Regulators & Legislators Must Not ‘Repeat History (Again) after Ignoring It (Again)’

ILAS mis-selling has continued steadily for well over a decade. Here’s a few articles about a massive scandal that occurred in 2004:

Investors may sue insurers over fund fiasco (SCMP – May 2004)

Fund Losses Spark Fury (The Standard – Nov 2004)

Repeating History after Ignoring It (Asia Sentinel – June 2009)

According to the articles, more than 7,000 Hong Kong investors, many of them “wealthy bankers, lawyers, accountants and other members of the professional elite”, suffered catastrophic losses as a consequence of poorly trained, commission-hungry “advisers” flogging complex, crappy products they did not understand, while simultaneously advising clients (aka suckers) to borrow “three times their initial investment to buy extra shares”. This fiasco eventually left some investors penniless and in debt, while the so-called advisers made out with a fortune, presumably quadrupling their commissions.

Regulators responded to the scandal by doing practically nothing.

It’s no surprise that history soon repeated itself. In 2009, approximately 30,000 investors lost their savings in the Lehman mini-bond meltdown.

According to Vanson Soo, “the impact of the Lehman mini-bonds saga could have been minimized, if not prevented, if the SFC had acted decisively [in response to the 2004 scandal]”.

“The SFC could have punished the wrongdoers to send out the right message, restructured the regulatory landscape to prevent any similar episodes and seized the opportunity to demonstrate its seriousness in dealing with misconduct of financial institutions.

No, thank you. The SFC did none of the above.”

The SFC’s response to the Lehman mini-bond scandal was hardly better. This is exactly why, today, there are well over a million Hong Kongers locked into ripoff ILAS savings plans that never should have been sold to them.

Inevitably, history will keep repeating itself and investors will continue to be exploited unless regulators and legislators take the job of regulatory reform seriously. Ultimately, this will require a complete ban on commissions (a form of legalized bribery), a ban on opaque fee structures (a form of legalized fraud), strict licensing requirements for advisers (who are capable of ruining people’s financial futures), serious enforcement of antitrust laws (since collusion is presumed to be rampant), and introduction of class action lawsuits (so that millions of ripped off investors have a speck of hope about getting their money back).

Reform will also require sensible regulation of “pay packages and performance incentives” and strict rules to ensure that products are “fair to investors”. This is exactly what Enoch Yiu called for yesterday in a new article written for the South China Morning Post, entitled:

Give new insurance regulator power to examine pay and products 

As Enoch mentioned, “The legislative process for setting up an Independent Insurance Authority kicked off last week, and lawmakers are set to spend months of debate on what the new regulator should and should not do to protect Hong Kong’s nine million policyholders.”

The core reforms that must be introduced are already crystal clear. If lawmakers are troubled by the details, they can use the UK’s Retail Distribution Review as a template.

Lawmakers & regulators must not botch up this opportunity to right the wrongs of the past. If they do, we all know what will happen (again).

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