For instance, banks, regulated by the Hong Kong Monetary Authority, also sell insurance; and many insurance companies sell investment-linked products over which the Securities and Futures Commission has oversight.

To help navigate a route through these issues, a consultation paper on creating a new insurance authority would be issued by the end of the year or in the first quarter of next year, a government source said.

The authority could be empowered to collect fees and hire professionals to regulate the market and would have new powers to monitor the financial strength of insurance companies as well as the operations of salespeople and the protection of policyholders' interests.

The proposed authority will replace the Office of Commissioner of Insurance, which is an arm of the government staffed by 90 civil servants.

The power and resources of the Commissioner of Insurance are limited, critics say, and in the light of the expanding insurance market, the government wants to set up a new authority with expanded power that could enhance consumer protection and the overall regulation of the insurance market.

The HKFI is showing signs of initial support for the reform, and chief executive Peter Tam Chung-ho said insurers believed setting up a new authority would help enhance the regulatory framework in the city.

'The authority will have more power and be in a better position to check on the financial health of insurers, which will prevent failures of insurance companies, which is of utmost importance to customers and policyholders,' said Mr Tam.

But the HKFI has not yet confirmed it will be willing to abandon its self-regulatory model for the oversight of insurance salespeople, and analysts say this may well be the most controversial part of the reform.

The consultation process, due to be completed by the end of this year, will decide if the authority should directly license and regulate the agents and have the power to penalise misconduct.

Similarly, the SFC currently licenses brokers, investment banks, fund houses and financial advisers and oversees their staff. It is empowered to issue a range of penalties, such as suspension or revocation of licences, fines or even criminal prosecution for any misconduct.

But the consultation paper to be issued on an insurance authority will canvass opinion on whether the new insurance regulator should also have the power to impose such a range of sanctions on insurance companies and salespeople.

Mr Tam said the industry would work with the insurance authority to decide how to regulate the salespeople. He said he hoped the industry would have a role to play in their regulation.

Some insurers have expressed concern about additional costs arising from setting up a new authority, but Mr Tam said that if the change led to improved regulation it would be value for money.

Michael Huddart, Hong Kong head of Manulife International, said the proposed reforms were consistent with global trends.

'However, we want to see the details of what is being proposed and what costs will be passed back to the industry before giving full endorsement,' Mr Huddart said.

With regard to the regulation of agents, Manulife felt the IARB had done an excellent job for the industry for many years.

'So there is no real need for change, but we understand post the financial crisis why regulators may want to bring the regulation of market conduct for all intermediaries - agents, brokers and banks - under one umbrella,' he said.