In Hong Kong, insurance intermediaries are self-regulated, which means that, in effect, they are not regulated at all. They write their own rules, and they break them as often as they please. Over the past few decades, they’ve scammed millions of consumers, and to date, they’ve gotten away with it.
Insurance intermediaries, despite their name, are actually engaged in the sale of investment products. In 2013, Hong Kong’s so-called life “insurance” companies earned 99.3% of new premiums through the sale of investment products such as ILAS, whole life, and endowment policies. (Only a small fraction, if any, of these products’ premiums pay for life coverage).
Independent experts from around the world agree that investment products sold by insurance companies are ripoffs, because fees and commissions are obscenely excessive and not clearly disclosed.
“Pure” Investment Products
In Hong Kong, all investment products (except those issued by insurance companies) are regulated by legitimate, independent regulators.
Intermediaries who are licensed with the SFC and MPFA must abide by the Codes of Conduct of those organizations.
Both Codes require intermediaries to clearly disclose any remuneration they receive from product issuers. The MPFA also explicitly requires that intermediaries disclose whether one product pays a higher commission than another, thus creating a conflict of interest.
Perhaps not surprisingly, the insurance industry doesn’t require itself to disclose such information, probably because it would send potential customers into a state of shock and drive them away.
Insurance-related investment products commonly pay commissions which are hundreds and even thousands of times larger than similar products which are regulated by the SFC and MPFA.
What Happens When An Insurance Broker Holds an SFC or MPFA License?
Over 25,000 insurance intermediaries hold an MPFA license. No data has been published regarding the total number of SFC-licensed insurance intermediaries, but the number is certainly in the thousands. Convoy Financial Services, the largest insurance broker in Hong Kong, discloses that over half of its approximately 2,000 “consultants” are SFC-licensed:
I recently asked the SFC and MPFA whether an insurance intermediary has to abide by the SFC and MPFA Code of Conduct when promoting or selling investment products issued by insurance companies. Here is what they said:
“Thank you for your email of 2 December 2014 to the Authority and the emails of 10 and 12 December 2014 copied to the Authority. The concerns you raised are noted.
The Authority will continue to monitor the compliance of MPF intermediaries with relevant MPF requirements and will take appropriate action if any breach is substantiated. If the activities concerned do not relate to the advising on or selling of MPF schemes/funds, the Authority would not be in a position to comment as such activities are outside the MPF regime.“
My Response to SFC and MPFA:
All Investment Advice Falls Within the SFC and MPFA Regulatory Regimes
Whenever an MPFA or SFC-licensed insurance intermediary gives advice regarding an investment product issued by an “insurance” company, that intermediary is implicitly (if not explicitly) giving advice on all other investment products which he or she is licensed to give advice on, namely MPF funds or SFC-regulated investment products.
Why is this the case?
Because the act of advising a client to invest X amount of money in one product, such as an ILAS, is in effect a recommendation to not invest that same X amount of money in other products, such as MPF funds (via voluntary contributions) or ordinary mutual funds (via direct investment).
A recommendation to not invest in MPFA or SFC-regulated products is an MPFA / SFC-regulated activity.
When an intermediary recommends a bundled product (containing both investment and insurance), the intermediary is advising against buying pure life insurance and a pure investment product separately.
By logical necessity, any kind of advice that involves helping a client to select the most suitable investment option will fall within SFC and/or MPFA-regulated territory.
Consequently, SFC and MPFA have the authority to regulate commission disclosure during the advice stage, prior to any product sales.
In order to protect retail investors, I encourage SFC and MPFA to amend their respective codes of conduct to require intermediaries to disclose any commissions payable by investment product issuers—even if product issuers are “insurance” companies—and also to disclose whether the size of the commission paid is different depending on which investment product is sold.
Clients of MPFA and SFC-licensed intermediaries have a right to known whether the investment advice they receive is potentially being corrupted by massive secret commissions payable by “insurance” companies.