Hong Kong’s legislature is debating whether or not to enact a law requiring insurance companies and insurance agents to act in the best interests of clients.
In other words, the legislature is debating whether it should be legal for insurance agents to steal from consumers by hard-selling ripoff products that pay large hidden commissions (products such as ILAS and whole life) instead of recommending cheaper, superior products (such as term life and index funds). The debate inevitably raises questions about the future legality of insurers using commissions to incentivize their salespeople to screw clients.
Predictably, some players in the industry are panicking. Their entire business model is in danger. According to a new article published in the South China Morning Post:
some insurance industry representatives told lawmakers they are not comfortable with the new law containing the principle requiring intermediaries “to act honestly, fairly, in the best interests of policyholders/potential policyholders and with integrity”. They argue that the principle may lead customers to initiate lawsuits and say it is vague to define what is “in the best interests” of policyholders.
The author of the article, Enoch Yiu, says that she and some of her colleagues do not “understand why insurers are so worried about this clause.” She points out that the industry’s self-regulatory bodies long ago issued codes of conduct that use the exact same language, and since then, “we have not heard of many policyholders rushing to sue their insurers or salesmen”.
Why do these insurance industry bodies have their own version of a code of conduct requiring their members to act in the best interests of their clients, but are so firmly opposed to adding a similar line in the law? It just doesn’t make any sense.
Actually, it makes perfect sense.
One of the main reasons the legislature is setting up a new regulator is because the current self-regulatory bodies don’t enforce their own rules. Almost every player in the industry is using unethical sales tactics to push the most costly, crappy products. The current codes of conduct are meaningless because they’ve never been followed, let alone enforced.
That’s why, if ripping off consumers became illegal, it could forebode apocalypse for the industry—especially if the new regulator has the authority and the motivation to punish those who break the law.
Insurers are understandably “uncomfortable”.
But maybe they shouldn’t be too worried.
As Enoch Yiu pointed out, until now, few policyholders have sued their insurer. She implies that this is because “the majority of insurers and agents…are doing a good job.”
That’s obviously not true.
The real reason policyholders haven’t been suing insurers is because it’s too expensive and risky for the vast majority of people to access the legal system. Contingent legal fees are banned in Hong Kong, and class action lawsuits don’t exist. The only ripped-off consumer (that I know of) who has sued an insurer is Jeremy Hobbins. Despite the facts being overwhelmingly on his side, the judge ruled against him and ordered him to pay the other side’s legal fees. Hobbins’ total bill was about $2 million USD. Most people never come across this much money in their entire lifetime. It’s no surprise that policyholders aren’t “rushing to sue their insurer”.
So, even if ripping off consumers were outlawed, it wouldn’t lead to a flood a lawsuits. It’s just not possible until Hong Kong rises from the Dark Ages and introduces class action lawsuits and contingent legal fees. (Click here to learn more.)
Consequently, in order to protect the rights of consumers, it’s essential that the new insurance regulator is truly “independent”. If it isn’t, if it is infiltrated by industry practitioners with shady histories and questionable ties to former employers, consumers will likely remain as screwed as ever.
Enoch Yiu’s article was titled “Insurers should always act in clients’ best interests” because she believes the legislature shouldn’t allow itself to be influenced by the self-serving, twisted logic of the industry. She thinks there’s no justification for watering down the proposed law. I totally agree.
However, I think the law is flawed and inadequate. It will be ineffective at stopping consumer exploitation. History has proven that the temptation to “get-rich-quick” from big commissions almost always overwhelms an agent’s power of reason, ethics, and fear of getting caught. Agents will always find some way to rationalize their actions—at least to themselves—just like a religious person rationalizes his/her belief in magic and fairy tales.
Consequently, as long as commissions remain legal, most agents will continue to push products that generate the largest commissions, no matter how bad the products are for clients.
ILAS and whole life will continue to be scandalously oversold.
Thus, Hong Kong’s legislature must issue a timeline for a complete ban on commissions and other types of conflicted remuneration. The financial well-being of millions of consumers depends on it.
I also think the new regulator would be wise to keep a close watch on all companies who are currently opposing the idea of “acting in clients’ best interests”. Their objections are indicators of past misconduct and an intent to continue engaging in it.