Section 114 of the SFO forbids any corporation or its representatives from operating a business that involves dealing in or advising on securities (or holding themselves out as doing so) unless they possess an SFC license. Offenders face up to $5 million in fines and 7 years imprisonment.
Half of Convoy’s Advisers Do Not Have an SFC License
Convoy is a large financial advisory company listed on Hong Kong’s stock exchange (stock code: 1019). One of its subsidiary companies, Convoy Financial Services Limited, is an insurance brokerage licensed under PIBA. Another subsidiary, Convoy Asset Management Limited, is licensed with the SFC.
On page 20 of Convoy’s latest semi-annual report to shareholders, there is a chart showing the license records of Convoy’s 2,200 Hong Kong-based advisers:
49% (roughly 1,100) of the advisers do not have an SFC license, which means they are not able to sell or advise on SFC-regulated investment products. They can only sell and give advice on investment products that are issued by insurance companies.
Because these 1,100 advisers work purely on commissions, they only earn money when they make an insurance sale. They are paid nothing if they advise a client to speak with a colleague who is more qualified and able to advise on a broader range of investment products. Consequently, these advisers have a strong incentive to exaggerate the attractiveness of insurance products and to hold themselves out as being more qualified and unbiased than they really are.
Advisers who have both an SFC and a PIBA license are only slightly less conflicted. They have little incentive to recommend SFC-regulated investment products, since insurance commissions are obscenely higher.
As a result, Convoy and its advisers have historically focused on flogging ILAS, an insurance product which is widely regarded to be a scam.
Potential Convoy customers are likely to obtain most of their information about Convoy through its website.
The home page states, “Convoy deals with each customer’s particular needs through a platform with comprehensive product coverage“. The menu contains links not just to MPF and Insurance, but also to Funds and Securities & Futures.
Under the section, Why Convoy, if one clicks on the link, Independent Financial Advisers, one is brought to another page (shown below) which states, “There are many financial products from the whole of the market, but how do you know which ones best suited your needs?” The implied answer is to talk to one of Convoy’s advisers. They will allegedly “act [in] the client’s best interest and be independent from all product providers“. They will also provide “professional and impartial advice on financial planning“.
When Convoy claims to deal with “each customer’s particular needs through…comprehensive product coverage” and to offer “impartial advice” about “financial products from the whole of the market“, Convoy is implying that all of its advisers are SFC-licensed.
Convoy’s website contains no disclosure that half of its advisers are not. Nor does it disclose that all of its advisers, including those with an SFC license, have a huge financial incentive to recommend ripoff insurance products, due to much higher commissions.
If Convoy’s advisers were truly “independent from all product providers“, as Convoy advertises, then the advisers would not accept commissions, and they’d all be fully licensed.
Screenshot of Convoy’s Website in 2011
An Analysis of Convoy’s “Financial Needs Analysis”
When a consumer meets with a Convoy adviser, the first thing the adviser does is help the client fill out a financial needs analysis (FNA). As its names suggests, the FNA form is supposed to help determine what type of product (if any) the client needs. The form does not presuppose that the client needs an insurance product or an SFC-regulated product, but it does presuppose that the adviser is licensed to offer advice on both types of products, even if the adviser is not.
Below is copy of Convoy’s FNA in 2012. It was filled out by Leung Chung Yan, whose story was reported in the South China Morning Post last year, in an article titled, “Hong Kong Consumers Angry After Being Sold Complex Insurance Product ILAS“.
The very first sentence in Part I of the FNA states, “Being an independent financial advisor, we need to provide unbiased analysis for different customers and recommend composite financial strategies for them.” This statement suggests that the analysis has no bias towards any particular products, including insurance products.
However, the adviser who penciled in the form (Lau Wai Tak) did not have an SFC license. She only had a PIBA license.
Part II of the FNA is labeled, “Insurance Cover Questionaire”. These two pages have been crossed out and marked NA (not applicable)—even though the adviser only had an insurance brokerage license.
Part III (A)
Part III (A) of the form is labeled “Suitability Questionaire”. The stated purpose of this section is to “help you assess your attitude towards risk and investment resources and objectives before your selecting financial / investment products“. The section has 12 questions, and it mentions the word “investment” 25 times. Some of the questions ask about bonds, stocks, commodities, futures, and funds, even though the adviser is not licensed to advise on these products.
Part III (C)
Part III (C) of the form appears to have been badly mislabeled. These two pages are not supposed to be given to the client until after the FNA is completed and a product has been recommended. Presumably, the adviser gave these pages to Leung Chung Yan in the correct order, despite the bizarre labeling.
Part III (D) & the Customer Declaration
Part III (D) of the FNA was cut and pasted from a circular issued by HKFI (the Hong Kong Federation of Insurers). This section of the form specifically says it is “for ILAS” and that it is “required by HKFI“.
Probably 95% of consumers will not know what the acronyms ILAS and HKFI stand for unless the adviser explains their meaning.
Q1 asks, “What are your purposes of buying this product [i.e., ILAS]?”
When answering this question, the client has not yet agreed or expressed an intent to buy any product yet, including ILAS. The adviser is still in the middle of the FNA process and is not yet in a position to make a recommendation—assuming that the analysis is really unbiased, as is claimed in the first sentence of Part I.
For the reasons just stated, Section D should not be located in the initial FNA. It should only be given to the client after the adviser has determined that ILAS is suitable and preferable to other products.
Immediately below Section D is the Customer Declaration. It states, “the above Risk Profile process is for the purpose of helping me to assess my attitude towards risk and investment resources and objectives before selecting financial / investment products“.
This statement contradicts Section D directly above it, since Section D presupposes that ILAS has already been selected.
Most consumers likely won’t notice this contradiction since they won’t understand the acronym “ILAS”. But if they did spot the contradiction, they would likely believe that HKFI is responsible (not Convoy), since Section D’s questions are said to be “required by HKFI“.
Despite the inconsistencies on this page of the FNA, consumers should still expect that their adviser’s analysis will be unbiased, since the first sentence of Part I explicitly says so.
Parts IV, VI, & VII
Part IV of the FNA is the actual analysis. After helping the client (Leung Chung Yan) fill out the FNA, the adviser (Lau Wai Tak) recommended that Ms. Leung buy an ILAS product—the only type of investment product which Ms. Lau was licensed to sell.
None of the FNA forms disclosed that Ms. Lau was unlicensed to advise on SFC-regulated investment products.
[NOTE: According to Schedule 5 of the SFO, advising on securities would include advising someone to NOT buy securities, such as mutual funds, and to instead buy ILAS.]
Part VI of the FNA is the Disclaimer. It’s the only section which mentions Convoy’s subsidiary companies. It refers to the adviser, Ms. Lau, as a representative of the “Convoy Group”, which implies that she represents all of the company’s subsidiaries, including Convoy Asset Management Limited, which is licensed under the SFC. Actually, Ms. Lau only represented Convoy Financial Services Limited, an insurance brokerage.
Part VII is the Declaration. It states that the FNA is “for the purpose of enabling my Financial Consultant to identify my needs and to determine the suitability of particular financial products“. This statement reaffirms that Section D of Part III (labeled “for ILAS“) should not have biased the analysis towards ILAS.
However, the analysis was biased for a different reason: Ms. Lau was not licensed to sell any other investment products.
Concluding Remarks about the FNA
The purpose of analyzing the above FNA was not to focus criticism on Ms. Lau Wai Tak. She was inexperienced and freshly hired when she helped Leung Chung Yan fill in the above forms. Ms. Lau, like hundreds of other Convoy advisers, probably did not realize that she did anything wrong.
However, Convoy’s executives are fully aware that they systematically misrepresent the qualifications and impartiality of their advisers, both on their company’s website and on their FNA forms.
They have no excuse for issuing FNA forms that do not have a disclosure section about their advisers’ licensing credentials (or lack thereof).
For this, and for the misleading claims on their website, they should be held accountable.
Recap: A Five-Step Fraud
Step 1: Convoy falsely advertises that all of its advisers are more qualified and impartial than they really are.
Step 2: After a consumer is attracted by the false advertising, a Convoy adviser schedules a meeting with the potential customer. Half of the time, the adviser only has an insurance brokerage license.
Step 3: The adviser conducts a financial needs analysis, pretending that the analysis is unbiased. The adviser also pretends that he/she is more qualified to evaluate the client’s needs than he/she actually is. The adviser does not disclose that he/she does not have an SFC license and can’t advise on most investment products.
Step 4: The adviser recommends an investment-linked assurance scam (ILAS), the only investment product that he/she is licensed to sell.
Step 5: After the adviser successfully closes the sale, the insurance company pays a massive commission to Convoy. Convoy keeps most of the commission and passes the rest to the adviser.