Transcript Black and White - TheRapeOfHongKong.com

ILAS
From the Point of View
of Mis-sold Hong Kongers
ILAS: What Is It?
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A mutual fund investment wrapped in a life insurance policy
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Most policies provide little life protection
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Originated in the UK several decades ago as a means for
reducing taxes. Most of the tax benefits no longer exist.
ILAS does not help Hong Kong citizens reduce taxes, so
there's no apparent reason for a Hong Kong citizen to own
one.
The types of ILAS policies sold in Hong Kong are now
illegal in the UK.
ILAS products continue to be aggressively sold in places
with poor regulation, a lot of wealthy people, and a lot of
British expats (e.g., Hong Kong, Singapore, Dubai).
ILAS Statistics
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About 2.5 million policies sold in Hong Kong
over the past 15 years
About 1.7 million policies in force right now
Insurers have collected over half a trillion HK
dollars in premiums since 1997
Why Have ILAS Products Been Sold
to So Many Hong Kongers?
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Insurance companies pay very large commissions, much
larger than fund companies
Commissions are not adequately disclosed in the way other
investment products are (as required by SFC & HKMA)
The fee structure hides the upfront costs (by making costs
appear to be spread out over several years)
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Most people don't know they have better investment options
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Gullible investors are lured in by “free” fund units
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Investors are led to believe that their account value shows
how much money they've earned (it doesn't)
ILAS on the Outside
(Why did Zurich choose this picture for the cover of its policy brochure?)
ILAS on the Inside
Zurich Vista “Surrender” Charge
(Why are the charges so complex? Is this necessary?)
Multiple Layers of High Charges
Example: Harvest 101 Investment Plan
(Sold to Ms. Leung)
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Policy Fee: 6% of Every Contribution ($60 / $1000)
Administration Charge: 6% per year, deducted from Initial
Account
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Exit Charge: Up to 100% of Initial Account
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Accumulation Account Charge: 1.5% per year
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Fund Management Fees: 1 to 2%
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Advisory Fee: 0 to 2%
She paid fees greater than 13% during the first year.
She then paid an 86% exit charge after the 13th month.
A Direct Fund Investment Is Significantly Cheaper
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ETF index funds (Management fees as low as 0.05%)
Fundsupermart (A fund platform for do-it-yourself
investors. Offers about 500 funds with free fund
switching. 2% upfront charge for stock funds. 0.2%
annual platform fee for bond funds. No other charges
besides underlying fund charges.)
iFAST Central (A fund platform for investors who want to
pay an adviser to manage their funds. Platform fee is 0.1
to 0.3%. Advisory fees are determined by the adviser.
Operated by the same company as Fundsupermart.)
MPF special voluntary contributions (Over 500 funds.
Free fund switching within limits. Average FER is 1.65%.)
Note: None of the above options have the massive, hidden upfront charges that many ILAS products have.
ILAS Commissions are Excessive
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Before indemnity commissions were banned on 1 Jan 2015,
a 25 year ILAS policy paid an upfront commission equal to
more than 1 year of the policyholder's savings.
A 25 year policy paid 5 times more than a 5 year policy.
A 25 year ILAS policy paid an upfront commission which
was 630 times larger than the average upfront
“commission” received when selling mutual funds through
iFAST Central. (1260% vs 2%)
A 25 year ILAS policy paid an upfront commission which
was 4200 times larger than the upfront commission
received when selling MPF funds via special voluntary
contributions. (1260% vs 0.3%)
It's not yet clear how big ILAS commissions are after Jan 1
Conflict of Interests
Insurance intermediaries constantly face a moral dilemma. Do they offer advice which is in the
best interests of clients? Or do they give advice that earns them a bigger commission at their
clients' expense? (Note: Clients are not told how much commission different investment
products pay. This makes it very difficult for clients to know when their intermediary might be
taking advantage of them and giving biased advice. The relationship between client and
intermediary is necessarily based on trust, a trust which is easily betrayed.)
ILAS: Is It Suitable for Anyone?
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Four regulators (SFC, OCI, HKMA, and HKFI) have stated
that ILAS policies are not suitable for investors who have no
insurance needs
Most ILAS policyholders did not indicate any need or desire
for insurance before being advised to purchase the product
Even if policyholders had indicated insurance needs, ILAS
policies provide such a small amount of life coverage that
the policies are not suitable to meet those needs.
One's “insurance needs” is the amount of life coverage one
needs to take care of one's dependents (such as children)
in case one dies. An extra 1 to 5% of the account value is
not adequate.
In the Best Interests of Clients?
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Legally, brokers are supposed to be held to a higher
ethical standard than insurance agents, and their
Code of Conduct requires them to act in the bests
interests of clients.
There is no obvious scenario in which ILAS would be
in the best interests of a Hong Kong citizen.
If a Hong Konger has insurance needs, he/she would
be better off buying a term life insurance policy and a
pure investment product separately. (The same
argument applies to whole life, universal life, and
endowment policies as well.)
A Savings Plan or a Savings Scam?
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Longer Lock-in = Bigger Upfront Losses
If you were sold a 25 or 30 year policy, then you
just agreed to give away all of your savings for the
next two years.
Most of the fund units purchased in the initial
period, including the “free” fund units, will be taken
back by high charges (either an exit charge or
annual administration charges).
The only way to prevent the insurance company
from taking back your fund units is by dying.
2 million regular premium policies sold in HK
Do insurers immediately pocket most of the policyholders' initial contributions? Do most
of the initial units and “bonus” units exist only on paper? If so, since ILAS offering
documents state that insurers buy real fund units, would they be committing fraud?
Sky-High Termination Rates
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According to an expert interviewed by SCMP, 93% of all ILAS
policies are terminated early.
According to an expert interviewed by International Adviser,
99% of 25 year ILAS policies are terminated early.
According to the book, The Great Expat Financial Planning
Ripoff, policyholders only maintain payments on ILAS policies
for 7.2 years (on average).
According to my estimates, based on OCI's data from 2013,
90% of 30-year policies will be terminated early, and half of
them will be terminated by the 9th year.
ILAS policies are currently being terminated about twice as
fast as they are being sold. The trend has been accelerating.
Hazardous to Your Financial Health
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Early termination results in exit penalties as high as 100%.
25 and 30 year policies have the highest exit penalties, yet these
policies are the most likely to be exited early. These policies are
the most dangerous for investors and the most lucrative for
insurance companies.
Insurance companies do not disclose early termination rates.
Instead, they keep this information secret and promote 25 and 30
year policies most aggressively, paying bigger commissions and
using extra “free” fund units as an enticement.
A pharmaceutical company or doctor would likely face criminal
charges if they knowingly sold and misrepresented expensive
medical products that had little or no health benefits but had a
very high likelihood of damaging a patients' health.
Undisclosed Indemnity Commissions:
Deceptive, Arguably Illegal, and
Harmful to the Interests of Policyholders
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Before 2015, when brokers sold a 25 year ILAS policy, the insurance
company secretly paid 25 years of commissions upfront.
The broker had (and still has) no incentive to provide the 25 years of
service (such as investment advisory service) which he/she agreed to
provide. The broker can take the money and disappear (which often
happens).
Policyholders were given the impression that their broker's commission
came out of the fees which were deducted monthly from the underlying
funds.
The Prevention of Bribery Ordinance requires brokers to obtain
permission from clients before receiving a kickback from product
issuers. Clients did not give their brokers permission to receive
decades of payments upfront. When brokers accepted these secret
payments without explicit permission, they arguably committed a
criminal offense.
HKFI Explicitly Approved Deceptive
Commission Disclosure Practices
In a circular issued on 22 Oct 2013, HKFI told
intermediaries that it was “acceptable” to not
disclose whether commissions were indemnified
(even though this would significantly magnify the
intermediaries' conflict of interest). HKFI only
required intermediaries to disclose that they would
receive, for example, 3% of premiums to be paid
over the premium term. Intermediaries did not have
to disclose that all commissions would be paid
upfront on Day 1, thereby creating a massive
incentive to sell (rather than provide long-term
service).
Screenshot of HKFI's 22 Oct 2013 Circular
Unauthorized Advertisements
On 4 June 2007, OCI stated:
"It is incumbent upon authorized insurers and
insurance intermediaries to ensure not only that
the materials used for marketing and promoting
ILAS to the public have been authorized by the
SFC, but also that when communicating with
prospective customers either verbally or in writing,
they must not depart from the information
contained therein. Failure to comply with this
requirement might constitute a criminal offence
under section 103 of the SFO."
Examples of Unauthorized Advertisements
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ILAS is a “fund platform”, a “tax wrapper”, a fund
investment with free insurance, no credit risk
You can get your money back after the ICP
Fees are understated/misrepresented, potential returns are
exaggerated
Promoting unauthorized funds via portfolio bonds
Claiming that you will earn money immediately even though
the policy's cash value will be less than what you pay (for
up to a decade or more)
Claiming that a special offer of extra “free” fund units will
compensate you for the losses incurred by twisting policies
ILAS “Mis-Selling”
Cartoon was mis-borrowed from Martin Shovel
Exploitation of Fresh Graduates
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ILAS products are hard to sell to someone who
doesn't know you or trust you
Companies constantly recruit new graduates, pay
them no salary (just sales commissions), and
train them to sell to all their friends and family
After the young grads have sold ILAS products to
everyone they love, the grads run out of people to
sell to and have to find a new job
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Relationships are destroyed in the process
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Companies repeat the cycle, ad infinitum
Convoy Financial Services Limited
Convoy Financial Services Limited
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Has an army of about 2000 commission-based
ILAS sellers
Advertises itself as an “independent” financial
advisory company, despite conflicts of interest
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Likely violating Section 114 of SFO
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Aggressively recruiting young Mainlanders
Portfolio Bonds & Unauthorized Funds
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Insurance brokers use ILAS portfolio bonds to distribute
offshore funds which have not been authorized by SFC.
The unauthorized funds pay very high commissions.
Over 80 have collapsed or been suspended since 2008.
Many have been exposed as frauds.
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Portfolio bonds pay 6-8% commissions
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Unauthorized funds pay commissions as high as 15%
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Total commission is as high as 23%.
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Selling unauthorized funds through ILAS without a Type 1
SFC license is probably a criminal offense
Marketing unauthorized funds to retail investors is also a
criminal offense
Secret Fund Commissions
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Some portfolio bond victims claim that their
insurance broker denied receiving commissions for
promoting the underlying unauthorized funds.
Industry insiders have confirmed that this is common.
Insiders say that the fund commissions are received,
but the commissions are paid to a different company,
typically offshore, in order to evade corporate taxes
and the SFC (Section 114 of the SFO).
The above activities may involve criminal acts of
fraud, bribery, and money laundering.
LM CEO Peter Drake
The LM Scandal
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12,000 investors scattered across the world lost
their life savings.
35 in Hong Kong are registered with LMIVC.
Signs that the MPF fund was a Ponzi scheme as
early as January 2009.
MPF was popular with expat insurance brokers
because it paid high commissions (up to 15%).
Insurance companies knew the MPF fund was
troubled, but they helped distribute it anyway
because they wanted to maintain “market share”.
Mis-sold Policyholders Do Not Trust the SROs
Mis-sold insurance policyholders are required to file
their complaints with self-regulatory organizations
(SROs).
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However, the top executives of the SROs run
companies which have been mis-selling ILAS to
consumers and possibly committing criminal
breaches of the Securities and Futures Ordinance.
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Mis-sold policyholders (with justification) have little
faith that an SRO will assess their complaint in an
unbiased and fair manner.
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What should victims do? Wait for the establishment
of the new regulator, the Independent Insurance
Authority (IIA)?
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Controversy Over SFC's
Regulatory Role
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The Lehman Minibond scandal was a public relations
nightmare for SFC. The SFC was probably eager to
avoid being blamed for a second mis-selling scandal,
particularly one related to ILAS.
On 13 August 2009, the SFC issued a circular denying
that it had a duty to regulate ILAS sellers, despite the
fact that several insurers and corporate insurance
brokers believed the law required them to be licensed
and regulated by SFC.
SFC urged these companies to leave the SFC alone,
signaling that it would not cause them any problems if
they did not cause the SFC any problems.
Lehman Minibond Victims
Lawyer Criticizes SFC
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In 2010, a lawyer, Timothy Loh, published an
article criticizing SFC's “disturbing” guidance on
ILAS and warned sellers that they should
probably get an SFC license if they had any
reason to believe that they may need one.
Carrying on a business in an SFC-regulated
activity without an SFC license is a criminal
offense.
Loh claimed there was a “real possibility” that
unlicensed ILAS sellers could be found guilty of
a criminal offense.
CIB Warns Brokers that They May
Need an SFC License
PIBA Advises Brokers to Obtain an SFC
License if They Sell Portfolio Bonds
German Court Ruled that ILAS Is an
Investment (Not Insurance)
According to an article published on 8 Aug 2012 by the law
firm, Norton Rose Fulbright:
“In a series of landmark decisions, the German Federal Court
(BGH) held for the first time that unit-linked life assurance
policies often qualify as investment products, and are therefore
retroactively subject to much more stringent case law rules
developed by German courts over recent years.
As a result, a large life insurer is likely to be liable for hundreds
of millions of euros…in mis-selling charges”
A Potential Path to Justice
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If a court decides that ILAS sellers are
required to be licensed by the SFC, it could
potentially impact almost every ILAS that has
ever been sold, possibly leading to
compensation for policyholders.
This could be the best chance for all ILAS
victims to receive justice.
It would also mean that ILAS sellers can no
longer be self-regulated. They'll be under the
watch of SFC.
Mr. Hobbins' Lawsuit Revisited
According to the judgment of Anselmo Reyes:
“it has long been settled at common law that commission paid to an
insurance broker by an insurer does not constitute an illegal secret
profit unless it is in excess of what is normally paid within the
insurance market.”
“there is no evidence whatsoever that the commission or fees
which Clearwater received from Skandia or any other insurer
(Zurich, Generali, Aviva) was otherwise than that normally paid in
the insurance market.”
If ILAS is an investment product, then it should be
evaluated against other investment products. Reyes'
judgment would be wrong, since ILAS commissions
are in excess of what is normally paid within the
investment market.
Mr. Hobbins' Lawsuit Revisited (2)
Reyes also stated:
“By PBO [Prevention of Bribery Ordinance] s.19 the mere fact that a
practice is customary within a trade will not constitute a defence to an
offence under s.9. But in the present case there is more than just a
customary practice within the insurance brokerage industry. That is
because the practice has been validated by over a century of judicial
authority.”
Reyes was wrong about the practice “being validated
by over a century of judicial authority”. ILAS
products were invented only a few decades ago, and
the 2012 German case undermines his point.
Non-Linked “Insurance” Products
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Experts around the world, such as Suze Orman in the United
States, assertively state that most life insurance products
(other than term life insurance) are “ripoffs”. These “ripoffs”
include not just ILAS, but also whole life, universal life, and
endowment policies.
Like ILAS, these other products contain very little insurance,
and they pay excessive, undisclosed commissions. The
products are primarily savings and investment vehicles.
Policyholders' return on investment is often negative for up to
a decade, due to the excessive upfront costs.
In 2013, Hong Kong insurers earned 99% of new life
insurance premiums by selling products which are widely
regarded as “ripoffs”.
Mis-selling of Non-Linked Products
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In 2013, after discovering an alarming amount of misselling, HKMA forced banks to start disclosing ILAS
commissions. In response, banks stopped selling ILAS.
In Dec 2014, HKMA published the findings of its Mystery
Shopping Programme. HKMA found that banks had shifted
to mis-selling non-linked insurance products, using the
same tactics they had previously used to mis-sell ILAS.
In 2013, ILAS accounted for 21.5% of new life insurance
premiums. 77.8% of new premiums came from non-linked
products (excluding term).
The numbers suggest that non-linked products are probably
mis-sold a lot more frequently than ILAS products.
Commissions Should Be Banned
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Even if full commission disclosure was
mandatory, intermediaries would still push
whichever products pay the highest commission.
The UK, Australia, and some other countries have
already banned product issuers from paying
commissions to intermediaries.
The British regulator recently reported that the
country's commission ban had no negative impact
on consumers. “Product bias” has been reduced.
Fees have been driven down.
What Can OCI Do for ILAS Victims?
What Can OCI Do for ILAS Victims?
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Publicly state its views on when and whether
ILAS sellers need to be licensed with SFC.
Refer ILAS complaints to the SFC instead of
the SROs when there has been a potential
breach of the SFO.
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Get the IIA set up as soon as possible.
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Hold SROs accountable until the IIA is set up.
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Other ideas...
Conclusion
Main takeaway points:
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ILAS has been used to exploit Hong Kongers
ILAS was not suitable for the vast majority of
people it has been sold to
ILAS sellers should have been regulated by
the SFC (not self-regulated)
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ILAS victims deserve to be refunded
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Hopefully OCI agrees and will help
Questions from Victims Unable to Attend
1. If you (Annie Choi) were a "consultant" with only a
PIBA license, and you were eager to sell an ILAS to a
prospective client who has little knowledge of mutual
fund investments, how would you sell the product?
What would you say to the client to get this deal
without providing any sort of investment advice
regarding the fund pool within the ILAS? As the
Commissioner of Insurance, how can you assure that
those PIBA licensed "consultants" will not regard
themselves as investment professionals when selling
ILAS, which in fact to most people is an investment
product?
Questions from Victims Unable to Attend
2. What have you done, what system has OCI built
to ensure that PIBA, as an SRO, in their
investigation process for a complaint, places
policyholders' lawful interests above their member
companies, and follows up the case in a timely
manner?
3. Why do you allow those insurance brokers to
refer to themselves as "independent financial
advisors", or “IFAs”, for so many years to fool the
public, given the obvious conflicts of interests
between their commission and their clients' real
needs?
Questions from Victims Unable to Attend
4. Since [an SRO executive] already said his
company does not need to follow HKFI regulations
(i.e., the requirement about insurance need and
investment horizon), does Annie Choi think there
is a need for the IIA (a truly independent regulator)
to conduct an examination on the ILAS sales
committed by these brokers over the past years?
If no, why not? Does Annie Choi think the IIA
should be given the power to re-open the closed
cases by SROs? If no, why not?
Questions from Victims Unable to Attend
5. Is it appropriate for an insurance company,
within the context of HKFI's Code of Conduct
for Insurers, to process an ILAS application
when it knows the customer does not have
insurance needs and therefore, is aware that
the ILAS is not in compliance with HKFI
regulations. How is that considered fair,
honest, and consistent with the public's
interest?
Questions from Victims Unable to Attend
6. OCI issued a new circular in 2014 to ban
indemnity commissions and unfair charges on
existing ILAS products, which implied that the
previous products and remuneration structure
were not fair to customers. From this perspective,
should insurers refund money back to customers,
within the context of the HKFI Code of Conduct for
Insurers, given that it is the view of OCI that
customers were being treated unfairly with those
previous product terms and remuneration
structures. If no, why not?