To Mr. Stephen Tisdall and the SFC:
Thanks for your lengthy reply, and I apologize for my delayed response. I got carried away with other ILAS-related business, which was referred to in the South China Morning Post on Monday:
In case you didn’t already see it, SCMP also recently mentioned your prior response to me:
I followed your suggestion and read the SFC’s 13 August 2009 circular, and unfortunately, this document reaffirmed my conviction that the SFC’s head is placed firmly where I said it was.
In particular, I am referring to the following paragraph:
“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 because there are many pure investment products on the market which tend to have lower initial charges, are more negotiable than ILAS and do not give rise to the same penalties for early termination. These types of products would appear to be more suitable for, and attractive to, those who are principally concerned with investment and are unconcerned with the acquisition of life cover. Accordingly, although the value of an ILAS policy is usually determined by reference to fluctuations in the value of the underlying funds that are selected by the policyholder, 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. The SFC therefore considers that promoting, offering or selling ILAS to the public does not constitute dealing in securities within the meaning of paragraph (b) of the SFO definition of that expression.”
The parts I’ve underlined are unquestionably false. The only possible reason for acquiring most ILAS policies is to “secure a profit from fluctuations in the value of the underlying funds”, not to get “life cover”. The so-called 1% insurance protection typical of most ILAS policies is only enough to qualify as an insignificant partial refund of the annual management fees. I’ll illustrate with an example: My girlfriend has contributed $13,000 to an ILAS policy. Nearly all of that money was indirectly paid as commission to the broker. That $13,000 can only be recovered by her family if she dies. Her fictional account value is subject to a $720 annual policy fee and a 6% annual administration charge. In total, the annual fees add up to 11.5%, which is 11.5 times higher than the 1% “protection” in the event of death. If one cuts through all the complexity and obfuscation, one will see that my girlfriend has already paid nearly $13,000 in fees, yet her family will only receive a so-called “death benefit” of $130 if she dies. In other words, she paid $13,000 for $130 of life coverage. If “ILAS are first and foremost insurance policies providing the policyholder with life cover”, then ILAS is a scam and the SFC shouldn’t have authorized any of them.
But of course, everyone knows that ILAS are not “first and foremost insurance policies”. One can simply browse through the websites of companies selling ILAS to read about the real purpose of ILAS. According to Sun Hung Kai Financial’s website, “Unit-linked products are a kind of insurance plans but they are different from traditional life policies. They emphasis on providing investment returns rather than protection.” But according to the SFC, “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”. Everyone in the industry is saying one thing, and only the SFC is saying the opposite. Why? Did no one at the SFC even bother to read the names of the ILAS products it authorized? Here’s a list of some of the juiciest one:
The Executive Wealthbuilder Account
Harvest Wealth Investment Plan
Wealth Regular Investment Savings Plan
International Investment Account
International Wealth Account
Manulife Wealth Creator
Premier Investment Plan
PRUlink smart wealth builder
PRUsaver Investment Plan
SUPRA Savings and Investment Plan
“Wealth Accumulator” Plus
Wealth Amplifier Investment Plan
Wealth Express Invest Plan
Wealth Plus Invest Plan
The primary purpose of these products is clearly indicated in their names: to profit from an investment in the underlying funds. Yet the SFC pretends to be oblivious to the obvious. I think it’s completely fair to say that the SFC has its head up its ass.
Mr. Tisdall, you have suggested that the only way the SFC could regulate the sale of ILAS is if there were a change in the laws. It’s not so clear to me that this is the case. Perhaps the SFC just needs to correct a misinterpretation of the laws. Contrary to the comments in the 2009 circular, the sale of ILAS seems to fall within the legal definition of dealing in securities, which is as follows: “making or offering to make an agreement with another person…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 only point which isn’t clear is the exclusion in sub-paragraph (xi) of that definition, which says that a person is not dealing in securities if that person issues an advertisement, invitation, or document authorized under section 105. I’ve looked at section 105, which points to section 103, and my understanding of these sections is that the sales materials of all investment products, not just ILAS, are authorized under section 105. So if the sale of ILAS is not “dealing in securities”, then neither is the sale of mutual funds. But the sale of mutual funds is “dealing in securities”, so why wouldn’t the sale of ILAS also be considered “dealing in securities”? Can you please clarify? Have I overlooked something?
If it’s the case that the sale of ILAS is in fact “dealing in securities”, and the companies selling it are not complying with SFC regulation, could they be held legally accountable for their non-compliance? If so, I am interested in knowing whether their non-compliance could be grounds for recovering the money of thousands of ILAS victims. I would be grateful for any thoughts you have on this matter.
Myself and others have been in contact with the offices of several members of the Legislative Council. There’s a meeting scheduled next week with one LegCo member to discuss possible legislative changes concerning ILAS. I would like to get your opinion about which parts of the law need to be changed to bring ILAS exclusively under SFC regulation. As you hinted in your email, the Insurance Authority has done a terrible job regulating ILAS. I agree, and I think it deserves to be stripped of that responsibility. It would be much better if ILAS were regulated solely by the SFC and if it were regulated just as strictly, if not more strictly, than other investment products. If I could have my way, ILAS would be banned, as well as the entire commission-based sales model, but short of that, I think bringing ILAS under SFC regulation is the least bad alternative.
I am cc-ing this email to other regulators and multiple news organizations. I am also posting it at TheRapeOfHongKong.com. It would be great if you could give a public response addressing the issues I have raised.
Thanks for your time,