The SFC issued a circular on 13 August 2009 which stated that the SFC did not regard sales of ILAS as falling under the SFO definition of “dealing in securities”, meaning that companies or people who sell ILAS do not need an SFC license.
Schedule 5 of the SFO defines “dealing in securities” as:
making…an agreement with another person, or…attempting to induce another person to enter into…an agreement…the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities
To support its view that selling ILAS does not constitute “dealing in securities”, the SFC gave the following rationalization, which contained three blatantly false claims (highlighted in red):
ILAS are first and foremost insurance policies providing the policyholder with life cover, but which have an additional investment element. Life cover, as distinct from investment, would appear to be the dominant factor motivating a policyholder to acquire an ILAS product because there are many pure investment products on the market which tend to have lower initial charges, are more negotiable than ILAS and do not give rise to the same penalties for early termination. These types of products would appear to be more suitable for, and attractive to, those who are principally concerned with investment and are unconcerned with the acquisition of life cover. Accordingly, although the value of an ILAS policy is usually determined by reference to fluctuations in the value of the underlying funds that are selected by the policyholder, it cannot be said that the purpose of acquiring an ILAS policy, or even the dominant purpose of doing so, is to secure a profit from fluctuations in the value of the underlying funds. The SFC therefore considers that promoting, offering or selling ILAS to the public does not constitute dealing in securities within the meaning…of the SFO definition of that expression.
Many ILAS policies, such as portfolio bonds and “101 plans”, have effectively zero life cover. When policyholders die, they only get an extra 1% of their account value, which is a mere fraction of the exorbitant annual fees. The only possible reason for buying such policies is for investment—not life cover.
One doesn’t need to read the policy documents to determine that some ILAS are “first and foremost” investment products. One can just read their names:
- The Executive Wealthbuilder Account
- FORTUNE Builder
- Harvest Wealth Investment Plan
- Wealth Regular Investment Savings Plan
- International Investment Account
- International Wealth Account
- Manulife Wealth Creator
- Premier Investment Plan
- PRUlink smart wealth builder
- PRUsaver Investment Plan
- Rainbow Investor
- Rainbow WealthMaster
- SUPRA Savings and Investment Plan
- Treasure Accumulator
- Uniflex Investment
- “Wealth Accumulator” Plus
- Wealth Amplifier Investment Plan
- Wealth Builder
- Wealth Express Invest Plan
- Wealth Plus Invest Plan
- Wealthmaster Plan
Some insurance companies who sell ILAS don’t even call themselves insurance companies. Standard Life calls itself as “a major long-term savings and investment company”.
Before buying an ILAS policy, consumers are required to fill out a Financial Needs Analysis form. The first question is: “What are your purposes of buying this product?”
Most people tick “Savings” or “Investment”, not “Life Protection”.
The SFC authorizes all ILAS policies and their accompanying documents, so the SFC should be well-aware that most ILAS policies are investment products with effectively zero life cover.
So why would the SFC deny that the purpose of buying an ILAS policy is for investment?
Either the SFC was extremely negligent in its due diligence, or else the SFC was lying. Whichever the answer, it calls into question the SFC’s conclusion that ILAS sellers do not need an SFC license.
The penalty for dealing in securities without a license is severe—up to $5 million in fines and 7 years imprisonment.
The seriousness of this issue demands an immediate response.
The SFC needs to reassess its understanding of ILAS and its views on whether those who sell ILAS need to be SFC-licensed. The SFC should then publicly reaffirm or revise its views as stated in the August 2009 circular. Lastly, it should apologize for the unnecessary doubt and confusion it has caused with its nonsensical remarks.