One of the Most Disgraceful Regulatory Responses in the Developed World

To ILAS Regulators, the Office of the Ombudsman, the Independent Commission Against Corruption, the Legislative Council, and the Media:

Hundreds of thousands of Hong Kong investors have been exploited because ILAS regulators have collectively refused to properly regulate commissions (by not keeping them reasonable and requiring full disclosure), the qualifications of brokers and agents (by not requiring them to thoroughly understand ILAS and how it compares to alternative investment products in the market), and the ILAS sales process (by not implementing a system to prevent ILAS from being mis-sold to clients and to hold brokers and agents accountable when they give deceptive information and self-serving advice; this would most notably include mandatory audio recording).

Even though regulators know they are responsible for allowing the insurance industry to wreak havoc on the savings of countless individuals and families, they are now pretending like they have no moral obligation to help restore these innocent victims to the financial position they would be in had they not been swindled by fraudulent products and corrupt behavior that regulators have collectively sanctioned.

I don’t know how to explain this disgraceful performance, except through a combination of corruption, incompetence, and self-delusion.

Below are the most recent responses I have received from ILAS regulators, followed by my reply to each. Regulators have unanimously expressed a willingness to do nothing. The most perplexing response of all is the response from the Office of the Ombudsman.

Although the Ombudsman is not an ILAS regulator, it has a duty to hold regulators accountable when they fail the public. Unfortunately, if the Ombudsman refuses to do its job, no organization exists (that I know of) to hold the Ombudsman accountable. I am therefore urging journalists to contact the Ombudsman for further questioning.

I am also cc’ing this letter to the Independent Commission Against Corruption, since it is the only watchdog left that hasn’t indicated a determination to do nothing. Because players throughout the ILAS industry have been violating Section 9 of the Prevention of Bribery Ordinance, they are already valid targets for investigation by the ICAC. LegCo member Kin-Por Chan acknowledged this in a recent SCMP article.

 Response from the Ombudsman

Dear Mr Lucy,
We refer to your emails of 4 to 11 November.  You considered that investment-linked assurance scheme (“ILAS”) products are not suitable for most investors.  However, the regulatory authorities in Hong Kong have failed to play their roles thereby leading to frequent mis-sale of such products in Hong Kong. You therefore asked this Office to conduct an investigation of the ILAS regulators, with special emphasis on the Office of the Commissioner of Insurance.

2.             The function of The Ombudsman is to investigate complaints of maladministration by the Government departments and public organisations listed in The Ombudsman Ordinance.  However, how ILAS products should be regulated are matters of professional judgement.  They are not administrative matters subject to The Ombudsman’s investigation.

3.               We regret that we would not take your case forward.  Thank you for writing to us.

Yours sincerely,

( Barry Chung )for The Ombudsman

Reply to the Ombudsman

I was never given time to file the official complaint letter that I said I was going to file. I was still in the process of writing it when I received the above response. The Ombudsman rejected my case before it even knew what I had to say. This was unfair, not just to me, but to the countless thousands of victims who have suffered financially.

I disagree with the claim that no maladministration has taken place. The regulation of ILAS is decades behind the UK’s, and this has been publicly and scathingly criticized for a very long time. There must be hundreds of thousands of ILAS mis-selling victims who don’t understand what happened to them, yet regulators have refused to do anything to identify, notify, and help these people. It’s inexcusable. The persistent refusal of regulators to address the devastation caused by ILAS is a straightforward matter of maladministration, maybe even corruption. The Ombudsman’s denial of this is extremely puzzling.

I request that the Ombudsman allow me to submit a complaint letter that describes the situation more extensively. I also request that it reconsider opening an investigation (case number OMB2013/4618). 

Response from the Insurance Authority

Dear Mr Lucy,

We refer to your e-mail of 4 November 2013 below, the contents of which have been noted.

As mentioned in our previous email of 15 October 2013, the assessment of the suitability of an ILAS policy for a particular client should be based on a totality of the circumstances.  We have no further comments to supplement except that we are working with the insurance industry on the enhanced quantitative remuneration disclosure for ILAS policies, which is expected to be implemented next year.

As insurance regulator, we will promptly follow up any complaint cases lodged with our office and take actions as considered appropriate.  If you have further information concerning misconduct of any insurance intermediaries, please provide us with the relevant information for our follow-up actions.

Regards,

Helen Ho
Office of the Commissioner of Insurance

Reply to the Insurance Authority

It’s obvious the entire industry has been engaging in misconduct. Here are three reasons why:

1) ILAS products are fraudulent. The Rube Goldberg fee structure and bogus “bonus allocation” are designed to conceal massive upfront commissions and give the appearance of value where there is none.

2) Insurers have been bribing intermediaries with commissions that can be hundreds of times higher than the commissions paid for selling competing fund products, such as those offered by iFAST.

3) ILAS has been flogged to Hong Kong citizens, even though it clearly isn’t suitable for them. The main attraction of ILAS is the ability to avoid foreign capital gains taxes, but Hong Kong citizens don’t pay them!

It is inexcusable that the Insurance Authority has refused to acknowledge these facts and take appropriate actions. I am investigating a potential lawsuit, and I will not change my mind unless the Insurance Authority acts soon.

Response from the Hong Kong Monetary Authority

Dear Lindell,

We refer to your email of 11 November 2013 as appended.

The HKMA’s guideline is silent on bonus allocation but para. 6.1 of the “Guidance Note on Gifts, Promotions and Incentives for Class A and Class C Products” issued by the Hong Kong Federation of Insurers (January 2012), which is available on its website, permits allocation of bonus fund units.

The HKMA requires banks to adequately disclose and properly explain to customers the nature, features and risks of ILAS products.  Therefore, the HKMA would be concerned if a bank has adopted inappropriate practices in the sale process that will result in customers’ attention being distracted from the nature and risks associated with the ILAS products.  Furthermore, the HKMA requires banks to take all reasonable steps to ensure that the recommended ILAS product is suitable for a customer having regard to the customer’s circumstances.

Should any improper sale practices or potential mis-selling in relation to banks’ sale of ILAS come to its notice, the HKMA would take follow-up actions.  Before deciding whether a case of misconduct is substantiated, the HKMA would assess the evidence on hand to decide whether there is a prima facie case for formal investigation.  After investigation, the overall circumstances of each case as reflected by the evidence collected would be taken into account before reaching an impartial judgement on each case.  If misconduct on the part of a bank and/or its staff can be established, disciplinary actions may be taken pursuant to the relevant legislation.

We hope you would appreciate that we cannot comment on matters related to individual cases or individual banks.   However, as to the assistance available to aggrieved customers with respect to intermediaries’ sale of ILAS products, our reply to you on 18 October 2013 has provided details.  We would also urge any customers who believe they have been mis-sold ILAS products by banks to lodge a complaint with our Banking Complaint team for follow-up.   The team can be contacted at 2878 1378.

Thank you.

Best regards,

Public Enquiry Service
Hong Kong Monetary Authority

Reply to the Hong Kong Monetary Authority

Please read what I wrote to the Insurance Authority above. The HKMA knows that ILAS mis-selling is widespread and that the very essence of a mis-sale is that the victim doesn’t know they were exploited. Thousands of victims will continue to suffer silently unless the HKMA takes a proactive attitude towards identifying and notifying these people. Please set a good example for other ILAS regulators to follow.

Response from the Securities and Futures Commission

 Nothing.

Reply to the Securities and Futures Commission

The SFC cannot pretend like it is not partly responsible for the ILAS mis-selling scandal. The SFC authorized many blatantly fraudulent and exploitative ILAS products. It did not require commission disclosure on marketing documents until recently (and even now, disclosure is not mandatory or complete). The SFC also designed pitifully inadequate illustration documents which don’t show the devastating long-term effects that ILAS fees inflict relative to direct fund investing, which is vital information that inexperienced investors need to know before buying an ILAS product.

As I argued in my last letter, ILAS seems to fall under the legal definition of a security, which means that people selling ILAS should comply with SFC regulations. Inexplicably, the SFC has denied this and hasn’t been enforcing the rules. I am still waiting for a response to my letter. Unless the SFC can provide a clearer and more rational defense for its interpretation of the law, I will be investigating a potential lawsuit on behalf of ILAS victims.

Response from ILAS Self-Regulators (PIBA, CIB, HKFI)

Nothing.

Reply to ILAS Self-Regulators (PIBA, CIB, HKFI) 

The whole industry is rife with criminal behavior, so this total lack of response from industry representatives is exactly what I expected. Nevertheless, there is no good excuse for PIBA not having reached a conclusion to its investigation into the cases of Leung Chung Yan and DeAnn Tsang. Both of these ladies have been patiently waiting for more than half a year to receive their money back, along with an apology from Convoy. I ask that PIBA please provide a concrete update immediately.

I called PIBA’s office last week only to be told that one of the cases is in the “final stages” of investigation and that PIBA was “still collecting information”. The lady on the phone gave me no time-frame for when PIBA would be finished, even though there’s already enough public information to potentially put thousands of people in prison. I’m convinced that PIBA is not really conducting a genuine investigation but is instead buying time with its excuses.

Concluding Remarks
 

The longer that regulators refuse to appropriately address the ILAS mis-selling scandal, the more that public awareness and outrage will spread. I’m confident that it will be a hot-button issue with protesters this summer at Occupy Central.

Lindell Lucy

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