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.