Brokers have a duty to act in their clients’ best interests. If insurance companies offer obscene undisclosed commissions to induce brokers to rip off their clients by selling them exploitative ILAS products, then both insurers and brokers violate Section 9 of the Prevention of Bribery Ordinance (PBO). The punishment for this offense is up to 7 years imprisonment and a fine of up to $500,000 HKD.
Commissions only become compliant with the PBO if clients give permission to their brokers to receive commissions, and “before giving such permission, [clients] have regard to the circumstances in which [permission] is sought.”
In other words, if clients are not told all the facts which they’d need to make an informed decision, then any permission they give is meaningless as far as the PBO is concerned.
This means brokers are breaking the law if they fail to disclose pertinent facts about the commission payments they receive.
Anyone with common sense will immediately realize that ILAS victims were not adequately informed about their brokers’ remuneration, because if they were informed, they wouldn’t have bought ripoff products or permitted their brokers to receive outrageous commissions at their expense.
“Regard to the Circumstances”
Clients need to have “regard to the circumstances” in which their brokers are asking for permission to receive a commission. This phrase is not very specific, but it would obviously include any “circumstances” that give rise to conflicts of interest or are essential to a client’s understanding of the product being sold.
For example, if a broker introduces a contractual ILAS savings plan, the client should be made aware that the broker’s commission depends on the length of the contract signed. (A 5-year plan will pay 5 years of upfront commissions. A 10-year plan will pay 10 years of upfront commissions, and a 25-year plan will pay 25 years of upfront commissions.)
This arrangement creates a conflict of interest in which the broker has a financial incentive to advise his client to sign the longest possible contract, even though longer contracts are extremely dangerous and end in disaster nearly 100% of the time.
Moreover, because the broker will be paid for decades of service before he provides it, he won’t have a strong financial incentive to actually provide the service. He could just take the money and run. Clients need to know this.
Clients should also be informed that their brokers’ upfront commissions are paid for with their “initial contributions”. This means, in effect, that clients’ first years of savings are not really saved. Most units purchased in the initial period are guaranteed to be reabsorbed by fees to pay for brokers’ commissions (among other expenses incurred by the insurer).
Clients would also need to know that selling funds within ILAS pays commissions which are multiple times higher than selling funds directly. This “circumstance” creates a conflict of interest in which brokers have a financial incentive to recommend ILAS instead of “direct” funds, even though ILAS is far more expensive and dangerous.
If a broker who recommends ILAS is not licensed to sell funds directly, then the client should be made aware of this fact, since it is another conflict of interest which could bias the advice being given.
If a client gives a broker permission to receive commissions for selling a 25-year ILAS savings plan, for example, but the broker has not informed the client about all the important “circumstances” as described above, then the broker has breached the PBO and faces serious penalties.
Commission Disclosure in the Past
Many brokers have historically disclosed that they receive a commission for selling ILAS products. However, this disclosure was often just a single sentence written in fine print buried somewhere in the middle of 30 to 40 pages of densely-worded forms that needed to be signed (forms that few people had the time or patience to read thoroughly).
Here is Convoy Financial Services’ disclosure in 2012:
The above disclosure is so minimal that it obviously does not satisfy the requirements laid out in subsections (4) and (5) of Section 9 of the Prevention of Bribery Ordinance.
Even though the above form has been signed, it is totally meaningless as far as the PBO is concerned.
Commission Disclosure Now
Recently, insurance regulators started requiring brokers to more clearly disclose that they receive a commission for selling ILAS products. However, these new disclosures are just as minimal as the disclosures of the past. The only thing really new is a statement which says clients may ask their broker about the amount of commissions the broker will receive.
This disclosure is pitifully inadequate because clients wouldn’t know to ask about other conflicts of interest inherent in the commission structure, such as the fact that brokers have an incentive to recommend toxic long-term contracts and to recommend ILAS over direct purchase of funds.
Brokers would have to decide for themselves whether to disclose this extremely important information. However, it’s unlikely that many would do it because it would almost certainly result in the client rejecting their recommendation.
Below is an example of the new commission disclosure required by regulators. It is still not compliant with the PBO.