As regulators crack down on investment-linked assurance scams (ILAS), commission-hungry rip-offers are turning to alternative ways to fleece consumers. The preferred method appears to be whole life investment policies, as these products can extract excessive, secret commissions comparable to ILAS.
The above chart shows that between 2010 to 2013, sales of whole life policies increased by almost 50%, while sales of ILAS were nearly cut in half. This is happening because financial institutions are recommending whole life policies in situations where they previously recommended ILAS. Their change in behavior is motivated by the fact that it’s now easier to rip off consumers using whole life, as opposed to ILAS.
Sales of term policies dropped by more than 25%, even though term is the only type of life insurance product which most people need. This is likely a sign that the overall quality of financial advice in Hong Kong is swiftly deteriorating, and institutional greed is growing increasingly out of control.
Hong Kong Banks Dump ILAS for Whole Life
The aggressive promotion of whole life was first reported more than one year ago in the South China Morning Post. Reporter Nicky Burridge went undercover and visited eight different banks to find out what type of advice the banks would give her. In seven of her eight visits, the banks pitched investment products issued by insurance companies, usually whole life plans. According to Mrs. Burridge:
“This reflects the fact that insurance plans are more profitable to banks than straight investments such as mutual funds, and certainly more than exchange-traded funds or single stocks or bonds.
The mystery shopping also revealed a trend for banks to sell whole-of-life insurance before they sell investment-linked assurance schemes, as ILAS plans are getting a lot of regulatory scrutiny these days.
Generally the banks seemed focused on the cost pressures of their business. They tended to recommend the high-profit products, and they cut out the time-consuming steps to financial advice.
For example, banks are supposed to know their client before selling a product. But none did a financial needs analysis, less than half administered a risk-profile questionnaire, and advisers typically failed to find out about basic issues like the shopper’s financial situation.”
“Local sources estimate that up to three-quarters of high street banks in Hong Kong have either slowed sales or are no longer offering ILAS products to retail investors, but rather are offering whole of life insurance products on which the compliance requirements are less stringent.”
Independent experts agree that both whole life and ILAS are ripoffs. Honest financial institutions don’t push these products. Sadly, the number of honest financial institutions in Hong Kong can probably be counted on one’s fingers.
Brokers Ramp up Sales of Non-ILAS Life Investments
Insurance brokers have begun to jump on the banks’ bandwagon. Convoy Financial Services, the largest insurance broker in Hong Kong, recently stated in its latest semiannual report:
“In the past, we relied heavily on ILAS products. In the first half of this year, with our diversification strategy and the growth of new businesses, the contribution of ILAS revenue is steady but has decreased as a percentage of total revenue. We are now providing our customers with insurance products such as annuities, retirement savings plans, critical illness plans, general insurance, medical insurance and universal life insurance plans. Compared with the first half of 2013, these non-ILAS insurance products have doubled in revenue, contributing 6.7% of revenue in 2013 and 13.9% in 2014. This significant increase proves we have adapted to the changing markets successfully. With our professional front-line consultants and experienced management team, our diversification of product sales is continuing strongly.”
Later in the report, Convoy states that the motivation behind its push into non-ILAS life investment products is “to counter the change in ILAS business and its stringent regulatory environment.” Its new business strategy apparently has little to do with providing better service for clients. Convoy is primarily concerned about keeping big commissions rolling in at the expense of deceived consumers, who foolishly believe the company’s fraudulent advertising:
Ban Commissions to Eliminate Conflicts of Interest
If Hong Kong regulators crack down on whole life policies, the insurance industry will likely just shift to selling some other type of financial booby trap.
History shows that most financial intermediaries always flog whichever toxic product is easiest to sell and generates the biggest instant paycheck, even if that means their clients will be exploited for decades by the product issuer.
The only way to effectively deal with this socially corrosive form of white collar theft is to forbid product issuers from corrupting intermediaries via payment of commissions, bonuses, or any other type of remuneration that biases advice. Hong Kong must shift to a fee-based advisory model. Insurance companies must be forced to compete by making their products more transparent and fairly priced, not more opaque, deceptive, and exploitative.