To the Consumer Council and the Office of the Commissioner of Insurance:
I’ve received and read Standard Life’s letter (attached). The conclusion to their so-called investigation is that they are guilty of no wrongdoing, and Ms. Leung doesn’t deserve a refund. Their denial of the truth shouldn’t surprise anyone as the act of selling Harvest 101 to wide swaths of the Hong Kong public demonstrates their total lack of moral integrity. I am curious to know how many thousands of ILAS complaint response letters the Consumer Council and OCI have received over the past ten years. Do they all look just like this one? And does it ever get tiring reading all of them?
My argument has consistently been that Harvest 101 is such a rotten deal for Hong Kong citizens that Standard Life has no defensible excuse for selling it to any of them. If I am wrong, then someone please describe a hypothetical Hong Kong citizen for which Harvest 101 is a good deal. I don’t think there is such a person, but supposing there is, then tell me what percent of the Hong Kong public fits this description. Is it consistent with the types and number of Hong Kong citizens to whom Harvest 101 has been sold?
If Harvest 101 is a bad deal for all Hong Kong citizens, then there is no avoiding the conclusion that Standard Life is guilty of designing a business model in which they profit at the expense of the public good, which means Harvest 101 doesn’t deserve to exist and should be banned immediately, and all previous Harvest 101 customers in Hong Kong ought to be reimbursed for damages they never should have suffered.
I want to illustrate with an analogy. Think of Harvest 101 as a medicine that makes you sicker as soon as you take it (exit fees) and permanently handicaps your immune system for the next 25 years (high management fees). Standard Life is the pharmaceutical company who manufactures this so-called medicine, and Convoy is the doctor who prescribes it. Standard Life knows it is manufacturing a drug that is destructive to your health, and Convoy knows it is selling you the worst drug on the market, but they conspire and continue to do it anyway because they are making so much money and don’t give a damn about your health. When hordes of sick patients start to complain to the government, Convoy and Standard Life shrug innocently and say the medicine bottle had a warning label on it. They argue that by swallowing the pills (signing) the patients agreed that they understood they were ingesting poison, which absolves Convoy and Standard Life of all responsibility.
What would the Hong Kong justice system do to this doctor and this pharmaceutical company? How would they be treated in the media?
I now want to examine some quotes from Standard Life’s defense. I will follow each quote with my criticisms.
“Like other investment linked assurance schemes in the market, our Harvest 101 product is generally more suitable for customers having a medium to long-term investment horizon.”
And like other investment-linked assurance schemes in the market, Harvest 101 is a complete ripoff. Do you know why Harvest 101 is a medium to long-term product? It’s not for the benefit of consumers. It is medium to long-term by necessity. The product can’t exist as short-term because everything policyholders pay in the short-term is handed over as bribe money (commission) to the corrupt brokers who sold them this travesty. The brokers must be bribed because they’d otherwise have no good reason to recommend Harvest 101 because Standard Life’s management fees are too high. Let me repeat, Harvest 101 is a medium to long-term product because policyholders are screwed so badly in the short-term. Their only chance of getting back all the money they paid is if the stock market goes up consistently for a decade or more. This is a terrible deal for investors and a golden deal for the insurance companies and insurance brokers. The insurance industry is guaranteed to win, and the investor is guaranteed to lose. It doesn’t matter if investors eventually break even a decade later. One needs to consider the opportunity cost. How much did investors lose because their brokers steered them into ILAS instead of something like a no-load mutual fund or index fund?
“[The long term nature of the product] is a material fact disclosed in our principal brochure which we require all of our brokers to inform customers of when they bring new business to us.”
Mutual funds can be short-, medium-, or long-term, whichever you prefer. But not ILAS. Short-term is an excluded possibility due to the bribe money required to sell it. Why doesn’t Standard Life require brokers to disclose this “material fact”? I argue it is because Harvest 101 is a ripoff, and Standard Life has to disguise this fact in order to sell it.
“Moreover, the illustration document given to Ms. Leung at the sales quotation stage contained an upfront ‘warning’ stating that the product should only be selected if the customer intends to pay the premium for the whole term.”
The illustration document should contain a revised upfront ‘warning’ stating that the product should only be selected if the customer agrees to getting metaphorically and financially ass-raped with a log. According to the assumptions in the illustration document (an 11.5% average return on underlying funds), if the customer pays the premium for the whole term ($1,000 per month for 25 years), the opportunity costs of ILAS will be about $700,000. I’ve explained this before in previous emails. With Harvest 101, your account is eventually worth $875,868 (according to Standard Life’s own calculations). But if you avoid Harvest 101 fees by investing directly in mutual funds, you investment would be worth $1,572,613 (or about 80% more). In calculating this latter number, for simplification, I assumed the investments were in no-load funds and funds with minimum contributions of $1,000 or less (like the Tracker Fund of Hong Kong). You could still invest in funds with larger minimum contributions though. After you accumulate a large amount of money in one fund (with low minimum contributions), you simply sell your stake in that fund and reinvest the money in another fund (with larger minimum contributions).
One more point. Standard Life provides a single warning statement, but they deliberately withhold a thorough explanation for the necessity of the warning. The average customer consequently has no clear understanding of the reason for the warning being there. Why doesn’t Standard Life provide a chart showing specific numbers reflecting the financial consequences of stopping payments of contributions early? I am certain that it’s because it would tip off investors that Harvest 101 is a rotten deal and scare most of them away. Standard Life depends on the fact that the public is desensitized to warning labels. Because so many products have some kind of warning, people tend to gloss over them without much thought. People who buy Harvest 101 from a friend, like Ms. Leung, are especially unlikely to regard the warning as more than a benign formality. Consumers can usually hold this assumption without much consequence, but Harvest 101 will be the one exception that comes back to haunt them. Standard Life rides this aspect of mass psychology all the way to the bank.
“Furthermore, after we approve an application, we will most certainly issue an information leaflet and a ‘right to cancel notice’ together with the policy pack which highlights to the customer a right to cancel the policy during the cooling off period to ensure the customer has not chosen the product on impulse.”
The customer doesn’t need a right to a cooling off period. The customer needs a right to objective advice and unbiased information. I argue that no informed rational person would invest in Harvest 101. Therefore, all people who bought it did not understand it, and they also did not realize that they had much better investment options, which means that their advisers were either swindlers or fools and that the Harvest 101 policy documentation is misleading (by neglecting to reveal important facts, such as opportunity cost, and specific numbers on projected account value if the policyholder stops making contributions early).
“We feel sorry to hear of your disappointment with the insurance product chosen…and we understand your frustrations. We hope to work together with you to ensure this matter can be resolved.”
Bullshit. Utter bullshit. If Standard Life understands my frustrations, then they certainly don’t intend to ensure the matter is resolved. They will do everything in their power to avoid resolution because the issues I raise applies to every single individual who has ever bought this product. A fair resolution would be so damaging to their bottom line that they would likely spend millions fighting to obstruct justice before admitting defeat.
“Let us now begin to address your points on our Harvest product…Compared to mutual funds, ILAS is a different type of savings vehicle which incorporates an insurance element which is characterized by the fact that a death benefit is payable when the death of the insured person occurs.”
If this is how Standard Life addresses points, then they’re doing themselves no favors. They’re only making my argument stronger. The death benefit is merely 1% of the account value. I don’t see how anyone can call this insurance and keep a straight face. If Ms. Leung died today, her family would receive 1% of a $13,000 investment, or about $130, enough to pay for a cheap dinner. Calling this a death benefit is little more than a cruel joke.
“Moreover, other generic features that a customer may find attractive of an ILAS product include: a disciplined approach towards regular long-term savings, free fund switching amongst a wide range of investment choices, and a flexibility to incorporate other kinds of insurance such as healthcare and medical benefit riders into the policy to render its features more comprehensive.”
Investors don’t need ILAS to have discipline or to buy health insurance. Investors also don’t need ILAS to switch funds for free. To achieve that, one only needs to invest in no-load funds, which is what Convoy should be recommending to clients, as opposed to ILAS. The only ILAS feature that arguably has some value is the ability to freely switch out of funds that would otherwise have sales or withdrawal fees. But this is a feature that most policyholders will rarely use, if at all, since they probably have almost zero knowledge about mutual funds. The only way a rational person could find these “generic features” to be attractive, is if the costs of ILAS (credit risk, exit fees, policy fees, two levels of management fees) weren’t so unreasonably high.
“In the end, it is up to the customer to weigh up one investment vehicle over the other. We will, however, of course state all material facts and risk factors in our sales materials with the aim of helping our customers to better make their decisions.”
More lies. Standard Life doesn’t state all material facts (as I’ve explained above), and if their true aim was to really HELP customers in making a decision, they’d advise them to not buy Harvest 101. I’ve now heard the stories of several victims of Convoy, and the common thread running through all these stories is that the victims didn’t understand the difference between a mutual fund or ILAS (particularly the costs and benefits of each), and Convoy made no attempt to explain these differences, nor did Convoy ever suggest that the victim invest directly in a mutual fund as opposed to ILAS. Every time, Convoy recommended that the client do what was in Convoy’s best financial interest at the expense of the client’s interest. The same can be said of Standard Life. In its Harvest 101 documentation, Standard Life makes no effort to help potential customers understand the different costs and benefits of ILAS and mutual funds, because if they did, then customers wouldn’t buy Harvest 101. In summary, Convoy helps Standard Life to locate investors who are uninformed, and then they both conspire to keep them uniformed, since it is far more profitable than educating them.
There’s not much more that I want to say because I believe my point is crystal clear. The only thing unclear is when the Hong Kong government will decide that protecting the public is more important than pissing off a subset of rich bastards who deserve to be stripped of their ill-gotten wealth and thrown in prison.
I’m cc’ing this message to the media and other regulators.