One More Reason ILAS Commissions Violate the Prevention of Bribery Ordinance

This is the third in a series of posts explaining why ILAS commissions violate Section 9 of the Prevention of Bribery Ordinance. The first two can be found here and here.

Section 9 - PBO - Subsection 3

A broker is the “agent” of his client, and the client is his “principal”.

According to subsection 3 (circled in red), brokers are prohibited from using account statements or other documents which are “false, erroneous, or defective in any material particular” and “intended to mislead” clients.

Countless news articles, a few blogs, and an entire book have been devoted to explaining how ILAS account statements and policy brochures are designed to deceive consumers by concealing gargantuan upfront costs, including decades of indemnified commissions.

Due to the deceptive nature of these ILAS documents, any broker who has utilized them will have violated the Prevention of Bribery Ordinance. The only exception would be in cases where a broker was also fooled by these documents, or in cases where a broker explained the hidden facts, and his client still agreed to invest anyway (a highly unlikely event).

ILAS Brochures

Generally, when a consumer invests in mutual funds, a transparent upfront charge of 2 or 3% is applied in order to pay a commission to the broker.

When a consumer invests in funds via an ILAS savings plan, there appears to be no upfront charge. Policy brochures often state this.

Zurich Vista - No Upfront Charges (Highlighted)

Excerpt from a Zurich Vista brochure.

Any commission paid to the broker would seemingly come out of recurring charges, such as the administration charge or policy fee.

The administration charge is usually about 6% per year, applied towards initial units. Consumers could reasonably expect that their broker’s annual commission would be a fraction of this charge, and certainly no higher than it, given that the average commission rate for selling funds is about 3%.

Shockingly, ILAS commission rates are nowhere near 3%. For a 25-year plan, the rate is actually closer to 1300% of the first month’s investment.

To those who are unfamiliar with the industry, such a massive upfront commission might seem mathematically impossible, since it is about 13 times larger than the total amount of money invested by the client up to that point.

The reason insurers can afford to offer such generous commissions is because the money is given to brokers as a sort of loan.

Unbeknownst to clients, almost all the money they “invest” during the first two years of their plan is not genuinely invested. It is used, in part, to pay off their broker’s secret loan. If clients stop “investing” before the loan is paid, then the broker will have to pay back the loan himself.

ILAS Account Statements

ILAS account statements not only conceal the upfront costs incurred by clients, they also create an illusion that clients are making spectacular instant profits, due to so-called “bonus” units.

An example is shown below:

Harvest 101 Statement - April 2013 [Redacted]

$12,000 has been invested by the policyholder, and an additional $2,400 has been given by the insurer as a “bonus”. If the above savings plans is held till maturity, the units shown in the account statement will be subjected to 25 years of 6% administration charges as well as other charges. These charges are guaranteed to eat at least 75% of all the units shown in the statement. If the savings plan is immediately surrendered, then 86% of all the units will be instantly eaten by an exit charge. Regardless of what the policyholder chooses to do, she is guaranteed to lose almost all her units to various charges. The real value of her savings plan is thus only worth a small fraction of the value shown in the account statement. (Roughly $1,700, as opposed to $14,200.)

The real value of the above savings plan is about $1,700—not $14,227. The policyholder has experienced an 86% loss, even though the account statement shows an 18.5% gain.

The upfront commission paid to the broker for selling the above plan would likely have been $12,600.

Unless the broker admitted to receiving such a large commission and also explained that the account statement was a fraud, the policyholder would have little reason to suspect the truth.

The ICAC’s Mysterious Silence

Over the past half year, the author of this blog has emailed the Independent Commission Against Corruption dozens of times and has supplied loads of scandalous information about unethical ILAS sales. In response, the ICAC has issued seven different case numbers, but nothing else.

While the ICAC has been silently investigating (or maybe not), thousands of Hong Kongers have been and continue to be ripped off by brokers who purport to be acting in consumers’ best interests.

In order to prevent more people from being scammed, the ICAC needs to end its silence and issue a public statement about its views on ILAS commissions.

Specifically, the ICAC needs to address the following questions:

1) Does the Prevention of Bribery Ordinance allow insurers to pay upfront brokerage commissions which are hundreds of times larger than competitors pay (such as iFAST)?

2) Does the Prevention of Bribery Ordinance create an obligation for brokers to disclose material facts regarding commission payments, such as the amount of the commission, whether or not commissions are indemnified, or whether or not some products pay significantly higher commissions than other products do? Must the disclosure be documented to prove that it occurred?

3) Does the ICAC sanction current and past practices within the insurance industry regarding commission levels and commission disclosure?

4) If current or past industry practices have been in violation of the Prevention of Bribery Ordinance, how will ICAC penalize the offending brokers and insurers?

5) How will ICAC help exploited consumers?

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