To the Hong Kong Monetary Authority and the Office of the Ombudsman:
I appreciate HKMA’s last response, but it was nearly as disappointing as OCI’s. I am cc’ing this letter to the Office of the Ombudsman as part of a complaint against ILAS regulators (case number OMB2013/4618).
I am irritated by the fact that HKMA did not even acknowledge my question of whether “bonus allocation” is a regulatory violation. I devoted an entire letter to this topic, and all I got was a statement that HKMA wasn’t aware of any banks distributing Zurich Vista, as if to suggest that I made up the story about the Bank of China employee who convinced an older woman to churn her ILAS policies by using Zurich Vista’s “bonus allocation” as an enticement. That woman has agreed to contact HKMA to verify what I have said. Expect a message from her shortly. The fact that HKMA is unaware that banks have sold Zurich Vista indicates that there is a lot more that HKMA doesn’t know, but should.
In case HKMA isn’t aware, bonus allocation is a common feature of ILAS products. If some banks have never sold Zurich Vista, then they’ve likely offered bonus allocation through other ILAS products. Sometimes “bonus allocation” is referred to by other names. It’s called “extra allocation” in Standard Life’s Harvest 101. It’s called “enhanced allocation” in Friends Provident’s Zenith and Generali International’s Vision. Whatever insurance companies call it, the basic meaning and purpose are the same. The free fund units are supposed to appear so generous that it seduces investors into buying unsuitable policies, to invest as much as possible, and even to surrender old policies to finance new policies. What naive investors don’t realize is that these free fund units are worth a lot less than they appear to be. Because the units are placed in the initial account (not the accumulation account), the high fees prevent the units from growing much in value, or even cause them to shrink in value. If policyholders don’t hold their contract till maturity (it’s estimated that 93% don’t), the free fund units are in some cases forfeited.
I worry that HKMA dodged my question about “bonus allocation” because it is indeed a regulatory violation that many banks are guilty of, and HKMA (a) does not want the extra work of sorting out this mess, (b) fears being held accountable for poor regulatory oversight, and (c) does not want to cause trouble for cronies in the banking industry by exposing their wrongdoings and forcing them to cough up ill-gotten money.
I would appreciate if HKMA would give a concrete answer regarding the following questions:
- Is “bonus allocation” a regulatory violation? In all instances or only certain instances?
- Which banks have been offering ILAS products with bonus allocation? Which ILAS products?
- What will HKMA do to penalize banks that have violated the gift ban?
- What will HKMA do to identify, notify, and assist swindled consumers?
Putting the issue of “bonus allocation” aside, I now want to address HKMA’s deeply unsatisfying response to my question of whether a mis-sale has taken place when a customer was encouraged to buy ILAS despite indicating no need or want of life insurance in the financial needs analysis. To quote HKMA:
“In determining whether an allegation of the mis-selling of an investment or insurance product is substantiated, all relevant circumstances surrounding the case including the evidence available would be taken into account and adequately assessed in totality. As the surrounding circumstances and the evidence available vary, whether there are reasonable grounds to conclude any misconduct has taken place needs to be considered on a case-by-case basis.“
It seems to me that HKMA is trying to give the impression that it’s extremely tedious and time-consuming to determine whether an ILAS mis-sale has taken place. In many cases (if not most), this is simply not true. As I have argued to OCI, one only needs to look at two data points in the financial needs analysis to confirm and re-confirm whether a particular type of mis-sale had taken place. 1) Did the customer indicate no desire for life insurance? 2) Did the customer indicate that he or she had little or no investment experience? If the answer is yes to both questions, but the intermediary still sold an ILAS policy to the customer, then it’s all but certain that a mis-sale took place. Intermediaries who are suspected of mis-selling ILAS to clients should be given a chance to defend themselves, but I find it doubtful that they could provide evidence to prove they weren’t taking advantage of inexperienced customers who were seeking help.
HKMA states in its 22 April 2013 and 14 March 2011 circulars that banks should not sell ILAS to consumers who don’t need or want insurance because ILAS is generally unsuitable for people who have pure investment needs. Surely, HKMA wouldn’t have given these instructions unless there was evidence that banks were mis-selling ILAS disturbingly often. This raises the question of whether HKMA has taken steps to identify, notify, and assist potential victims. I’m afraid the answer is that HKMA has done nothing, and if so, it’s outrageously unacceptable. It’s like saying that it’s ok for banks to rip off thousands of uninformed consumers, as long as those consumers never figure it out. The sad truth is that most victims will never become aware of what happened to them unless someone tells them, since their victimization was founded on their ignorance of being cheated.
I have frequently argued that ILAS is unsuitable for Hong Kong citizens, even if they have insurance needs, because there is no rationale for them to invest in mutual funds through an insurance wrapper (aka, tax wrapper) as long as they pay 0% in capital gains taxes. Their only suitable option is to invest in mutual funds directly and buy insurance policies separately. I noticed in HKMA’s 14 March 2011 circular that banks were instructed to explain and give a fair evaluation of the pros and cons of investing in ILAS versus investing directly in funds and buying insurance separately. I suspect HKMA ordered this because HKMA agrees with me that ILAS is generally unsuitable for Hong Kong citizens. If so, then it should logically follow that HKMA would also agree with me that every sale of ILAS to a Hong Kong citizen has a high probability of being a mis-sale, and the number of mis-sales must be dreadfully high, since it’s estimated that 75% of all investment products sold to Hong Kong consumers are ILAS products (as of 2012).
I would again appreciate if HKMA would give concrete answers to the following questions:
- Does HKMA agree that one only needs to look at two data points in the financial needs analysis to confirm with near-certainty that an ILAS mis-sale took place?
- Does HKMA agree that ILAS is generally unsuitable for Hong Kong citizens and that every sale to a Hong Kong citizen has a high probability of being a mis-sale?
- Does HKMA think that banks have a duty to sell suitable products to their clients, whether or not they are instructed to do so by HKMA?
- Does HKMA have the authority and the will to conduct a total review of past ILAS sales within banks in order to screen for potential mis-sales?
- If yes to #4, will HKMA notify potential victims and offer assistance in seeking redress? How?
- If yes to #4, will HKMA hold guilty players in the banking industry accountable? How?
I’m cc’ing this letter to all ILAS regulators, the Legislative Council, and the media. It will also be posted at TheRapeOfHongKong.com. I hope HKMA will provide a response that sets a worthy example for other ILAS regulators to follow.
We are writing in reply to your emails of 2 October and 7 October 2013.
The HKMA regulates the sale of investment-linked assurance scheme (ILAS) products by banks. In view of the salient features and risks of such products, the HKMA expects banks in their sale of ILAS products to follow standards similar to those adopted in respect of their sale of other investment products. On this basis and also in light of our supervisory experience, as your emails mentioned, the HKMA has introduced enhanced requirements and further guidance in its circulars of 14 March 2011 and 22 April 2013, which are applicable to sale of ILAS products by banks. The HKMA will continue to provide further guidance to the banking industry in future as appropriate.
Recognising the importance of promoting consumer awareness of the features of ILAS products, the HKMA issued an inSight article on 22 April 2013 to provide tips for potential policyholders as to some important facts relating to ILAS products and disclosure of remuneration receivable from the insurer by the intermediary ( http://www.hkma.gov.hk/eng/
At the same time, the HKMA and other relevant financial regulators have collaborated with the Investor Education Centre (IEC) and the Consumer Council (CC) respectively to enhance the public’s understanding about ILAS. To this end, in July 2013 the IEC published an education booklet and broadcasted video series on TV and the Internet ( http://www.hkiec.hk/iec/en/
In your email of 2 October to the HKMA and other ILAS regulators, you asked whether the sale of an ILAS product would be regarded as a mis-sale “if the purchaser did not indicate an interest in ‘Life Protection’ on their financial needs analysis forms but instead only indicated a desire for ‘Investment’ or ‘Savings'”.
In determining whether an allegation of the mis-selling of an investment or insurance product is substantiated, all relevant circumstances surrounding the case including the evidence available would be taken into account and adequately assessed in totality. As the surrounding circumstances and the evidence available vary, whether there are reasonable grounds to conclude any misconduct has taken place needs to be considered on a case-by-case basis.
Your emails of 2 October and 7 October mentioned some tactics adopted by Swiss Privilege in the sale of ILAS products and the bonus allocation offered in the sale of Zurich Vista products respectively. We would like to clarify that AXA’s Swiss Privilege is not regulated by the HKMA and therefore we are not in a position to comment on its alleged sale tactics. As we are aware, no bank in Hong Kong has distributed Zurich Vista products. Nevertheless, if the HKMA becomes aware of any suspicious sale practice of banks, it will take appropriate follow-up actions.
Customers’ complaints about non-bank intermediaries’ sale of ILAS products may be lodged to the relevant insurance self-regulatory body(ies). If a customer is not satisfied with the way in which a self-regulatory body handles his / her complaint, he / she may seek assistance from the Office of the Commissioner of Insurance (OCI).
If a customer wishes to make a complaint about the conduct of a bank or its staff concerning the sale of ILAS, he / she is encouraged to lodge a formal complaint with the bank concerned first in order to give it the chance to resolve the complaint at an early stage. If the bank concerned has not fully addressed the complaint, the customer may seek assistance from the Insurance Agents Registration Board set up by the Hong Kong Federation of Insurers, the HKMA and/or the OCI.
Details of the complaint channels related to sale of ILAS products are also given in IEC’s education booklet mentioned above.
Public Enquiry Service
Hong Kong Monetary Authority