Transcript Black and White - TheRapeOfHongKong.com

ILAS
The Investment that SFC
Refused to Regulate
ILAS: What Is It?
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A mutual fund investment wrapped in a life insurance policy
Most policies have excessively complex, poorly disclosed,
high fees, and they provide little life protection
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 policies such as Zurich Vista and Generali Vision are
widely regarded as scams. (See The Great Expat Financial
Planning Ripoff, by Hugh Stevenson).
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 extremely 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 massive 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)
Why Does the SFC Exist?
Section 4 of the SFO states that one of the
regulatory objectives of the SFC is “to provide
protection for members of the public investing in
or holding financial products”.
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Section 6 of the SFO states, “In performing its
functions, the [SFC] shall, so far as reasonably
practicable, act in a way which…is compatible
with its regulatory objectives.”
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(Question: Has SFC fulfilled its regulatory objectives
with regard to ILAS?)
Industry Asks to Be Regulated,
but SFC Refuses to Regulate
SFC issued a circular on 13 Aug 2009, which stated:
"Some insurers, corporate insurance brokers and
insurance intermediaries appear to be of the view that
if they advise or make recommendations to
policyholders concerning the selection by them of the
underlying funds of ILAS (which invariably are
securities), this must constitute advising on securities
and must therefore give rise to an obligation to be
licensed under the SFO. The SFC does not share this
view."
(Comment: Even if this did not constitute “advising on securities”, insurance intermediaries necessarily hold
themselves out as “advising on securities”, which means they are required to be licensed under the SFO.)
Lawyer Criticizes SFC
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In 2010, a lawyer, Timothy Loh, published an article
criticizing SFC's “disturbing” guidance on ILAS. He
warned sellers that they should consider getting an
SFC license, in spite of SFC's actively discouraging
them not to do so.
Carrying on a business in an SFC-regulated activity
(or holding one's self out as doing so) without an
SFC license is a criminal offense.
Loh claimed there was a “real possibility” that ILAS
sellers who did not hold an SFC license 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”
(Could this happen in Hong Kong?)
ILAS: The Next Lehman Minibond
The Lehman Minibond scandal was a public relations nightmare for SFC.
During the midst of the scandal, SFC issued a circular denying that it was
responsible for regulating ILAS sellers. Some insiders speculate that SFC was
deliberately trying to distance itself from what it knew to be another, inevitable
mega-scandal. As a result, investors were left to hang, so that SFC would be
safe from criticism.
True or False?
In its 2009 circular, SFC stated:
"It is unlikely that an insurer or corporate insurance
broker that is not carrying on a business in a
regulated activity will be holding itself out as doing
so."
Fact: Insurance brokers openly advertise themselves
as independent financial advisers (IFAs). Often,
when they sell ILAS, their main selling point is not
the ILAS product itself, but rather, their allegedly
exceptional fund-picking skills and the long-term
investment advisory service they promise to
provide.
True or False?
In its 2009 circular, SFC stated:
"Any advice that might be given to a policyholder
concerning the underlying securities is not, in
fact, concerned with the acquisition or disposal
of securities at all."
Fact: Insurance companies are obligated to
acquire the securities selected by
policyholders.
True or False?
In its 2009 circular, SFC stated:
"ILAS are first and foremost insurance policies providing
the policyholder with life cover, but which have an
additional investment element. Life cover, as distinct
from investment, would appear to be the dominant
factor motivating a policyholder to acquire an ILAS
product...it cannot be said that the purpose of acquiring
an ILAS policy, or even the dominant purpose of doing
so, is to secure a profit from fluctuations in the value of
the underlying funds."
Fact: Many ILAS policies provide no life cover. SFC
authorizes all ILAS products and is fully aware of this.
True or False?
In its 2009 circular, SFC stated:
"It does not appear that financial gain is derived from advising or
making recommendations concerning the underlying funds of
ILAS. It is the sale of insurance products that generates the
financial gains that are enjoyed by the insurers, corporate
insurance brokers and insurance intermediaries."
Fact: Insurance brokers sometimes earn more commissions from
the underlying funds than from the ILAS products. (e.g., LM
MPF)
Fact: Consumers are often told that they are buying their brokers'
allegedly superior fund picking skills, not just an insurance
policy.
Fact: Some ILAS policies explicitly remunerate brokers for giving
investment advice. (e.g., Standard Life's Aspiration)
Does SFC's Code of Conduct Apply?
Why or Why Not?
If an insurance broker holds an SFC license, does the broker
need to follow SFC's Code of Conduct when giving investment
advice such as this: “I have evaluated all available investment
options, and in my opinion, I believe you should invest in mutual
funds through an ILAS, rather than buy funds directly.”
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SFC's Code of Conduct requires full commission disclosure.
Monthly payment ILAS products pay upfront commissions which
are hundreds or even thousands of times larger than that paid by
similar investment products (e.g., iFAST Central, MPF SVC).
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ILAS products are more complex, harder to understand, far
more expensive, and far more dangerous than most other
investment products, due to their long lock-ins and massive exit
penalties.
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Unauthorized Advertisements
In a circular issued 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."
Are These Illegal, Unauthorized Advertisements?
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ILAS is a “fund platform”, a “tax wrapper”, a fund investment
with free insurance
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There's no credit risk
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You can get your money back after the ICP
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Fees are understated/misrepresented, potential returns are
exaggerated
Promoting unauthorized funds via ILAS portfolio bonds
Claiming that you will earn money immediately even though
the policy's cash value will be less (for up to a decade or
more) than the amount of money you have contributed
Claiming that a special offer of extra “free” fund units will
compensate you for the losses incurred by twisting policies
Dealing in Securities?
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Schedule 5 of the SFO defines dealing in securities as: “inducing or
attempting to induce another person to enter into or to offer to enter into an
agreement…the purpose or pretended purpose of which is to secure a profit
to any of the parties from the yield of securities or by reference to
fluctuations in the value of securities.”
The value of an ILAS policy is determined by reference to fluctuations in the
value of mutual funds, which are classified as securities.
Sub-paragraph (xi) excludes an individual from dealing in securities if
he/she “issues any advertisement, invitation or document the issue of which
has been authorized by the Commission under section 105 of this
Ordinance” (meaning he/she doesn't need an SFC license).
Are ILAS sellers dealing in securities if they issue unauthorized
advertisements (“ILAS is a fund platform”) or if they use the ILAS as a tool
for distributing unauthorized funds that pay high commissions?
Does the sub-paragraph (xi) exclusion apply to sales of other investment
products, such as mutual funds? For example, can I sell mutual funds
without an SFC license if I issue SFC-authorized documents? Why or why
not?
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. According to SCMP, over 80 have
collapsed or been suspended since 2008. Many
have been exposed as frauds.
Portfolio bonds pay 6-8% commissions
Unauthorized funds pay commissions as high as
15%
Total commission is as high as 23%.
Unlicensed Activity?
On Feb. 9, the Insurance Commissioner clearly stated that she
believed the marketing of unauthorized funds through ILAS
portfolio bonds was SFC-regulated activity. Does SFC agree?
If yes, do the insurance brokers need a Type 1 or Type 4 SFC
license? Do the insurance companies also need an SFC
license?
If insurance brokers marketed unauthorized funds to retail
investors (non-professionals) via ILAS portfolio bonds, did the
brokers violate Section 103 of the SFO, which prohibits
marketing unauthorized funds to the public?
Have insurance companies also violated Section 103, for
example, by passing along unauthorized fund documents (e.g.,
the LM MPF Information Memorandum)?
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 to hide evidence that they breached Section 114
of the SFO.
One insider believes the above activities involve
criminal acts of fraud, bribery, and money laundering.
Does the SFC agree?
GN 15: Ripoffs Are Banned
Why Is SFC Still Authorizing Ripoffs?
AXA's Pulsar II
Minimum Contribution Period: Up to 4.5 years
Account Maintenance Fee: 5.5% deducted from initial units
Administration Charge: $600 HKD per year deducted from initial or
accumulation units
Account Service Fee: 1% deducted from initial and accumulation
units
Insurance Charge: A complicated formula which is to hard to
summarize
Death Benefit: Account value + 5% (life cover is less than the fees)
Early Encashment Charge: A complicated formula, but can be as high
as 65% of initial units
Underlying Fund Active Management Fees: ~1 to 2%, but can be
less or more.
Has SFC considered banning commissions?
Why or why not?
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The White House Council of Economic Advisers has
argued that commission disclosure is not an adequate
solution to the pervasive problem of mis-selling.
Intermediaries still have an incentive to ignore their
clients' interests and push whichever products pay the
highest commission.
The UK and Australia have already banned product
issuers from paying commissions to intermediaries. The
EU will very soon.
The FCA recently reported that the UK's commission ban
had no negative impact on consumers. “Product bias”
has been reduced. Fees have been driven down.
In Conclusion...
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Many ILAS policyholders were lied to, manipulated, and ripped
off. These people want their money back.
Most ILAS salespeople were not licensed with SFC, and if they
were, they did not follow SFC's Code of Conduct (by disclosing
commissions).
If the SFC and/or a Hong Kong court decides that ILAS sellers
are required to be SFC-licensed, it could potentially impact
almost every ILAS that has ever been sold, possibly leading to
compensation for hundreds of thousands of policyholders.
This could be the best chance for all ILAS victims to get justice.
Many ILAS victims are depending on the SFC to take responsible
action, since they cannot afford to fight in court and are
prohibited from joining together in a US-style class action lawsuit.