To the Hong Kong Monetary Authority and other ILAS regulators:
I have one more question to add to the others, but first I need to again quote the HKMA’s rule on gifts:
“3.1 Use of gifts
To avoid distracting customers’ attention from the nature and risks associated with ILAS products, AIs should not offer financial or other incentives (e.g. gifts) for promoting ILAS products. Discount of fees and charges, and the offering of any gifts for brand promotion, relationship building or other purposes not directly related to the promotion of ILAS products will not fall foul of this requirement.”
It appears to me that the way insurance intermediaries are using the so-called “bonus allocation” of ILAS products runs afoul of HKMA’s gift rule. I’ll illustrate with an example.
I know a victim who was mis-sold some ILAS products by an agent at AXA’s Swiss Privilege. The agent later quit his job at Swiss Privilege and began working at Bank of China. Once at Bank of China, he called the victim and asked her to surrender a single premium ILAS policy that he previously sold her, and then move the remaining money to a much worse regular premium ILAS policy at Bank of China. This policy (Zurich Vista) had much higher annual management fees, and it would take more than three times longer to mature. Over the life of the policy, the victim would be expected to contribute 4 times as much money as was being moved out of the first policy. She didn’t know this, but she trusted the agent when he said he would make the policy switch worthwhile by giving her a gift: a so-called bonus allocation of 35% for the first 12 months of the policy. He said this “free money” would more than compensate her for the surrender penalty losses, and she’d be even better off than before. Although this was not true, the victim, who someone with almost zero investment experience, was defenseless to know otherwise. Perhaps because the agent knew he was breaking rules, or because he was afraid of being sued by his former employer for poaching clients, he asked a colleague at Bank of China to handle the victim’s paperwork, to cover his tracks.
Some time later, the victim received an almost identical offer to surrender her ILAS policies at Swiss Privilege and move the remaining money to a Zurich Vista policy at Sun Hung Kai Financial. SHKF was offering “free money” (the so-called bonus allocation) to make up for surrender penalty losses.
It appears to me that the way Sung Hung Kai Financial and Bank of China were using bonus allocation to bait and trap clients was breaking HKMA’s gift rules. The purpose of the “free money” was to distract the customer’s attention away from the high fees and associated risks.
Of course SHKF and BOC will argue to authorities that the “bonus allocation” is a discount in fees, which does not break the gift rule, but if that is really true, then why weren’t they marketing the bonus to clients as a discount in fees? Why were they misleading clients into believing they were getting a gift of free money, when really the clients were just getting ripped off?
I would like to ask HKMA to issue a public statement on whether they regard the offering of “bonus allocation” with ILAS policies to be a breach in their gift rule, at least in some instances, if not all instances. If so, does HKMA think offending companies deserve to be punished and mis-sold consumers deserve to be compensated?
I would also like to ask for a public statement from other ILAS regulators on whether they agree with HKMA’s assessment of this issue. I am cc-ing this letter to the media and the Legislative Council. I am also posting it at TheRapeOfHongKong.com.
Thanks for everyone’s time,