German Court Rules that ILAS Is an Investment Product, Not Insurance—SFC Should Do Likewise

Letter to the SFC (#3)

In 2009, Hong Kong’s Securities and Futures Commission (SFC) issued a circular in which it bizarrely denied the indisputable fact that ILAS is first and foremost an investment product, which usually has only a negligible amount of insurance attached to it. Incorrectly believing that ILAS is primarily an insurance product, the SFC concluded that people who sell ILAS need not be SFC-licensed, and thus, they need not comply with SFC’s higher ethical standards and stricter regulations.

The SFC’s circular made no remarks about whether individuals who already hold an SFC license are required to comply with SFC’s Code of Conduct when selling ILAS. SFC’s Code of Conduct mandates that licensees fully disclose commissions when selling investment products:

SFC Rule on Commission Disclosure

Many insurance brokers who sell ILAS hold an SFC license. At Convoy Financial Services, the largest insurance brokerage in Hong Kong, more than half of brokers are SFC-licensed (see below), and nearly all of them sell ILAS. Presumably, these brokers should comply with SFC’s Code of Conduct when selling ILAS or any other investment products, even if those products are issued by insurance companies. However, most brokers have never disclosed commissions paid by insurance companies.

Convoy Consultant Licensing Record June 2014

Source: Page 20 of Convoy’s 2014 Interim Report

Investment products issued by insurance companies include whole life, universal life, endowment policies, and other so-called “cash value” policies. Only a small fraction of these policies’ premiums pay for life insurance, and the rest of the premiums are for investment. Thus, all of these products are first and foremost investments—not insurance—and they are sold as such by financial intermediaries (see the South China Morning Post’s undercover investigation of investment advice offered by eight Hong Kong banks).

On Oct. 20, I had meeting at SFC’s office with two representatives to discuss several issues, including whether or not SFC-licensed insurance brokers must comply with SFC’s Code of Conduct when selling ILAS and other investment products issued by insurance companies. Those gentlemen told me that the SFC would provide an answer within two weeks.

That was one month ago.

I hope the SFC is taking the issue seriously and is planning to announce a decision soon.

In its deliberations, the SFC should take into consideration recent landmark decisions made by the German Federal Court regarding the classification of ILAS products. According to an article published by the law firm, Norton Rose Fulbright:

“In a series of landmark decisions, the German Federal Court (BGH) held for the first time that unit-linked life assurance policies often qualify as investment products, and are therefore retroactively subject to much more stringent case law rules developed by German courts over recent years.

As a result, a large life insurer is likely to be liable for hundreds of millions of euros…in mis-selling charges”

When and if the SFC faces the fact that ILAS is an investment product, it’s likely that many players in Hong Kong’s insurance industry will be liable for billions of dollars in mis-selling charges. Guilty individuals will undoubtedly howl in protest, but their howling should not prevail over justice. Ripped off consumers deserve to have their money back.

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