Monthly Archives: December 2013

Weak ILAS Commission Disclosure Requirement Was Introduced to Cover the Industry’s Rear, Not to Protect Consumers

If you thought the new ILAS commission disclosure requirement was introduced to protect consumers, then you would be wrong. It was introduced to protect insurers and intermediaries from getting sued. Because many players in the industry haven’t been disclosing commissions for decades, they are terrified of being hit with a tidal wave of Jeremy Hobbins-like lawsuits accusing them of violating Section 9 of the Prevention of Bribery Ordinance. IFAs could also be accused of breaching their fiduciary duty.

Check out this article written by a HKU law student. He says, “Instead of protecting the consumers, I believe this new regulation is actually legalizing the existing common practice.” He is implying that many in the industry have until recently been breaking the law, which means that they could and probably should be prosecuted.

The self-regulated insurance industry has consequently agreed to require all future ILAS contracts to contain a sentence saying that insurers pay intermediaries a commission for selling their products. However, the amount of the commission isn’t disclosed and doesn’t have to be disclosed unless a client asks for this information. In other words, the industry is disclosing just enough to cover its rear, and nothing more.

If the new commission disclosure requirement were truly inspired by a desire to protect consumers, rather than the creators and distributors of ILAS products, it would have been introduced years ago, not in response to the Hobbins lawsuit. More importantly, the rule would require not just the existence of commissions to be disclosed, but also their full amount, and a comparison to the much lower commissions paid to intermediaries when they sell mutual funds directly (not through an insurance company). As I will explain in a future blog post, the commission for selling a 25-year regular premium ILAS policy is hundreds of times higher than the commission paid on an initial investment to a monthly savings plan on a fund platform like iFAST. Unsurprisingly, insurers and intermediaries aren’t requiring themselves to disclose this, as it would tip off clients to the fact that they are being financially raped so that their advisers can make a quick buck.

Although I would love to see mandatory full disclosure of commissions, the only real solution to wide-spread mis-selling is to align the incentives of advisers with the interests of their clients. This can only be done with a total ban on commissions.

This Is Your Brain on Commissions

Financial adviser Frank Furness says, “For me, it’s the best job in the world. Where else can I go out and meet somebody, drink their coffee, eat their cake, and walk out with $5,000 in my pocket? No other business.”

He adds, “Top financial advisers are not team players. They are loners. They are in it for themselves.” 

Guinness World Record Holder

After telling the story of how he broke the Guinness World Record for most sales in a month (198), Steve Young says, “It’s not about the commissions. It’s not about, you know, the quick sale. It’s about looking after somebody for a lengthy period of time. And with that you get the commitment and the respect and the trust with them.”

Note that Steve Young had only been in Singapore for 5 years when the video was shot, and he likely had over a thousand clients if he’d been generating over one million dollars in commissions each year, which meant he had very little time to look after each of his clients, especially if he’d been seeing several new prospects everyday.

Lehman Minibonds and Now ILAS: Rise of the Hong Kong Politico-Consumer

Here’s an interesting book review I just came across which provides an illuminating perspective on the ILAS mis-selling scandal, placing it in the context of larger social developments in Hong Kong.

“The minibond saga, in which banks sold complex structured products known as “mini-bonds” to depositors at the time they came into their branch simply to renew their time deposits for another term, is well documented. The deal foisted on the banks, which saw most investors get the vast majority of their principal investment returned, marked the start (rather than the end) of a growing retail investor-rights consciousness in Hong Kong.

From mini-bonds, the focus has now shifted to Investment Linked Assurance Scheme (“ILAS”) products – investments products wrapped in the form of an insurance product. Although ILAS products give retail investors access to institutional funds, they do often come with high administration costs and lock-up terms which means getting access to your money without incurring a hefty penalty is difficult. These products have proved popular over the years in Hong Kong, but there have been a growing number of incidents where investors are prepared to speak up in cases where they allege these funds have been missold to them.

The Hobbins court case, one of the defining cases on intermediary commission disclosure, put ILAS products very much under spotlight. However, investors have also found other routes to express their grievances at misselling other than through the courts, with a number of blogs detailing horror stories of ILAS products being sold to persons who could ill afford to buy them (see, the blog entitled “the Rape of Hong Kong” as an example). Pressure from below has instigated change with new commission disclosure requirements on intermediaries selling ILAS products set to come into force, along with an overhaul of the insurance regulatory system targeted for 2015, where the introduction of a new and powerful Independent Insurance Authority will put an end the current self-regulatory regime for insurance intermediaries.”

Are Convoy Executives Dumping Their Stock Before Sh*t Hits the Fan?

To the Securities and Futures Commission, Convoy, and the Media:

On December 2nd, Convoy made an announcement that insiders, which seem to include CEO Rosetta Fong and Chairman Quincy Wong, have dumped more than half of their shares of Convoy at a discount to the current stock price. Does it mean they have lost faith in their company’s stock? Do they know something that the public doesn’t? Are they trying to transfer potential future losses to outsiders with less knowledge of the risks that the company faces? I believe Convoy should provide public shareholders with an explanation, and the SFC should investigate whether any insider trading laws have been broken.

Several months ago, I predicted that Convoy’s major shareholders would dump their stock, and anyone who has read my blog knows why. In short, Convoy’s primary business of selling ILAS is unethical and vulnerable to regulatory reforms. Plus, the company is a sitting duck just waiting to be blasted with a never-ending stream of lawsuits. Here are three reasons why:

1) Convoy has made almost all of its money from selling ILAS to Hong Kong citizens, yet ILAS is a tax avoidance product designed for expats. Hong Kong citizens have no good reason for owning ILAS because they don’t pay any capital gains taxes. I believe Convoy has failed to perform its fiduciary duty in recommending ILAS to its local clients.

2) According to industry veterans, 99% of 25 year ILAS policies (and 93% of ILAS policies in general) are surrendered before maturity. Convoy knows this, and yet it keeps recommending long-term ILAS contracts to its clients, knowing that it’s bad advice. Convoy doesn’t even offer a warning to clients that the policy completion rate is so low. I believe this is another area in which Convoy has failed to perform its fiduciary duty.

3) Until regulators started requiring it recently, Convoy did not disclose to clients that it would be paid a commission from insurance companies that issue ILAS products that it sells. These commissions create a conflict of interests that corrupt advice, and many (if not most) of Convoy’s clients were unaware. According to the judge that handled Jeremy Hobbins’ unsuccessful lawsuit against Clearwater, brokers have a fiduciary duty to disclose the existence of a commission. I believe this means that anyone unhappy with the advice given by Convoy could successfully sue them for not disclosing the existence of the (large) commission that led to the bad advice.

I have a number of Chinese friends who have been unsuccessfully trying to get their money back from Convoy, but they don’t have the financial means to initiate a lawsuit. If anyone reading this would like to offer them some assistance in doing so, please contact me. I am willing to help organize a class action lawsuit (or the closest equivalent that exists in Hong Kong).

This letter will be posted at

Lindell Lucy

P.S. For those that don’t understand the complex ownership structure of Convoy, see this link. The info is a bit old, but I assume that Rosetta Fong and Quincy Wong each still have a 19.7% stake in Convoy Inc, which owns most of CFG (Convoy Financial Group Limited), which just sold a ton of shares of the publicly listed Convoy Financial Services Holdings.

Advisers Applaud Proposal to Ban 25 Year ILAS Policies

Last week, at a gathering of IFAs in the Middle East, the crowd erupted into applause after the CEO of “one of the largest advisory groups operating in the UAE” proposed banning 25-year regular premium investment-linked insurance policies. According to International Adviser:

“Explaining his position, Sardana said the reason these policies are currently being sold is not because they offer value to the client given “99% of the clients will not see through the 25 years”, but because of the “current remuneration”.”

In other words, the product was not suitable for 99% of people that it was sold to, yet advisers recommended the product anyway because it paid them the highest commission.

Last year, SCMP reported an estimate that 93% of ILAS policies in Hong Kong are surrendered before maturity. That estimate seemingly referred to ALL policies of any length (not just the longer 25 year policies). Using the same logic as Mr. Sardana, it would make sense to call for a total ban on all ILAS policies (or at least the current remuneration structure), since it is not suitable for nearly 19 out of 20 people that it is sold to in Hong Kong. Regulators’ refusal to stop this wholesale slaughter of consumers is reprehensible, and it stinks of corruption. I ask that anyone who has evidence of corruption please contact Hong Kong’s ICAC (Independent Commission Against Corruption).


Phone Number: 25 266 366

According to SCMP, LegCo member Kin-Poor Chan has already said the insurance industry is lucky that it hasn’t yet been investigated by the ICAC. I hope their luck is about to run out. I will have more to say about this later.