The SFC Must Draw a Line in the Sand on ILAS: Front-Loading Years of Commissions Is Unacceptable; Lock-In Periods and Exit Penalties Must Be Capped, Eventually Banned

South China Morning Post has continued its excellent coverage of the ILAS scandal. In the past two days, the paper has published two new articles about the latest regulatory developments:

SFC to step up oversight of investment-linked insurance

Insurers back rules on investment linked policies

According to the articles, the SFC issued a new circular telling insurers that fees should be “be set at a fair and appropriate level. Failure to comply would lead to a ban in offering such products.”

This sounds great, except for the fact that: “It would be subjective on how to determine [which] products…are unfair to investors.”

Unless the SFC issues concrete rules, and then punishes those insurers which don’t comply, the new guidelines are practically meaningless.

Insurers have already indicated that they have no plan to pull their most exploitative products off the market. They’ve implied this in one of their new guidelines soon to be issued by OCI:

“Sales people would be banned from selling 20-year or 30-year-long savings policies to retirees or older people.”

Insurers are merely agreeing to stop selling exploitative, dangerous products to old people (something they’re already not supposed to be doing), but they aim to continue selling these products to young people.

There’s no excuse for it. 20-year and 30-year savings policies should not exist. They are suitable for no one.

A 30-year policy just means 30 years of front-loaded commissions. It offers no value to investors, only to salespeople.

Here are my recommendations to the SFC:

1) Since most ILAS savings plans can be sold on a contract ranging from 5 to 30 years, immediately cap the lock-in period at the bottom of the range. In most cases, this would be 5 years.

2) Eventually, put a ban on all lock-in periods and exit penalties, but give insurers a reasonable amount of time to adjust. Let’s say 6 months.

3) Eventually, ban commissions as the UK has done. Give the industry 18 months to prepare (i.e., till Jan. 1, 2016).

4) In the meantime, ban IFA companies from accepting commissions. If they want to keep accepting commissions, then they must call themselves something else which clearly indicates they have a conflict of interests.

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