The Duty of an MPF Intermediary
According to MPFA’s Code of Conduct, MPF intermediaries are required to act honestly, fairly, and in the best interests of clients. They must disclose conflicts of interest (such as commission payments) and any material information which is necessary for a client to make an informed investment decision. MPF intermediaries are also required to be knowledgeable about the various features of the MPF system, including special voluntary contributions (SVCs), which are in addition to mandatory contributions.
Most MPF Intermediaries Are Also Insurance Intermediaries
According to MPFA’s latest statistics, Hong Kong has 30,846 MPF intermediaries. The vast majority of them—25,135—are insurance brokers and insurance agents.
Convoy Financial Services, the largest insurance broker in Hong Kong, discloses that well over half of its insurance brokers are MPFA-licensed:
Insurance Intermediaries Have Stopped Selling Life Insurance
Ironically, most insurance intermediaries no longer sell life insurance. Instead, they’ve circumvented the SFC and have capitalized on their self-regulatory system to make a fortune selling ripoff life investments, such as ILAS, whole life, endowment policies, etc. Some of these products are so brazenly exploitative—outright fraudulent—that multiple complaints have been filed with the Hong Kong police. (See here.)
The latest annual statistics released by OCI show that in 2013, the life insurance industry earned 99.3% of new premiums from selling life investments. Only 0.7% of new premiums were derived from pure life insurance (i.e., term).
The reason why life investments have flourished is because sales commissions are obscene—hundreds of times higher than commissions generated by SFC-regulated investment products.
An Upfront ILAS Commission Is 630 Times Larger than the Average Upfront iFAST Commission
An investment-linked assurance scheme (ILAS) is an absurdly high-cost fund platform wrapped within smoke, mirrors, and a veneer of insurance.
At the beginning of this year, I wrote a blog post comparing ILAS to an SFC-regulated fund platform, iFAST Central. The upfront commission for selling funds through a 25-year ILAS turned out to be 630 times larger than the average upfront commission for selling funds through iFAST.
It gets worse when comparing ILAS to MPF.
An ILAS Commission Is 4,200 Times Larger than an MPF Commission!!!
The MPF system is a collection of fund platforms with free switching between platforms.
I recently spoke with an MPFA-licensed insurance broker who strongly insists that ILAS and other life investments are blatant ripoffs. When his clients want to save up for the future, he often recommends MPF special voluntary contributions (SVCs).
He says he recently helped a client invest a lump sum of $250,000 through an MPF SVC. His total commission was $750, or 0.3%.
He says the size of an SVC commission is the same when setting up a regular savings plan—just 0.3% of the amount of money invested on the first month. No commissions are paid for contributions made on the second month or thereafter.
In contrast, the commission for selling a 25-year ILAS savings plan is 1260%, or 4,200 times larger than an SVC commission!!!
This massive ILAS commission comes straight out of a policyholder’s initial contributions. The policyholder saves no money until two years later (though this fact is hidden by the deceptive policy structure).
MPF Intermediaries Use “Bait and Switch” Tactic to Dupe Consumers into Buying ILAS and other Ripoff Life Investments
Every person working in Hong Kong is required to invest 5% of their salary in an MPF scheme. Contributions are capped at $1,500 per month, and employers must match their employees’ contributions.
All Hong Kongers have heard of MPF, because, at some point, they have to choose which MPF funds to invest their money in. Many insurance intermediaries like to use MPF as a conversation starter when talking to new clients. According to an executive from Convoy Financial Services:
MPF is a great ‘door opener’. It concerns everyone and as such it creates direct and indirect business opportunities for industry professionals. Every working person in Hong Kong has an MPF account so the product effectively gives agents and fund providers an excuse to approach potential clients. And whenever the government proposes changes to the scheme, they will always create a huge response from the community, which is great because more public interest creates business.
Lately, Convoy has become criminally aggressive in using MPF as a ‘door opener’. Sky Post busted the company for its involvement in a fraudulent marketing scheme. Cold-callers pretended to be MPFA agents and would arrange meetings with victims to talk about their MPF funds. When the victims arrived, they’d be greeted by a Convoy broker who would try to sell them an ILAS.
Complaints have since been filed with the police.
ILAS vs. MPF SVC
When investing in an MPF SVC, the investor can switch scheme providers free of charge. They can also cash in all of their funds with no penalty. The fee structure is simple: just one annual fee, expressed as a percent of assets under management. The minimum investment amount is as low as $100 HKD per month.
When investing in a typical ILAS savings plan, the investor is locked into a single scheme for up to 30 years. Switching schemes or cashing in one’s funds can trigger penalties as high as 100%. The first two years of savings are, in effect, flushed down the toilet, deceptively “donated” to the scheme provider. The fee structure is so ridiculously complex that only a specialist can calculate the exact costs. If all the various fees are averaged across a full 30 years, the fees are still twice as high as MPF fees. But even more disturbing is the fact that virtually no investor holds an ILAS for 30 years. Almost everyone exits early, at a steep penalty.
The products are a disaster for consumers, a colossal fraud that has been allowed to flourish for decades. Fortunately, OCI has decided to ban the products, effective January 1st, 2015.
Insurance Intermediaries Deliberately Never Mention MPF SVCs
If one looks on the website of Convoy Financial Services, one will see a button on the menu labeled “MPF”. If one clicks on it, one will find a lot of information about MPF, but there is no mention of SVCs.
It seems that Convoy doesn’t want its clients to know about this investment option. The reason, of course, is that such info would interfere with sales of ILAS schemes, which are astronomically more profitable.
Historically, Convoy has earned nearly all its revenue from selling ILAS:
When promoting ILAS to clients, Convoy brokers frequently compare ILAS to MPF mandatory contributions. They correctly point out that saving 5% of one’s salary will not adequately prepare one for retirement. One needs to save even more. However, Convoy brokers deliberately do not mention MPF special voluntary contributions. Instead, they present ILAS as the best solution for saving money, implying that no other options are worth mentioning.
Below are two identical handwritten ILAS recommendations written by two separate Convoy brokers. One can clearly see that the brokers are trained to fleece clients by giving an incomplete and/or misleading presentation of the MPF system. The brokers neglect to mention any other investment option, except for ILAS.
Many MPF Scheme Providers are Insurance Companies that Flog Life Investments
I have already mentioned Convoy Financial Services multiple times, as it is clearly one of the most notorious offenders of MPFA’s code of conduct.
However, I should also mention HSBC Life, AIA, Manulife, Prudential, AXA, Sun Life, Bank of China Life, China Life, FWD, MassMutual, and Ageas.
These companies offer MPF schemes, and, presumably, they all allow SVCs. However, these companies avidly promote life investments at the same time.
The agents of these companies should be familiar with their respective companies’ products, including MPF products. Many of the agents are also licensed with the MPFA.
However, given the huge conflicts of interest, it is highly unlikely that these MPFA-licensed insurance agents promote MPF SVCs. Like Convoy’s brokers, they are probably pushing ripoff life investments, so that they can line their pockets at their clients’ expense.
Insurance Intermediaries Have Made a Mockery of MPFA’s Code of Conduct
Below are excerpts from MPFA’s code of conduct, followed by brief explanations of how MPFA-licensed insurance intermediaries have violated those sections of the code.
Act Honestly, Fairly and in the Best Interests of the Client
ILAS and other life investments are arguably never in the best interests of clients. MPF SVCs are typically a better option. However, dishonest MPFA-licensed insurance intermediaries neglect to mention SVCs so that they can exploit their clients’ lack of knowledge.
The fees and commissions of ILAS and other life investments are excessive, often deceptive, and always unfair.
Disclose Conflicts of Interest
MPFA-licensed insurance intermediaries do not disclose the fact that they are paid an astronomically higher commission for selling ILAS than MPF SVCs.
Many also do not disclose that they do not hold an SFC license, which means they cannot sell or advise on investment products which are superior even to SVCs (such as low-cost index funds).
The above remuneration rule explicitly states that MPF intermediaries must disclose “whether the benefits receivable would be different depending on the choice of the registered scheme(s) or constituent fund(s) made by the client.”
However, when giving MPF advice, MPFA-licensed insurance intermediaries never disclose that they receive 4,200 times more commission by promoting ILAS instead of SVCs.
Disclose Material Information
MPFA-licensed insurance intermediaries are eager to talk about MPF mandatory contributions, but they typically don’t even mention SVCs. They just move straight on to recommending ILAS or other ripoff life investments.
Moreover, when representing ILAS, they do not disclose the fact that the first two years of savings are not saved. The money is instead eaten by a deceptive fee structure. Much of the money is secretly redistributed to the intermediary in the form of commissions. The rest is pocketed by the insurance company.
Understand MPF System and MPF Products
Most MPFA-licensed insurance intermediaries who recommend life investments—and do not mention SVCs—are swindlers. Those who are not swindlers are ignorant and/or negligent.
They are also in violation of MPFA’s code of conduct. MPF intermediaries are required to be knowledgeable about the MPF system, including SVCs.
Greedy MPFA-Licensed Insurance Intermediaries Are Jeopardizing the Financial Well-Being of Hundreds of Thousands of Hong Kongers
Over a lifetime, the excessive, unjustifiable fees eaten by ripoff life investments, such as ILAS, can destroy well over half the retirement funds of victims. Eventually, hundreds of thousands of ripped off consumers will be forced to work for years longer than is necessary. Some may never accumulate enough funds to take care of themselves in old age. Taxpayers may be forced to eventually pick up the tab when life investment victims can no longer support themselves.
The MPF system was introduced to help Hong Kongers prepare for retirement. However, MPFA intermediaries are undermining the purpose of the system when they steal from consumers by recommending ripoff life investment products, as opposed to better-value MPF SVCs.
MPFA Should Penalize Rogue Intermediaries
It is safe to say that most MPFA-licensed insurance intermediaries are guilty of systematic violation of MPFA’s code of conduct.
According to MPFA’s website, one of MPFA’s roles is to “promote and encourage the development of the retirement scheme industry in Hong Kong, including the adoption of a high standard of conduct and sound prudent business practices by trustees and other service providers”.
In order to deter MPF intermediaries from violating MPFA’s code of conduct in the future, the MPFA should fine rogue intermediaries and strip them of their MPFA licenses.
MPFA Should Help Victims of Rogue Intermediaries
There are hundreds of thousands of victims, at least, and virtually every case of exploitation is almost identical. Consequently, MPFA needs to set up a system for handling complaints efficiently.
Due to information asymmetries, most victims of rogue MPF intermediaries are not aware of the fact that they were ripped off. For this reason, MPFA needs to initiate a public education campaign to spread knowledge of this scandalous situation. Victims need to know how they can seek justice.
Enforcing MPFA’s Code of Conduct Will Guarantee Billions of Extra Dollars Flowing into MPF Schemes, Helping Drive Down Notoriously High Administration Costs
The MPF system has long been criticized for its own excessive costs, though these costs are admittedly nowhere near as exploitative as the hidden costs of life investment products.
The banks and insurance companies who benefit from the MPF system argue that they must charge high fees because managing MPF schemes requires extra administration work. They say that they do not yet have the economies of scale necessary to bring down costs (i.e., they need more money to manage and to extract fees from, before they will be able to reduce fees for each consumer).
These arguments may or may not be self-serving lies, which allow the banks and insurers to continue feasting on the retirement savings of all Hong Kongers, courtesy of Hong Kong’s undemocratic government.
However, there is admittedly a grain of truth to the arguments, which is why MPFA is actively seeking solutions to reduce administration costs.
One solution that MPFA doesn’t seem to have considered, but should, is simply to enforce its code of conduct. Billions of dollars of SVC contributions would pour into MPF schemes if MPFA-licensed insurance intermediaries started behaving like decent human beings, rather than greedy scoundrels.
The additional MPF contributions would give scheme providers the economies of scale they say they need to lower costs.
MPFA Needs to Be a Better Watchdog in the Future
The fact that many MPFA-licensed insurance intermediaries have long been brazenly defiling MPFA’s code of conduct is not just an indictment of the insurance industry, it is an embarrassment to the MPFA.
Hong Kongers deserve better.