disclosure requirements is crucial for maintaining ethical standards and complying with regulatory expectations in insurance practice. The suitability assessment is a critical step before giving regulated advice, ensuring that the advice aligns with the client’s circumstances. This assessment involves understanding the client’s situation, considering available insurance options, and providing advice based on a reasonable understanding of the client’s needs. If the client withholds necessary information, the agent must inform them that the advice may not be suitable. The extent of the suitability assessment should be proportionate to the client’s circumstances and the type of insurance product involved.

Licensed insurance intermediaries, including agencies and broker companies, have specific conduct requirements under Section 90 of the Insurance Ordinance. These requirements aim to protect policyholders and maintain the integrity of the insurance market.

Key duties of intermediaries include:

1. **Suitability:** Ensuring that insurance products are appropriate for the individual circumstances of the policyholder or potential policyholder.
2. **Disclosure:** Providing policyholders or potential policyholders with all necessary information to make informed decisions.
3. **Conflict of Interest:** Avoiding conflicts of interest and disclosing any potential conflicts to the policyholder or potential policyholder.
4. **Asset Management:** Properly accounting for the assets of policyholders or potential policyholders.
5. **Compliance with IA Rules:** Adhering to rules prescribed by the Insurance Authority (IA).

Licensed Insurance Agencies and Broker Companies, along with their Responsible Officers, have additional responsibilities:

* Establishing and maintaining proper controls and procedures to ensure compliance with conduct requirements.
* Using their best efforts to ensure that licensed technical representatives (agents or brokers) adhere to these controls and procedures.
* Ensuring that the Responsible Officer has sufficient authority, resources, and support to carry out their responsibilities.

It’s important to note that failure to comply with these conduct requirements does not automatically lead to judicial proceedings. However, the IA may consider such failures when assessing whether an intermediary remains a fit and proper person to be licensed.

The IA may also publish codes of conduct to provide guidance on expected practices and standards for licensed insurance intermediaries. While these codes are not legally binding, failure to comply with them may be taken into account when assessing an intermediary’s fitness and propriety.

Statement I is correct: Licensed insurance intermediaries must consider the specific circumstances of policyholders to ensure product suitability, as mandated by conduct requirements.
Statement II is correct: Licensed insurance intermediaries are required to disclose necessary information to policyholders to enable informed decision-making, aligning with conduct requirements.
Statement III is incorrect: While licensed insurance intermediaries must avoid conflicts of interest, the requirement to maintain professional indemnity insurance is a separate regulatory requirement, not directly tied to the conduct requirements outlined in the scenario.

Therefore, statements I and II are correct.

Statement I is correct. According to the guidelines for licensed insurance brokers, they must disclose to the client the name of the insurer concerned for each insurance product recommended or arranged.

Statement II is correct. Licensed insurance brokers are required to provide clients with information on the major policy terms and conditions, including coverage, policy period, conditions precedent, exclusions, warranties, and any other clauses that could reasonably impact the client’s decision.

Statement III is incorrect. While disclosing fees and charges is important, the guidelines specify that licensed insurance brokers should disclose the level of premium and the period for which premiums are payable, not the broker’s commission.

Statement IV is incorrect. The guidelines state that if a licensed insurance broker intends to give regulated advice on or arrange an insurance policy with an insurer which is not authorized by the IA, the broker should disclose to the client the governing law of the insurance policy and the jurisdiction in which disputes under the policy will be determined. The broker is not required to disclose the insurer’s internal policies.

Therefore, statements I and II are correct.

Statement I is correct. The training and development department plays a crucial role in enhancing the company’s performance by providing relevant and effective training to staff and agents.
Statement II is correct. The Insurance Authority’s approval is required before appointing key persons in control functions to ensure they are fit and proper, safeguarding the insurer’s corporate governance.
Statement III is incorrect. While education and training are important for staff and agents, the educational and training needs of both must not be overlooked.
Statement IV is incorrect. The control function for intermediary management is responsible for administering insurance agents, monitoring their compliance with the Insurance Ordinance (IO), and ensuring their arrangements comply with the IO and Insurance Authority guidelines. It does not directly handle policyholder complaints.
Therefore, statements I and II are correct.

According to the guidelines issued by the Privacy Commissioner, licensed insurance agents must adhere to specific practices regarding record keeping, cooling-off periods, competence to advise, and disclosure of information.

Regarding record keeping, agents must follow the policies and procedures of their appointing insurer or agency and submit records promptly when required.

Concerning the cooling-off period, agents must inform clients of their cancellation rights before the application is finalized and deliver the policy promptly to allow sufficient review time.

In terms of competence, agents should only engage in activities within their skill set and seek guidance when needed.

Regarding disclosure, agents must provide clients with accurate and adequate information, including their name and license number, to enable informed decisions.

Statement I is correct because licensed insurance agents are indeed expected to possess appropriate levels of professional knowledge and experience, and only carry on regulated activities in respect of which they have the required competence, as outlined in General Principle 4.

Statement II is correct because licensed insurance agents are required to provide clients with accurate and adequate information to enable them to make informed decisions, as stated in General Principle 5.

Statement III is incorrect because while agents should act in accordance with record-keeping requirements, the cooling-off period obligations specifically require informing the client of their right to cancel and ensuring timely delivery of the policy, not necessarily submitting records to the insurer or agency related to the cooling-off period.

Therefore, statements I and II are correct.

A trustee is legally obligated to manage property for the benefit of another party. This involves a fiduciary duty, requiring the trustee to act in the best interests of the beneficiary. Underwriting, on the other hand, is the process insurers use to assess risk and determine policy terms. An unenforceable contract is one that a court cannot compel parties to fulfill. Unfair discrimination in insurance involves applying unjustified different terms based on factors not related to risk. An uninsured peril is a cause of loss not specifically covered by a policy. Unit-linked insurance ties policy value to investment fund performance. Utmost good faith requires both parties in an insurance contract to disclose all material information. A valued policy specifies an agreed value for the insured item. Vicarious liability holds a person responsible for the actions of another. A void contract has no legal effect from the start, while a voidable contract can be cancelled by the aggrieved party. Understanding these distinctions is crucial for identifying the role and responsibilities of a trustee in relation to insurance and contract law.

Statement I is correct. An assignment of an insurance contract transfers the assignor’s rights to the assignee, meaning the insurer is obligated to pay the assignee for losses occurring after the assignment. Statement II is incorrect. Assignment of policy proceeds affects both losses that have already occurred and those that may occur in the future. Statement III is correct. With the assignment of an insurance contract, both the assignor and assignee must have insurable interest at the time of assignment for the assignment to be valid. Statement IV is incorrect. While assignment of the right to insurance money does not require the insurer’s consent, assignment of the insurance contract often requires the insurer’s consent, depending on the type of policy, except for life and marine cargo policies.

I. Correct. An II should adopt a Risk-Based Approach (RBA) in designing and implementing its Customer Risk Assessment (CRA) framework, as this allows for a tailored approach based on the specific risks involved. This aligns with the requirements for AML/CFT systems.
II. Correct. The complexity of the CRA framework should be proportionate to the nature and size of the II’s business. A larger, more complex business will require a more sophisticated framework.
III. Correct. The CRA framework should be designed based on the results of the II’s inherent risk assessment (IRA). The IRA identifies the specific risks the II faces, which then informs the design of the CRA framework.
IV. Correct. The CRA framework generally includes customer risk factors, country risk factors, product/service/transaction risk factors, and delivery/distribution channel risk factors. These factors help to assess the overall risk associated with a customer or transaction.

Therefore, all statements are correct.

I. Correct. A policy franchise operates such that if the loss exceeds a certain threshold, the entire loss is payable. This is distinct from an excess, where the insured always bears the initial portion of the loss.
II. Incorrect. A single article limit is designed to limit the insurer’s liability for any one item within a broader category of insured property, especially when the value of that single item represents a significant portion of the total insured value. It does not require the insured to declare the value of each item.
III. Correct. Reinstatement insurance ensures that no deductions are made for wear and tear or depreciation when a loss is settled, providing a more comprehensive indemnity.
IV. Incorrect. In non-marine insurance, a valued policy pays the agreed sum in the event of a total loss, regardless of the actual value at the time of the loss. However, for partial losses, the actual amount of the loss is paid, not the agreed value. Therefore, statements I and III are correct.

Insurers have a responsibility to handle inquiries and complaints fairly and promptly. They must establish documented internal procedures for resolving complaints from policyholders. Furthermore, insurers are required to be members of the Insurance Complaints Bureau (ICB), which serves as an alternative dispute resolution mechanism for insurance-related disputes involving personal insurance contracts. The ICB’s jurisdiction does not extend to cases of misconduct by insurance intermediaries. The Insurance Claims Complaints Panel, a part of the ICB, adjudicates claim-related complaints. This panel consists of members from both within and outside the insurance industry, ensuring impartiality. Complainants are not charged any fees, regardless of the outcome. The Complaints Panel has the authority to make awards against insurers up to a certain limit, and insurers cannot appeal these awards. However, complainants retain the right to pursue legal action if they are not satisfied with the Panel’s decision. The Panel’s rulings consider the policy terms, general principles of good insurance practice, applicable laws, and guidelines issued by the Hong Kong Federation of Insurers (HKFI) or the ICB. The Panel can look beyond strict policy interpretations if they deem the result unfair to the complainant.

Statement I is correct. Licensed insurance intermediaries, as per the Insurance Ordinance, must consider the policyholder’s circumstances to ensure the regulated activity is appropriate for them. This aligns with the principle of suitability.

Statement II is correct. Intermediaries are obligated to disclose necessary information to policyholders, enabling them to make informed decisions. This is a fundamental aspect of transparency and fair dealing.

Statement III is incorrect. While intermediaries must use their best endeavors to avoid conflicts of interest and disclose any such conflicts, the ordinance does not explicitly state that they must eliminate all conflicts of interest. The focus is on avoidance and disclosure.

Statement IV is correct. Licensed insurance intermediaries are required to comply with the rules prescribed by the Insurance Authority (IA) under specified sections of the Insurance Ordinance. This ensures adherence to regulatory standards.

Therefore, statements I, II, and IV are correct.

Statement I is correct. Policy conditions establish the framework for the insurance policy, outlining the relationships, rights, and duties of both the insured and the insurer. This is a fundamental aspect of insurance contracts.

Statement II is incorrect. Policy limits, such as the sum insured, define the maximum amount the insurer will pay out for a covered loss. They do not dictate the minimum amount.

Statement III is correct. The Insurance Ordinance (IO) grants the Insurance Authority (IA) specific powers of intervention to ensure the IA can properly execute its functions. These powers are crucial for regulatory oversight.

Statement IV is incorrect. Practical classification of insurance relates to how an insurer internally categorizes its business, often based on the source of the business (e.g., direct, broker, or agent produced). It does not define the legal categories of insurance business as defined by the Insurance Ordinance.

Therefore, statements I and III are correct.

The Code of Conduct for Licensed Insurance Agents (Agents’ Code), published by the Insurance Authority (IA) under section 95(1) of the Insurance Ordinance (IO), serves several key purposes. Primarily, it establishes the minimum standards of professionalism expected of licensed insurance agents in their regulated activities. It also supplements the duties agents owe to their principals by requiring compliance with the principals’ requirements regarding regulated activities. Furthermore, it clarifies the statutory conduct requirements outlined in sections 90 and 91 of the IO and any rules made under section 94. The Agents’ Code outlines fundamental principles of professional conduct that insurance buyers are entitled to expect, fostering trust in the insurance industry. While the Agents’ Code does not have the force of law, the IA may use it as guidance in determining whether an agent’s actions are prejudicial to policyholders or the public interest, whether an agent remains fit and proper to be licensed, or whether an agent has satisfied statutory conduct requirements. The IA recognizes the diversity in scale and complexity of insurance agents’ businesses and will consider the relevant context when assessing compliance with the Agents’ Code. The Agents’ Code reflects a principle-based approach, and neither the Standards and Practices nor the Corporate Governance, Controls and Procedures are exhaustive.

A trustee is legally obligated to manage property or assets for the benefit of another party, known as the beneficiary. This role involves a fiduciary duty, requiring the trustee to act in the best interests of the beneficiary, with honesty, integrity, and prudence. The trustee must avoid conflicts of interest and ensure the proper administration and preservation of the trust assets. Under the laws governing trusts, the trustee is accountable for their actions and decisions related to the trust property. The concept of a trustee is relevant to insurance in scenarios where insurance policies are held within a trust structure, for example, in estate planning or for the benefit of minors or individuals with disabilities. Understanding the duties and responsibilities of a trustee is crucial in these contexts to ensure that insurance benefits are managed appropriately and in accordance with the trust’s terms and applicable laws.

Statement I is correct. According to the guidelines for licensed insurance brokers, they must provide clients with sufficient information to make informed decisions about insurance products.
Statement II is correct. A licensed insurance broker’s advice should be suitable for the client, based on the information obtained about the client’s circumstances. This aligns with the principle of providing appropriate advice.
Statement III is incorrect. While brokers should act with care, skill, and diligence, there is no explicit requirement to guarantee the lowest possible premium. The focus is on suitability and acting in the client’s best interest, not solely on price.
Statement IV is correct. Licensed insurance brokers must comply with the Personal Data (Privacy) Ordinance (Cap. 486) regarding the collection, retention, use, and security of clients’ personal data. This is a key aspect of protecting client privacy and confidentiality.
Therefore, statements I, II, and IV are correct.

I. Correct. An II should adopt a Risk-Based Approach (RBA) in designing and implementing its Customer Risk Assessment (CRA) framework, as this is aligned with the principle of tailoring AML/CFT efforts to the level of risk. This is in accordance with the guidelines provided by the Insurance Authority and the AMLO.
II. Correct. The complexity of the CRA framework should be proportionate to the nature and size of the II’s business. A larger, more complex business will require a more sophisticated framework. This ensures resources are allocated efficiently and effectively.
III. Correct. The CRA framework should be designed based on the results of the II’s inherent risk assessment (IRA). The IRA identifies the specific ML/TF risks the II faces, and the CRA framework should be tailored to address these risks.
IV. Correct. The CRA framework generally includes customer risk factors, country risk factors, product/service/transaction risk factors, and delivery/distribution channel risk factors. These factors help the II assess the overall risk associated with a customer or transaction.
Therefore, all statements are correct.

Statement I is correct. According to the Insurance Ordinance (IO), a licensed insurance broker company receiving client monies must maintain at least one client account with an authorized institution, with the word ‘client’ in the account title, and provide written notice to the institution as per section 71 of the IO.

Statement II is correct. The rules stipulate that monies received from a policyholder as premiums payable to an insurer must be paid into a client account.

Statement III is incorrect. While licensed insurance broker companies must reconcile client accounts, the exemption from this requirement for specified insurance broker companies is for 6 months, not 12 months, from the commencement date.

Statement IV is correct. A licensed insurance broker company must keep accounting records sufficient to demonstrate compliance with the Insurance Ordinance and related rules, and to ensure there is no contravention of specified provisions of the IO.

Therefore, statements I, II, and IV are correct.

Life insurance underwriting is typically a one-time process due to the insurer’s inability to cancel the policy and the need for the insured’s consent for changes. This critical nature often leads to centralized underwriting. General insurance, with its wide range of coverage, allows for policy reviews and cancellations upon renewal, making decentralized underwriting more feasible. Underwriting manuals and guidelines are essential for staff, requiring extensive research and development. ‘Target risks’ can refer to desirable business in life insurance (e.g., healthy young professionals) or undesirable business in general insurance (e.g., high-hazard risks). ‘Stop-lists’ identify types of business to avoid, demanding underwriting expertise and sensitivity to discrimination issues. Policy administration differs significantly between life and general insurance, with life insurance policies requiring production at claim time and verification processes being crucial. Claims handling in life insurance is often centralized due to the complexity and potential disputes, while general insurance claims, though wider in range, are often decentralized due to the smaller amounts involved in most cases. The Insurance Companies Ordinance (Cap. 41) and related regulations in Hong Kong govern these practices, emphasizing fair treatment of policyholders and financial soundness of insurers.

Statement I is correct. According to the Insurance Ordinance (IO), a licensed insurance broker company must maintain records in either Chinese or English, or in a manner that allows for easy conversion into either language. This ensures transparency and accessibility for regulatory oversight.

Statement II is correct. The Rules require licensed insurance broker companies to retain records for a minimum of 7 years. This retention period is crucial for audits, investigations, and ensuring compliance with regulatory requirements.

Statement III is incorrect. While financial statements must include insurance brokerage income, aggregate balances of cash held in client accounts, and insurance premiums payable, this requirement applies to financial years beginning *on or after* 1 January 2021, not before. The text specifies an exception for financial years beginning before this date.

Statement IV is incorrect. According to section 73(1) of the IO, any document (except an auditor’s report) provided must be approved by the directors and signed by *two* directors on behalf of the company, or by the sole director if the company has only one. The statement incorrectly suggests only one director’s signature is always sufficient.

Therefore, only statements I and II are correct.

Statement I: The Hong Kong Confederation of Insurance Brokers (HKCIB) and the Professional Insurance Brokers Association (PIBA) used to perform a self-regulatory function for their members. This is correct as stated in the provided text.
Statement II: The HKCIB and PIBA engage with the Insurance Authority regularly and assist in making policy recommendations affecting the local insurance broking industry. This is also correct, as they continue to play a vital role in representing their broker members.
Statement III: The Motor Insurers’ Bureau (MIB) is funded by the Insurance Authority. This is incorrect. The MIB is funded by a surcharge on motor insurance premiums.
Statement IV: The Employees’ Compensation Insurance Residual Scheme Bureau (ECIRS) was set up to act as a market of last resort for employers who have difficulty obtaining employees’ compensation insurance. This is correct; the ECIRS ensures that employers in high-risk occupations can obtain the necessary insurance.

Therefore, statements I, II, and IV are correct.

According to the Insurance Authority’s guidelines for licensed insurance brokers, several key disclosures and practices are mandated to ensure transparency and protect client interests. Firstly, a licensed insurance broker must inform the client about their license type (insurance broker company or technical representative), and if a technical representative, the name of their appointing licensed insurance broker company. This information should be provided before commencing any regulated activity or as soon as reasonably practicable afterward. If a technical representative works for multiple broker companies, they must clearly identify which company they represent for each transaction. Furthermore, a technical representative’s business card must accurately display their name, license number, license type, and the name of their appointing broker company. When recommending or arranging insurance products, brokers must provide comprehensive information on key features, including the insurer’s name, major policy terms, premium levels, and any fees. When comparing products, similarities and differences must be explained accurately. If the insurance policy is with an insurer not authorized by the IA, specific disclosures about the insurer’s jurisdiction, regulatory status, financial standing, and the policy’s governing law are required, along with written acknowledgement from individual clients.

Statement I is correct. Short-tail business, such as fire insurance, involves claims that arise and are notified relatively quickly after the insured event, typically within a short time frame.
Statement II is incorrect. A simple contract can be created verbally, in writing (not under seal), or inferred from conduct. The key characteristic is that it does not require a formal seal.
Statement III is correct. The solvency margin represents the extent to which an insurer’s assets exceed its liabilities. Maintaining a sufficient solvency margin is a regulatory requirement under the Insurance Ordinance (IO) to ensure insurers can meet their obligations.
Statement IV is incorrect. The subject matter of insurance can be property, a person, potential liability, or a legal right. It is not limited to only property and legal rights.

When an insured party has multiple insurance policies covering the same risk, the principle of contribution comes into play to ensure they do not profit from the loss. The ‘3/17 event of double insurance’ refers to situations where multiple policies exist. Several clauses and conditions modify how contribution operates. A ‘non-contribution clause’ stipulates that a particular policy will not contribute if other more specific insurance exists. A ‘partial contribution condition,’ exemplified by the ‘Marine Clause’ in standard fire policies, dictates that the fire policy only covers losses exceeding the marine policy’s compensation. Subrogation, a related concept, allows the insurer to pursue rights against third parties responsible for the loss, preventing the insured from receiving double compensation. Subrogation rights can arise in tort (negligence), contract, under statute (e.g., Employees’ Compensation Ordinance), or in salvage. Subrogation applies only when indemnity applies, and insurers cannot recover more than they have paid out as indemnity. Policies often stipulate that insurers are entitled to subrogation rights even before indemnification.

When a licensed insurance broker believes a client’s decision regarding an insurance policy is unsuitable, the broker has specific obligations to fulfill under the Insurance Ordinance (IO) and related regulations. The broker must explain why the decision is considered unsuitable, ensuring the client understands the potential risks or drawbacks. However, it’s also crucial to acknowledge and document that the final decision rests with the client, respecting their autonomy. This process should be clearly documented to demonstrate that the broker acted responsibly and provided appropriate advice, even when the client’s choice differs from the broker’s recommendation. This aligns with General Principle 7, emphasizing fair treatment and managing conflicts of interest, and Standard Practice 7.3, which focuses on avoiding the broker’s interests influencing the client’s decision.

Option 1 highlights the core responsibilities: explaining unsuitability, acknowledging the client’s decision, and documenting the process. Option 2 is incorrect because while brokers should offer suitable advice, they cannot force clients to accept it. Option 3 is incorrect because while documentation is important, it’s not the only action required. Option 4 is incorrect because it suggests the broker should disregard the client’s decision, which is not in line with ethical and regulatory standards. Therefore, the correct answer emphasizes both informing the client and respecting their final choice.

According to Part 6A of the Personal Data (Privacy) Ordinance, a data user intending to use a data subject’s personal data for direct marketing must adhere to specific requirements. This includes informing the data subject about the types of personal data to be used, the classes of marketing subjects involved, and the classes of individuals to whom the data may be provided. If the data is to be provided for profit, this must also be disclosed. The data user must also provide a response channel for the data subject to indicate their consent or objection. A critical aspect is obtaining explicit consent or a clear indication of no objection from the data subject before using their data for direct marketing purposes or providing it to others for such use. If consent is given orally for the data user’s own direct marketing, written confirmation of the permitted data and marketing subjects must be sent to the data subject within 14 days. However, providing data to others for direct marketing always requires written consent. The ‘grandfathering’ arrangement allows the continued use of data already used for direct marketing before the new provisions came into effect, provided previous requirements were met. Finally, data users must notify data subjects of their opt-out rights when using their personal data for direct marketing for the first time. Therefore, the correct answer will reflect the scenario where the data user has followed all the necessary steps to comply with the ordinance.

When an existing customer or beneficial owner is later identified as a non-Hong Kong PEP, enhanced due diligence (EDD) measures are required.

Statement I: Obtaining senior management approval for continuing the business relationship is a key EDD measure. This allows for a higher level of scrutiny and oversight. Therefore, statement I is correct.

Statement II: Taking reasonable measures to establish the customer’s or beneficial owner’s source of wealth and funds is also a crucial EDD step. This helps to understand the legitimacy of the funds and identify any potential risks. Therefore, statement II is correct.

Statement III: While ongoing monitoring is essential for AML/CFT, immediately terminating the business relationship solely based on the PEP status without further assessment is not necessarily required. A risk-based approach should be adopted. Therefore, statement III is incorrect.

Statement IV: While screening against sanctions lists is important, it is a separate process from identifying PEPs. Sanctions screening is related to UNSC sanctions implemented in Hong Kong under the UNSO and the UNATMO. Therefore, statement IV is incorrect.

Conclusion: Statements I and II are correct.