Convoy—Hong Kong’s largest pseudo-independent financial advisory firm—hit a record intraday low of $0.93 on Friday. The only other time the stock has been near these levels was two years ago, shortly after the Jeremy Hobbins lawsuit threatened to wipe out the entire “I”FA industry.
The Hobbins Lawsuit Revisited
Part 1: Bribery
Hobbins pointed out that massive, undisclosed ILAS commissions violate Hong Kong’s anti-bribery laws. The judge, Anselmo Reyes, disagreed.
He said as long as the commissions weren’t significantly larger than what was normally paid in the “insurance market”, then the commissions did not amount to bribery. Reyes’ logic was flawed because none of the ILAS products sold to Mr. Hobbins were genuine insurance products—they were all investment products. Consequently, Reyes should have asked whether the commissions were larger than what was normally paid in the broader “investment product market”. If he had done this, then he would have been forced to conclude that the entire “I”FA industry was guilty of bribery, because ILAS commissions are multiple times higher, sometimes hundreds of times higher, than commissions paid for selling competing and far superior investment products.
Part 2: Breach of Fiduciary Duty
Hobbins also argued that by not disclosing how stunningly massive the commissions were (nearly $1 million USD for a single transaction!), Clearwater, his “I”FA, had breached its fiduciary duty. Once again, the judge disagreed.
Although Clearwater did not disclose the amount of commissions it would receive for selling ILAS products to Mr. Hobbins, it did disclose that it would receive commissions. This disclosure was buried somewhere in the mountains of papers that Mr. Hobbins signed.
The judge claimed that this partial commission disclosure by Clearwater was just barely enough to “discharge its obligation as fiduciary”.
In response to this jaw-dropping judgement, a fee-based financial adviser remarked, “What the hell is Hong Kong’s idea of ‘fiduciary’ duty?? Fiduciary duty means a legal obligation for the IFA to put the client’s best interest ahead of their own. On what planet could an ILAS ever be construed as in the client’s best interest?!”
Clearwater emerged unscathed, but there was no guarantee that the next target of an ILAS lawsuit would be as lucky. Insurance regulators scrambled to cope with a rising tide of negative publicity.
For months, they deliberated over whether or not to start mandating full commission disclosure. Some feared that the industry might face another legal crisis involving not just lawsuits but investigations by the Independent Commission Against Corruption (ICAC).
During this period of regulatory uncertainty, Convoy’s stock spiraled downwards, going as low as $0.95. Insiders voiced fears that full commission disclosure would destroy sales of ILAS—the primary source of Convoy’s revenue. They correctly reasoned that no informed consumer would be willing to pay well over a year of savings for biased, unprofessional advice and access to a costly, inflexible “monthly savings plan”.
Out of self-interest, the “I”FA industry vehemently opposed full disclosure. Regulators, as usual, gave them exactly what they wanted.
They decided to mandate partial disclosure, the bare minimum that had saved Clearwater from legal repercussions but had failed to protect Mr. Hobbins from falling into a trap. In other words, the new rule was just enough for “I”FAs to cover their asses legally while still preserving their ability to easily exploit the trust of clients.
The industry breathed a sigh of relief. Convoy’s stock eventually recovered, suspiciously rocketing after a placement of questionably-priced warrants.
Independent Insurance Authority Reignites Fears of Doom
For the past couple of months, Hong Kong’s legislature has been debating a new law that will set up an independent regulator to replace the current self-regulatory system.
Players in the industry have been shitting themselves. Last month, South China Morning Post published an article entitled, “Forced disclosure clause in draft insurance bill could kill industry, insiders complain“.
These fears have caused Convoy’s stock to plummet back to post-Hobbins levels. It remains to be seen whether or not the fears are justified.
Falling Knife or Coiled Spring?
Convoy’s stock could sink like a stone towards zero, or it could snap back to $2.00 or more in a short period of time.
No one can know for sure. The answer depends on a few variables.
- Will the legislature and new regulator rein in ripoff insurance products and predatory sales practices? Or will it bless the industry and wish it “happy hunting”?
- Will Convoy be investigated by the Independent Commission Against Corruption (ICAC)?
- Will some of Convoy’s pissed off clients retaliate with lawsuits, and will Convoy be able to survive? [This blog post lists several reasons why the company is a sitting duck.]
In other words, will justice prevail?
If not, then it’s business as usual, and Convoy’s shareholders will profit at the expense of ripped off consumers.
If justice does prevail, then Convoy will be fined and/or sued into oblivion, and shareholders will lose everything.
Personally, I am rooting for justice.