Why Insurance-Linked Savings Plans Violate Hong Kong’s Theft Ordinance

Section 16A Theft Ordinance

If Hong Kong’s fraud law were applied specifically to insurance products, it would read as follows:

If any [insurer or broker] by any deceit…and with intent to defraud induces [a consumer] to [buy a product], which results either-

(a) in [profits] to [the insurer and broker]; or
(b) in [financial losses] or a substantial risk of [financial losses] to [the consumer],

the [insurer and/or broker] commits the offence of fraud and is liable on conviction upon indictment to imprisonment for 14 years.

Only two questions need to be answered to determine whether an insurance product breaks the law:

1.  Is the product intentionally designed to deceive and defraud consumers?
2.  Do sales of the product result in one of the following:

(a) profits to the insurer and broker
(b) financial losses or high risk of financial losses to consumers?

If the answers to both questions 1 and 2 are yes, then the insurer and/or broker will face up to 14 years imprisonment.

Question 1

Are ILAS Savings Plans Intentionally Designed to Deceive and Defraud Consumers?

Countless news articles, blogs, and books have been devoted to exposing the fraudulent nature of ILAS savings plans. Titles include:

Some of the fraudulent aspects of ILAS savings plans are summarized below. An investment term of 25 years is assumed, since it is the most exploitative and most frequently sold term. The initial period is assumed to be 24 months.

  • Consumers sign up for ILAS savings plans because they want to begin saving and investing. However, these so-called “savings plans” immediately destroy savings. Most of the first two years of contributions are funneled into the pockets of insurers via a “smoke and mirrors” fee structure.
  • Insurers claim that the plans have no upfront charges. This is misleading because most of the first two years of savings are predetermined (upfront) to be eaten by charges.
  • Insurers lure consumers into their trap by offering a large amount of free fund units, known as “bonus units”. These massive “bonuses” make a consumer’s account value show an immediate and impressive profit. However, the profit is fictitious. Most of the “free” units, along with the other units that the consumer purchases during the initial period, are guaranteed to be clawed back by fees. The units only reside in the consumer’s account temporarily, just long enough to inflate its value and prevent the consumer from realizing that he or she has been scammed.
  • Insurers give extra “bonus units” to trick consumers into believing that a 25-year plan offers better value than a plan with a shorter contract. Insurers do not disclose that nearly 100% of 25-year plans are surrendered early, which triggers an exit penalty that results in huge losses for consumers and correspondingly large profits for insurers. [Note: This instantaneous transfer of wealth from consumers to insurers is imaginary and happens only on paper. The real transfer already occurred during the first years of the plan, but it was hidden by the phony account value and deceptive fee structure.]
  • During the initial period, the consumer is unknowingly buying units solely for the benefit of the insurer, since these units are predetermined to be absorbed by the insurer’s fees. In effect, the units do not belong to the consumer—they belong to the insurer. However, the consumer’s account value is based on the value of these units, which gives the consumer the false impression that he is profiting from units that do not actually belong to him.
  • In other words, the account value indicates that the consumer is saving money and making huge profits, when he is in fact being scammed out of almost all his savings.
  • If the plans were not deceptive (not fraudulent), the account value would read $0 during much of the first two years, and the policy documents would clearly state that the insurer imposes an upfront fee roughly equivalent to the first two years of savings, regardless of whether the consumer’s annual savings are as little as $1,000 or as much as $1,000,000.
  • Without disclosure to consumers, insurers pay 25 years of commissions upfront to brokers. This payment is tantamount to a bribe, and it is equivalent to more than one year of a consumer’s savings.

[Note: “Deceit” is defined in subsection (3) of Hong Kong’s fraud law. Deceit includes not just false or misleading statements, but also omission of material facts.]

Question 2(a)

Are ILAS Savings Plans Profitable for Insurers and Brokers?

The products are massively profitable. Insurers, with the help of brokers, deceive consumers into giving away nearly all their savings for the first two years of the plan. More than half the money goes to brokers, and the rest goes to insurers. Insurers then collect unjustifiably high fees on all money invested after the second year. 

Question 2(b)

Do ILAS Savings Plans Cause Financial Losses or High Risk of Financial Losses to Consumers?

Obviously. Consumers are deceived into giving away most of their savings for the first two years of the plan. In part, the money pays for the 25 years of commissions that insurers secretly give to brokers upfront.

Because brokers are paid for 25 years of service in advance, consumers are exposed to high risk that they will not receive the service they unknowingly paid for. The high risk is a result of the fact that (1) many brokers switch employers or leave the industry within a few years, and (2) a significant number of brokerage companies go out of business in less than 25 years.

Also, consumers are duped into buying a policy which nearly 100% of people surrender early. As any honest financial adviser will readily admit, it’s impossible to know with certainty what anyone’s financial circumstances will be 3 year down the road, much less 25. A job loss or emergency can happen at anytime. Locking consumers into a ripoff savings product for 25 years is therefore a recipe for disaster.

Insurers should have phased out toxic long-term savings plans long ago, but instead, they’ve unscrupulously continued to sell them while hiding information about historical surrender rates.

The Industry’s Weak Self-Defense

An abundance of evidence supports the view that ILAS savings plans are in violation of Hong Kong’s Theft Ordinance.

However, insurers and brokers will deny culpability. They will point to the fact that they required every customer to sign a statement saying that he or she read and understood the policy documents—as if this somehow legalizes fraud.

It doesn’t.

ILAS policy documents do not disclose numerous material facts, and a lot of the provided information is deliberately misleading. Customer signatures are therefore obtained illegally—by fraud. 

Illegal acts are not self-legalizing.

Example Declarations

The three declarations below are excerpted from Standard Life’s Harvest 101 application form. Consumers can read, understand, and agree to every word of these declarations, yet they still won’t have a clue that they are being scammed.

Consumer Declares that He/She Understands the Principal Brochure, Key Facts Statement, and Illustration Documents

Fully Understand the Principal Brochure, Key Facts, Illustration Documents

The Principal Brochure, the Key Facts Statement, and the Fee Illustration do not say that the bonus is bogus, that the first two years of savings are not saved, or that the units in the initial account are purchased for the benefit of the insurer. All of these documents imply the opposite. 

The documents also do not disclose that the insurer pays 25 years of commissions upfront to the broker, which is equivalent to more than one year of a consumer’s savings. Nor do the documents explain that the insurer secretly offers five times more upfront commission if the broker recommends an extremely toxic 25-year plan, as opposed to a less dangerous (and less profitable) 5-year plan. 

Consumer Declares that He/She Understands the Exit Charge

Understand Exit Charges

Consumers understand that the policy has a massive exit charge, and they accept this because they think they will avoid the charge if they wait 25 years to cash in their policy. What consumers do not understand, because insurers do not disclose it, is that the exit charge is, in effect, unavoidable. If consumers do not pay the exit charge, they are guaranteed to pay an equivalent or even greater amount of money as a result of annual administration charges which accumulate over 25 years. 

Often, brokers tell consumers that the exit charge is a positive feature of the policy. They claim that the charge “locks up” initial fund units for the benefit of policyholders, to force them to save for retirement, just like an MPF account. This is not true. Initial fund units are “locked up” for only one reason: to guarantee that most of them will be eaten by charges, which pay for the broker’s obscene commission and the insurer’s profit. It is not for the consumer’s benefit.

Consumer Declares that He/She Understands the Nature, Structure, and Risks of the Policy, as Well as the Fees and Charges

Understand Nature, Structure, Risks of Policy

Consumers understand that the policy has an exit charge, an administration charge, etc., but they won’t understand why the policy has this charging structure, since the reason is not disclosed. (The secret reason is to hide indemnified commissions and other upfront costs of the policy.)

Consumers will also “understand” that the policy has a huge bonus and no upfront charges. These features of the policy are deliberately misleading, so if consumers’ understanding is incomplete or incorrect, that’s because the insurer attempted to induce misunderstanding.

The policy also has hidden risks which consumers will not know, such as the fact that policyholders have a near 100% likelihood of surrendering a 25-year policy early, or that their brokers could run away with 25 years of secret commissions long before providing 25 years of service. 

Of course, consumers do not understand the fraudulent nature of the policy. If the product were advertised as a fraud, then it would no longer be a fraud, and it would soon seize to exist, since no one would buy it.

A Picture of Justice

ILAS savings plans are designed to earn huge profits for insurers and brokers at the expense of deceived consumers. The products are therefore fraudulent and break the law.

The millions of victims who were deceived into purchasing these products made their decisions based on incomplete and misleading information. They deserve to be informed of the truth, and if they wish, their policy contracts should be invalidated, accompanied by a full refund, plus interest. Those victims who’ve already surrendered their policies deserve to be fully reimbursed for their losses.

The executives who are responsible for creating and distributing these products should be punished to the full extent of the law. This would send a clear message to other crooks that consumer fraud will not be tolerated in Hong Kong.

Recommended reading:

Investment-Linked Assurance Scams Explained: A Look at How Insurance Companies Defraud Investors out of Years of Savings and Why They Could and Should Be Prosecuted