Monthly Archives: January 2015

SFC Allows Insurance Brokers to Charge Fees for Giving Investment Advice—Even Though They Are Unqualified, Unlicensed, and Probably Committing a Criminal Offense

Lose Money Now!

Cartoon by Richard Collins, Sydney Morning Herald.

Giving Investment Advice Is an SFC-Regulated Activity

Giving investment advice and issuing research reports on securities, such as mutual funds, are Type 4 SFC-regulated activities.

Type 4 Activity

Carrying on a business in an SFC-regulated activity without an SFC license is a criminal offense. The maximum penalty is 7 years imprisonment and a fine of $5 million HKD.

Some ILAS Schemes Explicitly Remunerate Insurance Brokers for Giving Investment Advice

An investment-linked assurance scheme (ILAS) is a type of insurance policy whose value is “linked” to mutual funds. The SFC authorizes the offering documents of all ILAS products. Most ILAS policies are packaged with little or no life cover. They function exactly like investment products and have all the same risks. Currently, insurance brokers who sell ILAS policies and give advice on the underlying funds are not required by the SFC to obtain an SFC license.

Last month, the SFC authorized the offering documents of Standard Life’s new ILAS scheme, the “Aspiration”, which I call the Aspiration Crusher.

Any young Hong Konger who aspires to retire early will have their aspirations crushed if they are duped into buying this.

Young Hong Kongers who aspire to retire as early as possible will have their aspirations crushed if they buy this product. The fees are excessive and the added benefits are practically nil. Hong Kongers should instead consider investing through low-cost ETF index funds or through a fund platform like Fundsupermart.

The Aspiration Crusher has several layers of high charges. One of them is an “Initial Charge” which varies depending on the level of services which the insurance broker provides. The broker’s services include “market updates” and “portfolio review”. Standard Life refers to the insurance broker as a “financial adviser”. 

Standard Life - Initial Charge

The Aspiration Crusher also has an optional “Advisory Fee”, which is paid to the “financial adviser” on an ongoing monthly basis. This fee is determined by the level of services which the “financial adviser” provides. The services include market updates, portfolio review, etc.

Standard Life - Advisory Fee

Clearly, insurance brokers who receive an ongoing “advisory fee” are carrying on a business in an activity which looks very much like Type 4 activity (giving investment advice and issuing analysis / research reports on mutual funds). Standard Life even refers to the insurance brokers as “financial advisers”—not insurance salesmen.

Shockingly, SFC has implicitly sanctioned this apparent unlicensed activity by authorizing the Aspiration Crusher’s offering documents, which openly state what the unlicensed insurance brokers are being remunerated for.

This is not an isolated incident. One of Standard Life’s other ILAS products, the Harvest 101 Investment Scam, also has an optional “Advisory Fee”. The SFC authorized its offering documents in 2008.

SFC Has Irresponsibly Allowed Unqualified Insurance Brokers to Gamble with the Retirement Savings of Hong Kong Investors

According to Section 4 of the SFO, one of the regulatory objectives of the SFC is “to provide protection for members of the public investing in or holding financial products”.

Section 6 of the SFO states, “In performing its functions, the [SFC] shall, so far as reasonably practicable, act in a way which…is compatible with its regulatory objectives.”

The SFC has not been performing its regulatory objectives. It has allowed insurance intermediaries to provide investment advice, even though these intermediaries are unqualified, unlicensed, and unregulated. An unending flow of scandals reported in the media indicates that these intermediaries have likely blown up the retirement plans of countless thousands of Hong Kongers.

Insurance Brokers Who Gave Investment Advice without an SFC License May Have Committed a Criminal Offense

Last week, I published a blog post describing a few common situations in which sales of ILAS appear to fall under the legal definition of dealing in securities. In such situations, if the seller did not hold a Type 1 SFC license, he or she likely committed a criminal offense.

When ILAS sellers give advice regarding the selection of underlying funds, especially if they are explicitly being remunerated for this service (or holding themselves out as being remunerated for it), they may well be regarded as carrying on a business in advising on securities. Doing this without a Type 4 license is likely a criminal offense.

A screenshot of the SFO definition of dealing in securities, located in Schedule 5.

A screenshot of the SFO definition of dealing in securities, located in Schedule 5.

On 13 Aug 2009, the SFC published a circular in which it argued that advising on the underlying funds of an ILAS did not amount to advising on securities. The SFC gave two reasons. The first reason was this:

SFC Lame Excuse (1)

The SFC claimed that “the underlying funds are not acquired…on behalf of the policyholder”.  This statement is false, since the insurance company purchases the funds on behalf of the policyholder.

The SFC supported its false statement by misleadingly suggesting that the insurance company can do whatever it wants with the policyholders’ contributions. The SFC stated, “If the insurer chooses to invest part of the premium income”—as if the insurer had a choice. It doesn’t.

The insurer is contractually obligated to buy the funds selected by the policyholder. This is stated in the offering documents of every ILAS scheme. Here is an excerpt from the Key Facts Statement of Standard Life’s Aspiration Crusher:

PolicyholderSelects Funds which Will Be Acquired

The SFC gave a second reason for claiming that advising on the underlying funds of an ILAS is not advising on securities. The second reason is as inaccurate as the first one:

SFC Lame Excuse #2

Notice the words “at all”. This is an absurd exaggeration and self-evidently false. After the insurance intermediary gives advice, the policyholder selects funds based on the advice, and then the insurance company acquires the funds and holds them for the policyholder.

Probably realizing that its arguments were unconvincing, the SFC went on to say that, even if insurance intermediaries were to be regarded as advising on securities, the intermediaries still would not be carrying on a business in the regulated activity, since it “appears” they are not remunerated for their service.

SFC - No Financial Gain Is Derived from Promoting Underlying Funds

The underlined sentence is false. SFC knows it, since it authorizes all ILAS brochures. Standard Life’s Aspiration Crusher, as mentioned above, has an initial charge and an ongoing advisory fee whose sole purpose is to remunerate the insurance broker (aka “financial adviser”) for providing advice regarding the selection of the underlying funds.

The SFC’s 2009 Circular Was Irrational, Inaccurate, Irresponsible

For the reasons described in this blog post and in THIS one, it is obvious that the SFC is either totally incompetent or else has made a deliberate attempt to evade its responsibilities using misleading, irrational, inadequate, and inaccurate arguments. As a result of the SFC’s reckless behavior, thousands of unlicensed ILAS sellers have likely committed criminal offenses, and many of the victims of these unqualified, unregulated sellers have suffered catastrophic financial losses.

It is time for the SFC to take responsibility for its actions and issue a new circular outlining how it plans to regulate ILAS going forward. SFC also needs to explain how it plans to deal with the mess it has helped create over the past two decades.

HK Lawyer Says SFC’s 2009 Guidance on ILAS Was “Disturbing”—“Real Possibility” that Unlicensed Sellers Could Be Found Guilty of Criminal Offense

Broken Law

On Friday, I published a blog post describing a number of common situations in which sales of ILAS appear to fall under the legal definition of dealing in securities.

Dealing in securities is an SFC-regulated activity. Carrying on a business in an SFC-regulated activity without an SFC license is a criminal offense.

On 13 Aug 2009, the SFC published a circular in which it argued that, “as a general rule”, selling ILAS did not classify as an SFC-regulated activity and that ILAS sellers did not need to hold an SFC license.

The SFC’s arguments were based on a very narrow set of circumstances which do not apply to much of the ILAS business conducted in Hong Kong. It is highly unbelievable that the SFC was not aware of this.

HK Lawyer Says SFC’s Guidance Was “Disturbing”

On 30 June 2010, Timothy Loh, of Timothy Loh Solicitors, published an article titled, “SFC Guidance on Requirements for Licensing Under the Law: Reliable Or Not“.

The article was highly critical of the SFC’s 2009 circular. Loh wrote:

“recent guidance from the SFC has been disturbing in the vigor with which it has discouraged market participants from holding licenses under the SFO. A recent decision of the Hong Kong Court of Appeal serves as a reminder that the SFC does not have the jurisdiction to conclusively interpret the SFO. Where the SFC takes the position that a market participant does not need a license and refuses to grant a license based on this position, there is a real possibility that should the requirement for a license ever be litigated, a court may ultimately find that the market participant has breached the SFO.”

Loh Saw a Train Wreck Coming—Five Years Ago

In his article, Loh highlighted a then recent case in which the Securities and Futures Appeals Tribunal stated: “I do not consider… the content of the SFC website to represent any more than straws in the interpretative wind.”

The Hong Kong Court of Appeal later concurred: “the SFC’s view can be of no relevance as a matter of law unless it is a tool of statutory interpretation. Since [counsel] accepts that it is not such a tool, the Tribunal’s approach was plainly correct.”

Loh explained the significance of the decision as follows:

“Whilst the decision of the Court of Appeal merely affirms long-standing law, it is a context specific reminder that interpretations by the SFC are mere opinions rather than conclusive and binding interpretations at law. Whilst such interpretations are always relevant because the SFC is the regulator responsible for enforcing the SFO and it is less likely that the SFC will enforce the SFO in a manner inconsistent with its own interpretations, the SFC does not have the exclusive authority to litigate a breach of the SFO.

A private litigant may, for example, allege a breach of SFO licensing requirements in proceedings against an intermediary. In this case, a finding by the court that the intermediary was in breach of the SFO despite compliance with SFC guidance could require other intermediaries to shut down operations pending licensing.

Equally, for example, the SFC itself is free to change its interpretation and in this event, the SFC may take the view that a market participant which relied upon the SFC’s interpretation was not entitled to do so as it did not fall within the circumstances then contemplated by the SFC.

Finally, it is not inconceivable that in an egregious circumstance, the Secretary for Justice, who is not in any way bound by SFC guidance, would seek to commence criminal proceedings against an intermediary for breach of licensing requirements under the SFO despite the intermediary’s purported compliance with SFC guidance.

The Train Wreck Is Here

This blog post has been distributed to dozens of Hong Kong ILAS victims who are actively discussing among themselves how to recover their money.

I hope the SFC will finally pull its head out of the sand, take the lead, and issue a new circular addressing the points raised HERE.

It is not just the industry that needs guidance, but also the industry’s victims.

Portfolio Bomb: Distributing Unauthorized Funds through ILAS Products without Holding a Type 1 SFC License Was Likely a Criminal Offense

[This post has been sent to Hong Kong regulators and to victims of unauthorized funds which were distributed via ILAS portfolio bonds. Victims may refer to the information in this post when filing complaints.]

Money Bomb

Section 114 of the Securities and Futures Ordinance (SFO) forbids anyone from carrying on a business in an SFC-regulated activity (or holding themselves out as doing so) unless they hold an SFC license to engage in that activity. Anyone who breaks the law commits a criminal offense. The maximum punishment is a fine of $5 million HKD and 7 years imprisonment.

Selling Funds Is a Type 1 Activity

Anyone who wants to sell funds for a living must hold a Type 1 SFC license to deal in securities:

A screenshot obtained from SFC’s website. Click HERE.

A screenshot from SFC’s website.

Selling Funds through an ILAS Is Not Necessarily a Type 1 Activity

Under certain conditions, a person can legally sell funds indirectly through an investment-linked assurance scheme (ILAS) without needing an SFC license to deal in securities. The person only needs a license to sell this type of insurance policy.

The SFC issued a circular on 13 August 2009 stating its views on whether insurers, corporate insurance brokers, and insurance intermediaries needed to hold an SFC license when selling ILAS. The SFC concluded that, “as a general rule”, they do not. However, it stated that there could be exceptions in some circumstances. The SFC advised those selling ILAS to seek their own legal advice if they were engaged in activity that departed from what was described in the circular:

SFC's Concluding Remarks (cropped)

Much of the ILAS business conducted in Hong Kong falls outside the scope of SFC’s 2009 circular, which means that the SFC’s circular was pretty useless, if not deliberately misleading. Below, I describe three common scenarios in which a person selling ILAS likely needs a Type 1 SFC license.

Outside the Scope of SFC’s Circular (#1):
Selling ILAS Policies that Contain Minimal Life Cover

Schedule 5 of the SFO defines dealing in securities as “inducing or attempting to induce another person to enter into or to offer to enter into an agreement…the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities.”

Note that the value of an ILAS policy is determined by reference to fluctuations in the value of funds, which are classified as securities.

Dealing in Securities SFO

Screenshot of the SFO definition of “dealing in securities”, located in Schedule 5.

The SFC disagrees that selling ILAS falls under the definition of dealing in securities. The SFC claims that ILAS policies are purchased primarily to obtain life cover, not to profit from an increase in the value of the underlying funds. Here is a screenshot from SFC’s 13 August 2009 circular:

SFC Says the Purpose of Buying ILAS Is Not to Profit from Underlying Funds

The sentences underlined in red are false and/or misleading, since most ILAS policies have minimal life cover.

While it is true that some ILAS policies do provide a material amount of life coverage, most do not.

A portfolio bond, for example, usually only provides coverage equal to 1% of the value of the underlying funds. The annual fees applied towards the policy are much greater than 1%. Mathematically, the life coverage is completely canceled out.

The only justification for owning this type of ILAS policy is to profit from an increase in value of the underlying funds. Corporations and individuals who sell this type of ILAS policy are therefore dealing in securities, as described in paragraph (b) of the SFO definition.

This could be why the Hong Kong Confederation of Insurance Brokers (CIB), a self-regulatory organization, warns its members that they may need an SFC license when selling such policies. Here is an excerpt from CIB’s regulations for insurance brokers selling ILAS:

ILAS Policies with No Life Cover May Be Securities

Screenshot from CIB’s website.

Outside the Scope of SFC’s Circular (#2):
Issuing Any Advertisement, Invitation, or Document Which Is Not Authorized by SFC

Although sales of many types of ILAS polices fit the SFO description of dealing in securities, a person is excluded from the SFO definition of dealing in securities if the person “issues any advertisement, invitation, or document” which has been authorized by the SFC. This is stated in sub-paragraph (xi) of the definition:

Exemption to Dealing in Securities

Screenshot of the sub-paragraph (xi) exclusion of the SFO definition of dealing in securities.

In its 2009 circular, the SFC referenced the above exclusion when arguing that selling ILAS, in general, does not constitute dealing in securities:

Subparagraph xi

Screenshot from SFC’s 13 Aug 2009 Circular

According to Section 102 of the SFO, the definition of “invitation” and “advertisement” includes invitations or advertisements which are made verbally (such as in person at a cafe) or in writing (such as in an email or Whatsapp conversation). If, when selling ILAS, an insurance intermediary issues any advertisement, invitation, or document which has NOT been authorized by the SFC, then the exclusion mentioned in sub-paragraph (xi) of the SFO definition of dealing in securities would no longer apply. The intermediary would need to hold a Type 1 SFC license.

The Office of the Commissioner of Insurance (OCI) pointed this out in a 4 June 2007 circular:

Insurance Intermediary Will Need to Be SFC Licensed If They Utilize Unauthorized Documents

ICO stands for “Insurance Companies Ordinance”

OCI advised insurance intermediaries to do the following:

OCI - Don't Deviate from Authorized Materials (cropped)

Invariably, most insurance intermediaries issue some kind of verbal or written advertisement that is not authorized by the SFC. For example, intermediaries frequently promote ILAS as a “fund platform” or “tax wrapper”. Many insurance brokers, especially expat brokers, openly advertise ILAS portfolio bonds as vehicles for accessing a wider range of funds, including unauthorized funds. I know one retail investor who was cold-called by an insurance broker who promoted a certain unauthorized fund without even mentioning the portfolio bond (until later).

Insurance brokers who sell portfolio bonds which are linked to unauthorized funds necessarily must issue unauthorized advertisements, invitations, or documents related to the unauthorized funds. It is impossible to introduce an unauthorized fund without at least making a verbal unauthorized advertisement. Consequently, this activity will automatically classify as dealing in securities, which requires a Type 1 SFC license.

The Professional Insurance Brokers Association (PIBA), a self-regulatory organization, seems to hold a similar view. In its Code of Conduct for brokers selling ILAS, it advises its members to obtain an SFC license before selling portfolio bonds:

Brokers Selling Portfolio Bonds Should Hold an SFC License

Brokers who have promoted unauthorized funds via portfolio bonds without a Type 1 SFC license likely committed a criminal offense.

If they promoted unauthorized funds to retail investors (non-professionals), they likely committed a second criminal offense. Section 103 of the SFO forbids issuing “an advertisement, invitation or document which…contains an invitation to the public…to acquire an interest in or participate in…a collective investment scheme…unless the issue is authorized by the [SFC]“. Both OCI and SFC have warned the industry to take care not to break this law. An offense is punishable by up to 3 years imprisonment and a fine of $500,000 HKD.

Here is OCI’s warning:

Do not Depart from Information Contained in SFC Authorized Documents - Even Verbally (Underlined)

Source: OCI’s 4 June 2007 Circular on ILAS

Here is SFC’s warning:

SFC 2009 Circular - Do Not Utilize Unauthorized Documents

Source: SFC’s 13 August 2009 Circular on ILAS

Outside the Scope of SFC’s Circular (#3):
Carrying on a Business of Distributing Dodgy, Unauthorized, High-Commission-Paying, Offshore Funds through ILAS Portfolio Bonds

In its 2009 circular, the SFC claimed that, even if selling ILAS were to be regarded as an SFC-regulated activity (e.g., dealing in securities), it could not be regarded as carrying on a business in an SFC-regulated activity, because (according to SFC), there is no financial gain derived from promoting the funds which underlie an ILAS policy:

SFC - No Financial Gain Is Derived from Promoting Underlying Funds

I guess SFC doesn’t read the newspapers.

In the case of dodgy, unauthorized, offshore funds which are relentlessly flogged by expat insurance brokers, SFC’s observation is clearly incorrect. The South China Morning Post has reported that the LM Managed Performance Fund, which wiped out the savings of thousands of people across the world (including in Hong Kong), paid commissions which were as high as 15%. This is approximately twice as much as the 6-8% commissions paid by the insurance companies who supplied the portfolio bonds.

Promoting these dodgy, unauthorized funds via portfolio bonds is a huge business. According to another article in the South China Morning Post, more than 80 unauthorized funds, which were marketed in Hong Kong via portfolio bonds, have been “suspended” since 2008. Many of the funds turned out to be frauds. The news article does not mention the number of unauthorized funds which have not been suspended (yet), but presumably the number is quite large.

Insurance brokers who make a living promoting these dodgy, unauthorized funds are clearly carrying on a business in an SFC-regulated activity (dealing in securities), since they are issuing unauthorized advertisements, invitations, and/or documents (relating to the unauthorized funds) when they sell ILAS portfolio bonds (which contain minimal life cover). The brokers are not protected by the exclusion in sub-paragraph (xi) of the SFO definition of dealing in securities.

Therefore, these insurance brokers must hold a Type 1 SFC license to avoid breaching Section 114 of the SFO—even if they are dealing with professional investors.

Multiple sources say that many insurance brokers deny receiving commissions for promoting unauthorized funds via portfolio bonds. One source says that these brokers have fund commissions paid to a related SFC-licensed corporation (whose address is in the same building). Another source says the brokers have the commissions paid to an offshore company in order to evade corporate taxes. This practice of hiding fund commissions (from clients, regulators, and the government) likely involves criminal acts of fraud, bribery, and money laundering.

If brokers are hiding fund commissions in order to avoid being accused of breaching Section 114 of the SFO, I do not think they succeeded.

They would still be regarded as carrying on a business in an SFC-regulated activity, as they still earn money (the ILAS commission) by doing an act which exactly fits the SFO definition of dealing in securities:

“inducing or attempting to induce another person to enter into or to offer to enter into an agreement…the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities.”

Since the brokers issued advertisements, invitations, or documents which were not authorized by the SFC, they are not protected by the sup-paragraph (xi) exclusion.

The fact that ILAS, or notional units in an ILAS, are not by themselves classified as securities is irrelevant.

Financial Partners Limited

According to an article in the South China Morning Post, “When an Investment Fund Goes Bad, a company named Financial Partners was one of the most aggressive distributors of the LM Managed Performance Fund in Hong Kong.

A search for Financial Partners on the Confederation of Insurance Brokers (CIB) website gives a single result for a company named “Financial Partners Limited” whose CEO is Peter Kende. This is presumably the same Financial Partners and Peter Kende mentioned in the South China Morning Post article.

Screenshot from CIB’s website.

Screenshot from CIB’s website.

A search for “Financial Partners” on the SFC’s website also gives a single result for a company named “Financial Partners Limited”. Peter Kende is listed as one of its responsible officers.

According to SFC records, Financial Partners Limited only held a Type 4 SFC license (advising on securities) during the period when it was presumably selling LM funds. It did not obtain a Type 1 license (dealing in securities) until June 2014, more than 1 year after LM collapsed. Peter Kende also did not hold a Type 1 license until June 2014.

SFC License Record for Financial Partners Limited

SFC License Record for Financial Partners Limited

Assuming that my above analysis of the law is correct, then Financial Partners Limited would have needed a Type 1 license to legally distribute unauthorized funds via portfolio bonds. The company did not hold this license.

Insurance Companies

It seems that insurance companies selling ILAS with minimal life cover would also be dealing in securities if they issued any advertisements, invitations, or documents which are not authorized by the SFC.

In the case of an insurer who sold an ILAS portfolio bond that was linked to an unauthorized fund, it is hard to see how the insurer could have processed the application without issuing some kind of unauthorized advertisement, invitation, or document related to the unauthorized fund.

As I pointed out in another blog post last week, insurance companies that sold portfolio bonds linked to the LM Managed Performance Fund had a duty to distribute the fund’s unauthorized documents to policyholders or potential policyholders. I believe this may have required the insurers to hold a Type 1 SFC license.

Royal Skandia and Friends Provident are two insurance companies that sold portfolio bonds linked to the LM Managed Performance Fund. A search on the SFC’s website indicates that these companies did not have an SFC license.

SFC Should Issue a New Circular Addressing the Issues Raised in this Blog Post

The SFC’s 2009 circular was inadequate, inaccurate, and misleading because it failed to address the following facts, which the SFC should have known: (1) Most ILAS policies sold in Hong Kong contain minimal life cover; (2) intermediaries frequently issue unauthorized advertisements; and (3) in the case of portfolio bonds, intermediaries profit obscenely by promoting underlying funds.

If it turns out that large segments of the insurance industry have breached the SFO—and I believe they have breached it—then the SFC’s seemingly deliberate ignorance of the facts will have been one of the causes. 

HKMA Investigation Exposes Rampant Misselling of Ripoff Insurance Products in Hong Kong Banks

Cartoon by Patrick Chappatte

A Bank Robbery. Drawing by Patrick Chappatte

Last month, the Hong Kong Monetary Authority (HKMA) published the results of an undercover investigation into the selling practices of Hong Kong’s banks. The investigation, known as the “Mystery Shopping Programme“, confirmed what many of us already knew: that banks are systematically swindling customers with impunity, using so-called life “insurance” products that have little or no insurance content (namely ILAS, whole life, universal life, annuities, and endowment policies).

Many of these products, which I call “savings scams”, are designed to extract years of savings from victims without the victims realizing it. Insurance companies pay massive upfront commissions to the swindlers (i.e., salespersons) who assist in distributing this toxic waste.

Two months ago, I published a blog post titled, “Insurance Industry Finds New Ways to Rip Off Consumers after Regulators Crack Down on ILAS“. In that post, I highlighted the recent dramatic fall in ILAS sales (due to new consumer protection rules) and the simultaneous spike in sales of other “insurance” products, especially whole life, which is less regulated and pays a comparatively massive commission.

HKMA’s Mystery Shopping Programme findings provide an intimate look at how banks responded in this predictable, greed-driven manner. Unfortunately, the findings also highlight HKMA’s own incompetence and/or refusal to address the root of the problems: the inherently corrupt system of allowing product issuers to buy the integrity and objectivity of intermediaries with large, undisclosed commission payments.

By cracking down only on ILAS, instead of implementing an industry-wide crackdown on commissions and deceptive fee structures, regulators have allowed the insurance industry to keep pulling all of its same old tricks, which are nothing more than legalized forms of fraud and bribery (though in many cases, I believe the tricks are in fact illegal).

Regulators must wake up, stop letting themselves be fooled by the industry’s lies, and do what must be done: ban commissions and deceptive fee structures.

Tens of thousands of insurance agents and brokers, who make their living by swindling their fellow citizens, will have to find new work that actually contributes to society, rather than poisons it. This is inevitable and necessary.

Regulators must hold corporate rule-breakers accountable, which means forcing them to fully compensate all their victims. No more slaps on the wrist or closed-door scoldings. They must be shamed in public.

As long as corporations know they can break laws and regulations with impunity, nothing will deter them from continuing to do it in the future.

Highlights of HKMA’s Investigation

Below are notable excerpts from HKMA’s Mystery Shopping Programme Findings (8 Dec 2014). Each excerpt is preceded by my comments.

MSP = Mystery Shopping Programme
AI = Authorized Institution
ILAS = Investment-Linked Assurance Scheme
NLTI = Non-Linked Long-Term Insurance (i.e., whole life, universal life, annuities, and endowment policies)

HKMA says it found “weaknesses” in selling practices. HKMA needs to stop sugarcoating the ugly truth. What HKMA found is nothing more than white collar theft. Insurance intermediaries are using deceptive sales tactics and deliberately flouting regulations in order to maximize commissions at the expense of trusting customers.

HKMA - Weakness in Insurance Sales Regulatory Compliance (Highlighted)

Here, the sales staff recommended “insurance” products, even though clients did not need or want insurance. “Insurance” companies pay much higher commissions than other product issuers, so the sales staff was clearly motivated by greed. Note that the high charges and commissions are hidden by smoke and mirrors, which makes it easier to fleece the victims.

No Insurance Needs

The sales staff did not disclose the “insurance nature” of the products. What this really means is that the sales staff did not disclose the “exploitative nature” of the products.

Insurance Product Misrepresented as Investment Product

ACT NOW!!! QUICKLY!!! Don’t Think!!! Buy Our Toxic Waste Before It Sells Out!!! HURRY!!! My Early Retirement is Counting on It!!!

Hurry and Buy Before Our Toxic Waste Sells Out! (Highlighted)

HKMA is full of crap. Banks have not been required to take “appropriate follow-up actions”. That would mean banning conflicted remuneration and compensating victims.

Examine the Root Causes

Most banks stopped selling ILAS in mid-2013 after HKMA introduced enhanced consumer protections. In response, banks shifted to selling ripoff products that continue to be inadequately regulated.

Banks Stopped Selling ILAS in Mid-2013

In the salesperson’s mind, the customers’ needs do not matter. Only commissions matter.

The Customer's Needs Are Not Important (Underlined)

Here, the salesperson advised the naive customer to do something which would allow the salesperson to recommend an unaffordable policy that paid a higher commission. When the unaffordable policy inevitably collapses on the customer in the future, the salesperson will be protected from accusations of a regulatory breach, as no evidence will exist in the documents.

Juice Up My Commission Please!!!

Again, there is no focus on the needs of the customer. It’s all about swindling the customer, pushing whichever ripoff product pays the highest hidden commission.

My Commission Is All That Matters

This is another example of how salespeople avoid getting caught when they recommend unsuitable products that pay higher commissions.

Breaking Regulations Without Getting Caught

HKMA needs to pull its head out of its butt. It is impossible to sell scams without using deception. HKMA should just ban banks from selling this crap, and then the problems would be solved.

Disguising Fees, Charges, and Insurance

When salespeople say the insurance element of these products is so small that it can be disregarded, they are telling the truth. Only HKMA (and SFC) refuse to admit this obvious fact. The salespeople are dishonest only when they disguise the fact that the products are ripoffs.

Insurance Can Be Disreguarded

Here, the salesperson is a liar. Conceptually, the products are different. One is a scam, the other is not.

Non-ILAS Insurance Plan Misrepresented as Like a Deposit

While it is a complete load of bull to say that an insurance product has no fees or charges, it is probably true that many salespersons are so naive that they actually believe this nonsense. The policy structure and policy documents often disguise the real costs.

No Fees and Charges!!!

Risk free? What is going to happen to some of these insurance companies if they are ever held accountable for ripping off entire societies?

Risk Free Product

The art of selling snake oil.

Biased Representations

Maybe the sales staff was confused here and meant to say that the insurance product was 400 times worse?

400 Times Better

Here, the sales staff neglected to explain that all money paid during the initial payment period goes into the salesperson’s pockets, the bank’s pockets, and the insurer’s pockets. This information is probably not clearly disclosed in the policy documents, so the sales staff maybe didn’t realize it.

Did Not Explain that the Account Value Was a Sham and Initial Payments Paid for Commissions

Again, HKMA (and SFC) need to pull their heads out of their butts. It is factually correct to say that ILAS plans carry little or no life protection and their only value is as a fund platform. However, unlike a normal fund platform, such as Fundsupermart, “long-term” ILAS plans are an outright scam.

ILAS Is Fundamentally an Investment

It might take several hours to explain all the deceptive fees and charges contained in one of these scams. It’s no surprise that the salespeople don’t do it. You can’t sell a scam if you call it what it is!

Neglected to Explain the Numerous Charges

Here, the salesperson did not disclose that initial payments are deceptively transferred into his pockets. He told the victim that it was “ok” (for him) if the victim stopped payments after the wealth transfer was complete.

No Disclosure that the Initial Period is a Deceptive Transfer of Wealth

ILAS has free fund switching, but so do pure fund platforms, like Fundsupermart, which doesn’t scam investors out of their first years of savings. ILAS adds nothing of value to offset its deceptive high costs.

Free Fund Switching

 —

The salesperson didn’t tell the customer about the risks involved in trying to access “her” money in her lifetime. This remark all by itself illustrates why ILAS products are a scam.

The policyholder’s “account value”, which is really a “death value”, is designed to deceive policyholders about the fact that they have been fleeced.

The salesperson was lying when he/she said it costs 10% per year to switch funds if one doesn’t buy an ILAS. See Fundsupermart, as mentioned above.

Get Back Money In Your Lifetime

ILAS is flexible for the salesperson—not the customer. If the salesperson recommends a 25 year policy, as opposed to a 5 year policy, he/she can collect 5 times more upfront commission just by ticking a box on a form.

ILAS is Flexible

Here, the salesperson did not provide a policy brochure during the sales process. In most cases, this probably would have made little difference, as neither the salesperson nor the potential customer would have understood the brochure, since it is loaded with smoke, mirrors, and omissions.

Did Not Provide Brochure

Here, the salesperson advised the victim to cancel a term life insurance policy—which is the only life insurance policy that is NOT a ripoff—and replace it with a whole life insurance policy, which is one of the biggest ripoffs. (Whole life is just a term life policy bundled with a savings scam.)

Replacing Term Life with a Ripoff Whole Life

Inconsiderate, selfish, commission-maximizing behavior.

Salesperson Introduces Insurance Product Despite Customer Objections

The products had a huge helping of “insurance elements”, if by “insurance elements”, one is referring to massive hidden commissions and deceptive fees.

Insurance Element

All of the gobbledygook below is just a technical explanation of how insurance intermediaries defraud victims.

Mismatch

This one is truly shocking, an example of outright robbery. The salesperson advises the victim to pay ever penny he/she has into the initial contribution period of an ILAS. Most of the money paid during the initial period is redistributed to the salesperson in the form of a secret commission.

Total Wealth Transfer

 —

In this example, the salesperson robs a grandfather.

Robbing Grandpa

Absurd lies and high pressure sales tactics.

Lies and High Pressure Sales Tactics (Underlined)

It is perfectly natural to feel uncomfortable when you are being robbed.

Felt Pressured

This just proves that HKMA is utterly incompetent. Training and education of sales staff is not the problem. A total lack of ethics is the problem. Because it is impossible to eliminate people’s wickedness, HKMA must eliminate temptations to be wicked: namely commissions and all other forms of conflicted remuneration.

Laughable Way Forward

What a joke. HKMA says it “encourages” banks to adopt good practices. HKMA needs to punish non-compliant banks and force them to compensate victims.

HKMA Encourages - What a Joke (underlined)

I agree on this point and am happy to help publicize HKMA’s shocking findings. Maybe HKMA will finally be shamed into protecting consumers instead of unethical, if not criminal, banks.

Publish Results

Porton Capital CEO Threatens to Sue Ripped Off Investor for Talking to the Media

Porton Capital

Benjamin Robertson of the South China Morning Post has shone a spotlight on yet another investment fund gone bad:

HK Investors Suffer Huge Losses In Bets Through Cayman Islands Firm“.

Porton Capital, like LM and many other collapsed funds, paid excessively large, undisclosed commissions to the financial advisers who helped distribute it. 

Harvey Boulter, the CEO of Porton Capital, admitted that commissions ranged from 15 to 20%. However, like LM CEO Peter Drake, he denies that this was excessive.

Harvey Boulter, CEO of Porton Capital. Source: The Telegraph.

Harvey Boulter, CEO of Porton Capital. Source: The Telegraph.

Robertson’s article quotes an expert on funds like Porton who claims that a 20% commission is “very high” and that commissions normally do not exceed 5%.

Even more disturbing than the 20% commission is the fact that one investor apparently lost 90% of his investment through extra hidden charges. Porton Capital was supposed to use the investor’s money to purchase shares in a company called Enigma. However, 90% of the investor’s money disappeared. According to the article:

In 2006, an earlier Enigma investor paid 26 pence each for the shares. Company accounts show 365.3 million shares were issued at that time, raising £10.6 million (HK$124 million). The issue prices ranged from 2.1 to 4.3 pence.

It is not clear where the remaining 90 per cent of the client’s money went.

One of the Porton Capital victims, David Lewnes, was brave enough to go on the record to talk about his story. He apparently lost 50% of his investment through hidden charges. Upon speaking to the South China Morning Post, Lewnes received legal threats from Porton CEO, Harvey Boulter, who wanted to silence him.

Lewnes says he was sold Porton Capital through a Tokyo-based adviser.

As readers of Martyn Terpilowski’s LM Emails may recall, a Tokyo-based adviser named Fraser Jamieson was flogging both Porton Capital and the LM funds, despite receiving repeated warnings from Terpilowksi that both funds were “dodgy”.

In LM Email #16, Jamieson angrily told Terpilowski to “fuck off” and “spread his doom elsewhere.”

Jamieson’s clients have now suffered catastrophic losses, yet Jamieson has kept his massive commissions and is still doing business. He currently works at a financial advisory firm in Singapore called AAM and is apparently doing well.

Fraser Jamieson - Andrew Drummond

Fraser Jamieson. Source: Andrew-Drummond.com

Financial Analyst David Webb Calls On SFC to Investigate Convoy for Market Misconduct

Convoy - Your Finance Destroyer

A few weeks ago on New Years Eve, financial analyst and activist, David Webb, published a disturbing analysis of several shady transactions relating to Convoy, the largest financial advisory company in Hong Kong. The link is HERE.

Stock Market Manipulation

Convoy is publicly listed on the Hong Kong Stock Exchange (stock code: 1019). Webb claims that most of Convoy’s recently reported profit can be attributed to an investment in a single “massively inflated” stock (Finsoft Corp), whose price appears to have been manipulated by some unknown person(s):

Waited to Publish

In Hong Kong, stock market manipulation is a criminal offense. The maximum punishment is a fine of $10 million HKD and 10 years imprisonment.

Dissemination of Misleading Information

Webb also claims that Convoy published false and misleading information in its 2014 interim report, seemingly in an attempt to hide from investors the concentrated and questionable source of much of its profit.

In Hong Kong, it is a criminal offense to disseminate false or misleading information in order to “maintain, increase, reduce or stabilize the price” of a stock. The maximum punishment is a fine of $10 million HKD and 10 years imprisonment.

Webb has called on the SFC to conduct an investigation:

SFC Should Investigate Convoy (Underlined)

On January 9th, Webb updated his article and further claimed that Convoy failed to disclose Inside Information and a Disclosable Transaction:

Inside Information and Disclosable Transaction

Conspicuously Underpriced Warrants

In another section of the article, Webb pointed out that Convoy placed conspicuously underpriced warrants on two separate occasions (Feb 2011 and Feb 2013). The fact that the warrants were so underpriced suggests that the placement was not in the interest of public shareholders, but rather, in the interest of some unnamed third parties.

Suspicious Warrants

I myself had noticed the suspicious warrant placements more than a year and a half ago and subsequently filed a complaint with the SFC. It seemed to me that someone had attempted to manipulate Convoy’s stock price upwards immediately after both warrant placements. Upon the second warrant placement, Convoy’s stock price nearly doubled in price for no apparent reason.

I wrote a blog post about this, titled, “Was Convoy Involved in Illegal Market Manipulation after Issuing 80 Million Underpriced Warrants?” Below is a chart from that post:

On-Two-Occasions-Convoys-Stock-Price-Spikes-After-Warrants-Are-Issued

In response to my complaint, SFC replied to me, thanking me for bringing the issue to their attention, but they said they could not tell me anything else, due to a secrecy provision in the SFO. However, they did say this:

SFC Response

It has been a year and a half since they said that, but I have seen no press release.

Convoy’s CEO Resigns

In his article, Webb noted that Rosetta Fong resigned as CEO, effective 1 Jan 2015. Here is the official announcement released by the company:

Rosetta Fong Resigns as CEO

Source: Convoy’s 24 Dec 2014 Announcement

The announcement claimed, “Ms. Fong has confirmed that she has no disagreement with the Board and there are no any matters in respect of her resignation as the CEO that need to be brought to the attention of the holders of securities of the Company.”

The Parent Company Sells All Shares of the Publicly Listed Company

Webb also noted that on 21 Nov 2014, Convoy Financial Group Limited (the parent company) sold all of its shares of Convoy Financial Holdings Limited (the publicly listed company). My understanding of this transaction is that former CEO Rosetta Fong disposed of most if not all of her remaining ownership in the publicly listed company. Here is the shareholding structure in Sept 2014, before the parent company sold its shares:

OCI Bans ILAS Indemnity Commissions

Historically, nearly all of Convoy’s revenue has been derived from indemnified commissions which they received for flogging investment-linked assurance scams (ILAS):

Convoy's ILAS Commissions

Source: Convoy’s IPO prospectus and annual reports.

Last July, OCI banned insurance companies from paying indemnity commissions to brokers that sell their ILAS products. As a result, all commissions must now be paid on an earned basis—not upfront. The new regulations went into effect on January 1st, the same day that Rosetta Fong resigned.

Now, Convoy can no longer deceptively extract 25 or 30 years worth of commissions upfront from clients, which means the company’s primary source of revenue has completely disappeared.

In a recent interview with the South China Morning Post, Glenn Turner, former chairman of the Independent Financial Advisers Association, estimated that ILAS sales will “probably drop by 80 to 90 per cent…as agents lose interest in pushing them.”

Falling Knife or Coiled Spring?

Before OCI banned indemnity commissions, I wrote a blog post raising the question of whether Convoy’s stock was a “Falling Knife or Coiled Spring?

According to David Webb, the answer is neither. He says it’s a bubble, and he’s calling on the SFC to prick it. I am too.

Pop a Bubble

Further Reading

Hong Kong Consumers Angry After Being Sold Complex Insurance Product ILAS (SCMP – May 17, 2013)

American Schoolteacher Takes on HK’s ILAS Establishment (International Adviser – July 12, 2013)

The ILAS Scandal Intensifies: Ex-Employee Tells Regulators that Professional Misconduct and Incompetence Are Rampant at Hong Kong’s Largest IFA Company (May 19, 2014)

Whistleblower, Shawn Wong, Answers Questions about His Experience at Convoy Financial Services (May 22, 2014)

Convoy Financial Services, the Largest So-Called IFA Company in Hong Kong, Is a Colossal Fraud (May 22, 2014)

Reforms on insurance-linked investment products bring shake-up (SCMP – Aug. 11, 2014)

Letter to the SFC (#2): Convoy Systematically Defrauds Investors by Misrepresenting the Licensing Credentials of Its Advisers (Oct. 16, 2014)

Expat Crooks Drive Journalist Andrew Drummond Out of Thailand

Drummond's Website Logo

Several readers of this blog, particularly the LM victims, have probably heard of Andrew Drummond, as he published Martyn Terpilowski’s LM Emails on his website at the same time that I published them here. Drummond, based in Thailand, is well-known for exposing expat conmen.

It has been brought to my attention that, yesterday, there appeared on his website a statement announcing that he is leaving Thailand, headed for the UK, after receiving repeated violent threats against himself and his family.

The statement is here: British Journalist Quits Thailand after 25 Years – Statement (Andrew-Drummond.com)

The story is also in the Phuket Wan Tourism News: “Drummond Heads for Britain Warning Expat Crooks They Haven’t Won Yet“.

For some context on the situation, readers may find the following articles illuminating:

Thai Law Allows Expat Crooks to Escape But Punishes Journalists” (Phuket Wan Tourism News)

Thailand a Haven for Foreign Criminals — Surely Not” (Andrew-Drummond.com)

I am not sure how long Drummond plans to continue publishing articles on his website, but he did publish one new article after announcing that he was leaving.

Drummond’s Articles on LM

Here is a list of articles published by Andrew Drummond relating to the LM fiasco:

Every Victim of the LM Fund Scam Should Read This (Aug. 13, 2014)

LM Is Never Having to Say You’re Sorry (Aug. 16, 2014)

LM – Ponzi! Ponzi! Ponzi! – But Aussie Regulators Did Nothing (Aug. 20, 2014)

LM Managed Performance Fund Was For ‘Sophisticated Investors Only’ (Aug. 21, 2014)

LM Fund Client Was Able to Redeem His Investment – But He Was a Banker (Aug. 22, 2014)

Lies, Lies and More Lies – How LM Played for Time (Aug. 25, 2014)

‘What Chance Do Honest People Have?’ – How Bond Providers Turned a Blind Eye in LM Scam (Aug. 28, 2014)

About Turn? Royal London 360 Finds No Problem With LM (Aug. 29, 2014)

How the Media Unknowingly Colluded with LM (Aug. 29, 2014)

Fund Salesman Who Said LM Was ‘Highly Regulated’ Does a Belated About Turn (Sept. 3, 2014)

LM – The Appalling Offshore Stitch Up of Offshore Pensions (Sept. 5, 2014)

The LM Fiasco — ASIC Bears Its Gums (Nov. 20, 2014)

Expat Investing for Retirement in Asia – You Should Read This Warning (Dec. 16, 2014)

The LM Fund – Ding Dong Merrily on High – Now We Get It (Dec. 17, 2014)

LM Boss Given New Year Deadline (Dec. 24, 2014)

LM’s Unauthorized Fund Documents: Distribution to the Public Was a Criminal Offense

[The information in this blog post is intended to be a resource for LM victims in Hong Kong who are filing complaints with SFC, OCI, the police, and any other authority. A link to this post has been sent to all authorities. If any readers are not familiar with the LM scandal, read the the SCMP article, When an Investment Fund Goes Bad.]

LM MPF Information Memorandum Dec 2012

The LM Managed Performance Fund (MPF) was not authorized by the SFC for distribution to the Hong Kong public. According to Section 103 of the Securities and Futures Ordinance, it would have been a criminal offense for a financial adviser or insurance company to issue any of the related MPF fund documents (such as the Fact Sheet or Information Memorandum) to a non-professional investor. The penalty for an offense is a fine of up to $500,000 HKD and up to three years imprisonment.

Several LM victims who were interviewed by the South China Morning Post said that they were not asked to prove that they were professional investors, and “on their application forms, the sections regarding professional investor status [were] crossed out.” Presumably, these investors were not professional investors.

SFC Issued a Warning to the Industry in 2005

SFC Issued Another Warning to the Industry in 2009

Many LM victims were sold the MPF fund through a “portfolio bond”, which is a type of life insurance policy called an investment-linked assurance scheme (ILAS). ILAS policies, like investment funds, must be authorized by the SFC before being distributed to the Hong Kong public. If either the ILAS policy or the underlying investment funds are not SFC-authorized, it would be illegal to issue an invitation, advertisement, or other document inviting the public to purchase these products.

Even LM Warned Financial Advisers and Insurance Companies to Avoid Breaking the Law

LM Investment Management was fully aware of Hong Kong’s laws regarding the marketing of unauthorized funds to the public. That is why nearly every document that LM issued contained a warning to intermediaries which stated, “Not for distribution to Hong Kong public.”

Here is an excerpt from one of the MPF Fact Sheets, dated November 2012. See the red arrow:

Excerpt from the Jan 2013 LM Fact Sheet (Highlighted)

Excerpt from the LM MPF Nov 2012 Fact Sheet

Financial Advisers and Insurance Companies Broke the Law Anyway

The MPF Information Memorandum for bond providers (i.e., insurance companies) was packaged together with the MPF Application Form. The Information Memorandum states that it is designed for bond providers to give to their policyholders (“Indirect Investors”) for the purpose of providing information to them about the fund. The Information Memorandum also states that policyholders should read the Information Memorandum before directing the bond provider to invest in the MPF on their behalf:

In other words, the bond providers had a duty to give the MPF Information Memorandum to their policyholders, so that the policyholders could read the document and make an informed decision about whether they wanted to be exposed to the risks of the MPF.

If the bond provider gave the Information Memorandum to a Hong Kong policyholder who was not a “professional investor”, the bond provider would have committed a criminal offense.

As reported by SCMP, several LM victims who invested in the MPF, apparently through a portfolio bond, were never asked to show proof that they were a “professional investor”. These investors were presumably not professional investors.

When submitting the MPF Application Form, bond providers were required to affirm that they had broken no laws, such as when they gave the Information Memorandum to their policyholders:

Bond providers could not have given the Information Memorandum to a non-professional investor without breaking the law. It may be the case that some bond providers additionally committed an act of fraud by affirming that they did not break any laws.

Fraud is an act of deception perpetrated for financial gain. Bond providers clearly had something to gain when investing in the MPF. As explained by whistleblower Martyn Terpilowski, the LM MPF fund was very popular with advisers because the fund paid such high commission—as high as 15% upfront. Bond providers who did not process applications for the MPF fund risked losing business to their competitors, as advisers would simply advise clients to use an alternative bond provider who would process the application. 

Bond providers are not the only ones who may have broken the law. Advisers also had a duty to give the MPF fund documents to clients. According to a 2010 MPF Fact Sheet (which was for “Adviser / Intermediary Information Only”), the fine print stated that “investors must have read and considered the current Information Memorandum before investing in or holding this product”.

March 2010 Fact Sheet - Adviser or Intermediary Information Only (Highlighted)

LM MPF March 2010 Fact Sheet. “For Adviser / Intermediary Information Only”

Investors Must Have Read the Information Memorandum Before Investing - March 2010 Fact Sheet (Underlined)

LM MPF March 2010 Fact Sheet. Investors must of have read the Information Memorandum before investing.

If advisers gave the Information Memorandum to any clients who were non-professional investors, they committed a criminal offense.

SFC Must Hold Lawbreakers Accountable to Deter Future Violations and to Ensure that Victims Receive Justice

There is very strong evidence that both insurance companies and financial advisers (i.e., insurance brokers) violated Section 103 of the Securities and Futures Ordinance when they distributed the LM MPF fund. I hope the SFC will look into this matter further and punish anyone who is guilty of breaking the law. This will deter other insurance companies and financial advisers from feeling tempted to break the law again in the future.

However, the top priority of the SFC should be to keep in mind that many LM victims are retirees who have lost their life savings. These victims are facing and will continue to face severe financial hardships unless they receive compensation.

The SFC should also note that LM victims are scattered across the world, yet it appears that no regulator in any country has taken action against the financial advisers and insurance companies who irresponsible/unethically/illegally distributed the LM funds to their clients. I have personally been in contact with LM victims from more than half a dozen different countries, and a number of them have told me that they are all closely watching developments in Hong Kong, as they are hopeful that Hong Kong regulators will be the first to act and set a precedent for regulators across the region.

I hope the SFC does not let these people down.

LM’s Unauthorized Fund Documents

Below is a list of all the unauthorized LM fund documents which have been forwarded to me by several different sources. Click on the links to download.

LM MPF Summary Flyer – July 2008

LM MPF Fact Sheet – March 2010

LM MPF Summary Flyer – Sept 2010

LM Portfolio Bond Commission Instruction Form – Jan 2011

LM MPF Information Memorandum – 22 Feb 2011

LM MPF Rate Sheet – March 2011

LM MPF Fact Sheet – 30 June 2011

LM MPF Fact Sheet – 31 August 2011

LM Product Range and Upfront Commission Rates – 6 Oct 2011

LM – A Safe Harbour for Nervous Investors – 7 Dec 2011

LM MPF Fact Sheet – 30 Nov 2012

LM MPF Disclosure Update – 30 Nov 2012

LM MPF Information Memorandum and Application Form – 14 Dec 2012

LM MPF Fact Sheet – 31 Jan 2013

LM MPF Disclosure Update – 31 Jan 2013

LM MPF – List of Portfolio Bond, Platform, Trust, & SIPP Providers – 31 Jan 2013

Anyone who has more LM documents which are not listed here, please send them to me (lindelll@gmail.com), and I will add them to this list.

New Additions (Added on 23 Jan 2015)

LM MPF Three Highlights – Nov 2009 – Coomera Capalabra, Runaway Bay

LM MPF Information Memorandum – 25 Nov 2009

LM MPF Information Memorandum – 1 Nov 2011

LM MPF Audited Annual Report – 30 June 2012

LM MPF Update – Dec 2012

Peter Drake Responds to Questions about LM MPF – 1 March 2013

The Law: Section 103 of the SFO

Below, I have provided screenshots and links to sections of the law which I think are the most relevant to LM victims. Note that I am not a lawyer, so maybe I overlooked something.

Section 103 of the SFO states that it is an “offense to to issue advertisements, invitations or documents relating to investments in certain cases” (e.g., to non-professional investors). Note that the LM MPF was a “collective investment scheme” as mentioned in paragraph (b) below.

The Offense

Section 103(1) of the SFO

Section 105 of the SFO grants the SFC the ability to “authorize issue of any advertisement, invitation, or document which is or contains an invitation to do any act referred to in Section 103(1)” above. The MPF fund documents were not authorized under Section 105 of the SFO.

Penalty for an Offense

The maximum penalty for an offense is a fine of up to $500,000 HKD and 3 years imprisonment.

Section 103(4) of the SFO

Exceptions to the Rule

Unauthorized funds and related documents can be issued to “professional investors” without committing an offense.

Section 103(3) of the SFO

Section 103(3k) of the SFO

The Definition of a “Professional Investor”

The definition of a professional investor is described in several paragraphs in Schedule 1 of the SFO. The relevant paragraph is (j):

Definition (j) of Professional Investor in Schedule 1 of the SFO

Section 397 of the SFO grants the SFC the ability to make rules.

The rules made by the SFC regarding “professional investors” are located in two places. The first place is in the SFO under the Securities and Futures (Professional Investor) Rules Section 3. The part which concerns LM victims is paragraph (b), which states that individuals who have a portfolio of $8 million HKD or more will be regarded as professional investors:

Professional Investor - SFO Rules

The second place which describes SFC’s rules regarding “professional investors” is in SFC’s Code of Conduct, beginning on page 35:

Professional Investor - SFC Code of Conduct

Anyone who knows more about Hong Kong law than I do may feel free to leave a comment below or email me if I have left out any important information or made a mistake. (lindelll@gmail.com)

Essential Info for ILAS Victims: How to File a Complaint

[NOTE: This is the first in a series of posts I’ll be publishing over the coming days. It deals with the logistics of filing a complaint. The next posts will explain in detail all the laws and regulations which the insurance industry has broken. That info can help you write your complaint. For convenience, I have added the information contained in this post to the Resources page of this website.]

Snow ball

Snowball effect: As complaints pile up, pressure grows for regulators and law enforcers to take action.

ILAS victims (including savings scam and portfolio bomb victims) should file a complaint with every regulator and law enforcer that is responsible or potentially responsible for handling any matter related to your case. This will increase the likelihood of recovering your money.

When you file a complaint with a self-regulatory organization (such as PIBA, CIB, or IARB), make sure you copy your complaint to the Office of the Commissioner of Insurance (OCI), which has a duty to monitor how these organizations handle your complaint. None of these self-regulatory organizations can be trusted, as the committee members are also the executives of companies which openly scam consumers and violate regulations. They protect their own interests, not the interests of the people they scammed.

Below, I have listed all the relevant regulators/law enforcers and their contact information, accompanied by notes which explain what the regulator/law enforcers do and other important facts.

For convenience, if you would like to send a complaint to some or all of the relevant regulators/law enforcers simultaneously, I have listed their email addresses here at the top, so that you can simply copy and paste:

iamail@oci.gov.hkcomplaint@sfc.hkbankcomplaints@hkma.gov.hkgeneral@icac.org.hkcrimeinformation@police.gov.hkcc@consumer.org.hkmpfa@mpfa.org.hkhkfi@hkfi.org.hkinfo@piba.org.hkinfo@hkcib.orgcomplaints@ombudsman.hkbc_06_13@legco.gov.hkiia_consultation@fstb.gov.hkfso@fso.gov.hk

At the bottom of this post, I have provided links to laws, lawsuits, regulations, and codes of conduct which will be of interest to people filing complaints.

Anyone who has questions or would like help filing a complaint can send me (Lindell Lucy) an email: lindelll@gmail.com

Filing a Complaint

Office of the Commissioner of Insurance (OCI)
Website: http://www.oci.gov.hk/about/index08.html
Email: iamail@oci.gov.hk
Phone: 2867 2565
Address: 21st Floor, Queensway Government Offices, 66 Queensway, Hong Kong.
Note: You can file a complaint against any insurance company, insurance agent, or insurance broker with OCI. Your complaint will be forwarded to the relevant self-regulatory organization (PIBA, CIB IARB). OCI will monitor their handling of your complaint. It would be foolish to file a complaint with a self-regulatory organization without notifying OCI, as your complaint may not be handled in a fair manner.

Securities and Futures Commission (SFC)
Website: http://www.sfc.hk/web/EN/lodge-a-complaint/
Email: complaint@sfc.hk
Phone: 2231 1222 (press 2 after selecting your preferred language)
Address: 35/F, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong
Relevant Laws: Section 114 and Section 103 of the Securities and Futures Ordinance
Note: If your insurance broker has an SFC license and he/she has breached SFC regulations or the SFC Code of Conduct, you can file a complaint with the SFC. (You can do a search on the SFC’s website to see if your broker has an SFC license.) If your insurance broker/agent violated the Securities and Futures Ordinance, regardless of whether they hold an SFC license, you can file a complaint against them with the SFC. Self-regulated insurance brokers are terrified of SFC!!!

Hong Kong Monetary Authority (HKMA)
Website: http://www.hkma.gov.hk/eng/other-information/contact-us.shtml
Email: bankcomplaints@hkma.gov.hk
Phone: 2878 8196
Address: 55th Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong
Note: If you were sold a ripoff insurance policy in a bank, then you file your complaint with HKMA, as it is the bank regulator. You can also send the complaint to OCI.

Independent Commission Against Corruption (ICAC)
Website: http://www.icac.org.hk/en/report_corruption/index.html
Email: general@icac.org.hk
Phone: 25 266 366
Address: G/F, 303 Java Road, North Point, Hong Kong
Hours: Open 24 Hours
Relevant Law: Section 9 of the Prevention of Bribery Ordinance
Note: If you were sold an insurance policy by a broker, then you may be able to complain with the ICAC. A broker is supposed to be your agent, not the agent of an insurance company or fund company. The broker must disclose any conflicts of interest, especially about commissions. If your broker did not get your permission to receive a commission (a kickback from the product issuer), and if he/she did not disclose material information about how much commission he/she received and when he/she received it, then he/she violated Section 9 of the Prevention of Bribery Ordinance, which is an offense punishable by $500,000 in fines and 7 years imprisonment.

Hong Kong Police
Website: http://www.police.gov.hk/ppp_en/02_er_room/
Email: crimeinformation@police.gov.hk (only accept attachments up to 10 MB)
Phone: 2860 5012 (Commercial Crime Hotline)
Address: Find your nearest police station.
Hours: Open 24 hours.
Relevant Laws: Section 16A of the Theft Ordinance and/or Section 36 of the Crimes Ordinance
Note: If you were sold a scam insurance policy (a fraud), or if your broker deceived you for financial gain (defrauded you), then file a fraud complaint against the insurance company who created the scam and the insurance agent or broker who sold it to you. Fraud is a serious offense punishable by up to 14 years imprisonment.

Consumer Council
Website: http://www.consumer.org.hk/website/ws_en/complaints_and_advices/how_to_complain/howtocomplain.html
Email: cc@consumer.org.hk
Phone: 2929 2222
Address: Find your nearest Consumer Advice Center.
Hours: Mon to Fri, 9:00 – 1:00, 2:00 – 6:00
Note: Any ripped off consumer can file a complaint with the Consumer Council. The Consumer Council will act as a mediator and a monitor, similar to OCI.

Mandatory Provident Fund Schemes Authority (MPFA)
Website: http://www.mpfa.org.hk/eng/supervision/mpf_intermediaries/complaints_against/index.jsp
Email: mpfa@mpfa.org.hk
Phone: 2918 0102
Address: Units 1501A and 1508, Level 15, International Commerce Centre, 1 Austin Road West, Kowloon, Hong Kong.
Note: Many insurance agents and insurance brokers hold an MPFA license, and presumably, they should have to abide by MPFA’s Code of Conduct, which is more strict than the self-regulatory codes of conduct. File a complaint to MPFA if your agent/broker held an MPFA license and breached the MPFA code of conduct.

Hong Kong Federation of Insurers (HKFI)
WARNING: Self-Regulatory Organization / Has Conflicts of Interest
Website: http://www.hkfi.org.hk/#!/consumer-zone/avenue-for-complaints
Email: hkfi@hkfi.org.hk
Phone: 2520 2728
Address: 29/F Sunshine Plaza, 353 Lockhart Road, Wanchai, Hong Kong
Note: If you want to file a complaint about an insurance company (for creating a scam product and selling it to you), send the complaint to HKFI. Copy your complaint to OCI, so OCI can monitor the complaint. If you are complaining about a company’s agent, the complaint will go to the IARB.

Insurance Agents Registration Board (IARB)
WARNING: Self-Regulatory Organization / Has Conflicts of Interest
Website: Go to HKFI’s website.
Email: hkfi@hkfi.org.hk
Phone: 2520 1868
Address: 29th Floor, Sunshine Plaza, 353 Lockhart Road, Wanchai, Hong Kong
Note: The IARB was set up by HKFI. If you were sold a ripoff insurance policy by an insurance agent (not a broker), complain to IARB. Copy your complaint to OCI, so OCI can monitor the complaint. An insurance agent is the agent of a particular insurance company, whereas an insurance broker is your agent and is not tied to a particular insurance company.

Professional Insurance Brokers Association (PIBA)
WARNING: Self-Regulatory Organization / Has Conflicts of Interest
Website: http://www.piba.org.hk/index.php/en/about-piba/establishment-of-piba
Email: info@piba.org.hk
Phone: 2869 8515
Address: Room 2507-08, 25/F, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong
Office Hours: Mon to Fri, 9:00 – 12:30 / 1:30 – 6:00
Note: Insurance brokers are self-regulated by two different organizations, PIBA and CIB. If you were ripped off by an insurance broker, check to see whether your broker is licensed with PIBA or CIB. You can search the register of members on PIBA’s website to find out if the broker is licensed with PIBA. Note that there is a register for companies and a register for individuals. Complain to the organization with which your broker is licensed with. Copy your complaint to OCI, so OCI can monitor the complaint.

Confederation of Insurance Brokers (CIB)
WARNING: Self-Regulatory Organization / Has Conflicts of Interest
Website: http://www.hkcib.org/hkcib/en/about/ourMission.html
Email: info@hkcib.org
Phone: 2882 9943
Address: Room 3407, AIA Tower, 183 Electric Road, Fortress Hill, Hong Kong
Note: Insurance brokers are self-regulated by two different organizations, PIBA and CIB. If you were ripped off by an insurance broker, check to see whether your broker is licensed with PIBA or CIB. You can search the register of members on CIB’s website to find out if your broker is licensed with CIB. Complain to the organization with which your broker is licensed with. Copy your complaint to OCI, so OCI can monitor the complaint.

Office of the Ombudsman
Website: http://www.ombudsman.hk/en-us/how_to_lodge_a_complaint.html
Email: complaints@ombudsman.hk
Phone: 2629 0555
Address: 30/F, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong
Hours: Mon to Fri, 8:45 a.m. to 5:45 p.m
Note: If SFC, HKMA, or OCI is not handling/monitoring your complaint in a responsible manner, then file a complaint against them with the Office of the Ombudsman.

Legislative Council (LegCo)
Website: http://www.legco.gov.hk/general/english/members/yr12-16/biographies.htm
Email: Click HERE to download the emails of all LegCo members.
Phone: Click HERE to download the phone numbers of all LegCo members.
Note: You can try contacting one of the 70 members of the LegCo for help. LegCo members have power and influence. I suggest you avoid members of the LegCo who are not democratically elected, such as Chan Kin-por, who was elected by 52 insurance companies in 2008. Choose a member who was elected by a geographical constituency, NOT a functional constituency.

Bills Committee on Insurance Companies (Amendment) Bill 2014
Website: http://www.legco.gov.hk/yr13-14/english/bc/bc06/general/bc06.htm
Email: bc_06_13@legco.gov.hk
List of Members: http://www.legco.gov.hk/yr13-14/english/bc/bc06/general/bc06_mem.htm
Note: These members of the LegCo are responsible for overseeing the drafting of the bill which will set up a new insurance regulator (the Independent Insurance Authority). The bill will legally require insurance intermediaries to act in the best interests of clients. Contact these guys to pressure them to make sure that the bill is not corrupted by lobbyists from the insurance industry. Pressure them to amend the bill so that the new independent regulator will be able to take consumer complaints as soon as possible. It is outrageous that victims must file complaints with organizations that represent the very companies that committed the wrongdoings.

Financial Services and Treasury Bureau (FSTB)
Website: http://www.fstb.gov.hk/fsb/iia/eng/establishment/index.htm
Email: iia_consultation@fstb.gov.hk
Phone: 3655 5088
Address: Special Duties Division, 24/F, Central Government Offices, 2 Tim Mei Avenue, Tamar, Hong Kong
Note: Complain to the FSTB if you are unhappy with the way insurance is regulated in Hong Kong. They are responsible for setting up the new insurance regulator (the Independent Insurance Authority).

Financial Secretary
Website: http://www.fso.gov.hk/eng/role.htm
Email: fso@fso.gov.hk
Phone: Not Listed. Fax number is 2840 0569.
Address: 25/F, Central Government Offices, 2 Tim Mei Avenue, Tamar, Hong Kong
Note: If you’re unhappy about the way insurance is regulated in Hong Kong, complain to the Financial Secretary (John Tsang). “The Financial Secretary’s primary responsibility is to assist the Chief Executive in overseeing policy formulation and implementation in financial, monetary, economic, trade and employment matters.”

Laws

Section 9 of the Prevention of Bribery Ordinance (Corrupt transactions with agents)
Maximum punishment for offense is 7 years imprisonment and a fine of $500,000 HKD

Section 16A of the Theft Ordinance (Fraud)
Maximum punishment for offense is 14 years imprisonment

Section 114 of the Securities and Futures Ordinance (Restriction on Conducting Business in Regulated Activities without an Appropriate SFC License)
Maximum punishment for offense is $5 million HKD and 7 years imprisonment

Section 103 of the Securities and Futures Ordinance (Offence to issue advertisements, invitations or documents relating to investments in certain cases)
Maximum punishment for offense is $500,000 HKD and 3 years imprisonment
[NOTE: When insurance brokers distribute unauthorized funds to retail investors indirectly via portfolio bonds (the fund is technically bought by the insurance company, not the investor), it is an offense to give investors a copy of the fund’s information / marketing documents, as these documents have not been authorized by the SFC.)]

Section 36 of the Crimes Ordinance (False statutory declarations and other false statements without oath)
Maximum punishment for offense is a fine and 2 years imprisonment

Section 25 of the Organized and Serious Crimes Ordinance (Dealing with property known or believed to represent proceeds of indictable offence)
Maximum punishment for offense is a fine of $5 million HKD and 14 years imprisonment
[Note: This law is related to money laundering, which is the act of making “dirty” money (illegally gotten) appear as if it were legitimately gotten.]

Section 25A of the Organized and Serious Crimes Ordinance (Disclosure of knowledge or suspicion that property represents proceeds, etc. of indictable offence)
Maximum punishment for offense is a fine of $50,000 and 3 months imprisonment.
[Note: This law is related to money laundering. If someone (such as a bond provider) is aware of another person (such as an insurance broker) obtaining money illegally, but does not report this information to authorities, the person has committed an offense.]

Section 82 of the Inland Revenue Ordinance (Tax Evasion / Tax Fraud)
Maximum punishment for offense is $50,000 HKD fine + triple the amount evaded + 3 years imprisonment
[Note: Sources say that some insurance brokers hide fund commissions offshore to evade corporate taxes and to avoid violating Section 114 of the Securities and Futures Ordinance.] 

Hong Kong Competition Ordinance (Anti-Trust Laws)

Lawsuits

Judgement – Jeremy Hobbins vs. Skandia and Clearwater (Famous lawsuit in which undisclosed ILAS commissions were argued to be a form of bribery)

Article about the Hobbins lawsuit in the South China Morning Post: Cost in the Mists of Time

A Lawsuit in Singapore which was Settled out of Court — I visited Singapore last summer and obtained a digital copy of the court documents before this case was settled. It involved an American family who sued their financial adviser for mis-selling them an ILAS product, which caused them hundreds of thousands of US dollars of tax penalties, accounting bills, and legal bills. ILAS is a disaster for Americans. See this blog post: “American ILAS Victims Could Face Criminal Prosecution after FATCA“. Anyone interested in learning more about this lawsuit may contact me for more information (lindelll@gmail.com).

Regulations, Circulars, Codes of Conduct

SFC – 31 Oct 1996 – Introduction of ILAS Illustration Document (In Response to Complaints)

Consumer Council – 15 January 2004  – Warning for Consumers to Avoid ILAS

SFC – 23 February 2005 – Report on Selling Practices of Licensed Investment Advisers

SFC – 13 August 2009 – Clarification of ILAS Licensing Requirements

HKFI – 1 February 2010 – Code of Practice for Life Insurance Replacement

HKMA – 14 March 2011 – Enhanced ILAS Regulations

CIB – 22 July 2011 – Regulations for Brokers Selling ILAS

CIB – Code of Conduct for Insurance Brokers

MPFA – September 2012 – Code of Conduct for Registered Intermediaries

HKMA – 22 April 2013 – More Enhanced ILAS Regulations

HKFI – 22 April 2013 – Updated ILAS Regulations

SFC – 3 May 2013 – Enhance Disclosure Requirements for ILAS

Consumer Council – 16 September 2013 – Warning to Consumers about High ILAS Fees

SFC – October 2013 – Code of Conduct

HKFI – 22 October 2013 – FAQ on Updated ILAS Regulations

PIBA – 1 March 2014 – Updated Code of Conduct

OCI – 30 July 2014 – Ban on Indemnity Commissions and Unfair Charges (GN 15)

HKFI – 8 December 2014 – Updated ILAS Regulations

HKMA – 8 December 2014 – Mystery Shopping Programme Findings

HKMA – 8 December 2014 – Enhance Regulation of Non-ILAS Insurance Products

OCI – 10 December 2014 – GN 15 (Second Edition) – Ban on Indemnity and Unfair Charges

HKMA – 17 December 2014 – Update on ILAS Commission Disclosure Requirements

SFC – 22 December 2014 – Mystery Shopping Programme Findings

New but Hardly Improved: ILAS Policies Are Still Toxic after Indemnity Commissions Have Been Banned

Pulsar II - Brochure Cover

The cover of the principal brochure of AXA’s new Pulsar II Investment Insurance Plan.

Last year, the Office of the Commissioner of Insurance (OCI) banned insurance companies from paying indemnified commissions to their sales force. The new regulations went into effect on January 1st, 2015, a little more than a week ago.

Many people, including myself, had speculated that this would result in insurance companies eliminating their massive, upfront charges, as these charges existed primarily to secretly pay massive indemnified commissions (often equivalent to more than one year of a policyholder’s savings).

The Securities and Futures Commission (SFC) authorizes all new ILAS products, and it publishes many of the principal brochures on its website. As of today (Jan. 9), four brochures of newly authorized ILAS policies have been published. Three of them are single premium policies, and, of special interest, is one regular premium policy: AXA’s Pulsar II Investment Insurance Plan.

A pulsar is the remains of a dead star that has exploded after gravitational collapse. AXA chose a good name for its policy, because the policy will surely collapse on most of the investors who are conned into buying it.

Pulsar

The Vela Pulsar. Source: NASA website.

The Pulsar II has a 10 to 12 year lock-in. If the victim tries to exit beforehand, he or she will be subjected to a penalty of up to 65%. In other words, the victim is guaranteed to have a large negative return on investment for many years.

Pulsar II - 65 Percent Exit Penalty

Since 93% of ILAS policyholders are estimated to exit early, most Pulsar II policyholders are likely to lose money, probably lots of money.

This sounds awful. However, it is admittedly a small improvement over AXA’s Pulsar I, which had a lock-in of up to 30 years and an exit penalty of up to 100%.

Both Pulsars are radioactive, but the new one is less so.

The Fees Are Larger than the Life Protection

The Pulsar II’s death benefit is an extra 5% of the account value. However, the annual fees are as follows:

  • Account Maintenance Fee: 5.5% deducted from initial units
  • Administration Charge: $600 HKD per year deducted from initial or accumulation units
  • Account Service Fee: 1% deducted from initial and accumulation units
  • Insurance Charge: A complicated formula which is to hard to summarize
  • Early Encashment Charge: A complicated formula, but can be as high as 65% of initial units
  • Underlying Fund Active Management Fees: ~1 to 2%, but can be less or more.

When OCI banned indemnity commissions, it also issued the following statements and regulations:

OCI Comments on Fair Treatment of CustomersAnyone can conclude after just a quick glance at the fees and insurance content of AXA’s Pulsar II that the product does not come close to being in compliance with OCI’s new requirements. The 5.5% Account Maintenance Fee is by itself larger than the amount of life protection that Pulsar II offers.

This raises an important question: Why did SFC authorize a product that is not compliant with present regulations?

I think AXA should be held accountable for violating regulations, BUT SO SHOULD SFC FOR LETTING AXA DO IT!

AXA’s Pulsar II Should Not Exist

According to regulations issued by HKMA, HKFI, and OCI, insurance intermediaries are not allowed to sell ILAS policies to clients who have no insurance needs.

Before an ILAS policy is recommended, it must be documented that a client has BOTH investment and insurance needs. Here is the statement issued by OCI last July:

OCI - Do Not sell ILAS to Clients without Insurance Needs

The life protection offered by AXA’s Pulsar II is only 5% of the account value, which is less than the annual fees. Mathematically, there is arguably no life protection, since the fees cancel it out.

Consequently, Pulsar II should never be recommended to anyone with insurance needs, as it will not be suitable to meet those needs.

However, Pulsar II is not suitable for anyone with pure investment needs, as regulations forbid that it be sold to anyone with pure investment needs.

To summarize, Pulsar II shouldn’t be sold for pure insurance purpose, for pure investment purposes, or for combined insurance and investment purposes.

Simple logic shows that Pulsar II is not suitable for anyone, and it should therefore not exist. It should not have been authorized by the SFC.

I am Filing a Complaint Against the SFC with the Office of the Ombudsman

I am forwarding the above information to the Office of the Ombudsman to file a complaint against the SFC for negligence. The SFC should not be facilitating insurance companies’ regulatory violations.