Contradictory Statements Suggest that SFC Deliberately Lied about ILAS in Order to Evade Regulatory Responsibilities

Lehman Minibond victims angry at the SFC. Photo by South China Morning Post.

Lehman Minibond victims blamed the SFC. ILAS victims are now doing the same. Photo by South China Morning Post.

Schedule 5 of the SFO defines dealing in securities as “making or offering to make an agreement with another person…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”.

Investment-linked assurance schemes (ILAS) are insurance policies whose value is determined by reference to the value of securities, namely mutual funds.

Most ILAS policies provide little or no life cover. Functionally, they are investment products.

On 13 August 2009, the SFC issued a circular arguing that sales of investment-linked assurance schemes (ILAS) did not fall under the SFO definition of dealing in securities, meaning that the SFC had no responsibility to regulate ILAS sellers. The SFC in effect gave ILAS sellers a free pass to regulate themselves—a freedom which they have spectacularly abused.

To support its argument, the SFC made the following three statements, all of which are false:

  • “ILAS are first and foremost insurance policies providing the policyholder with life cover”
  • “Life cover, as distinct from investment, would appear to be the dominant factor motivating a policyholder to acquire an ILAS product”
  • “it cannot be said that the purpose of acquiring an ILAS policy, or even the dominant purpose of doing so, is to secure a profit from fluctuations in the value of the underlying funds.”

The SFC authorizes all ILAS products and their offering documents, which means that SFC should have known that most ILAS products provide minimal life cover. The main reason for purchasing such policies is to “secure a profit from fluctuations in the value of the underlying funds.”

It is possible that the SFC was just ignorant or negligent when it made the false statements mentioned above. However, the information below strongly suggests that the SFC deliberately lied.

SFC Admits that ILAS Is Predominantly for Investment

According to paragraph 3.9 of the SFC’s Code on Investment-Linked Assurance Schemes, the SFC defines ILAS as an investment-linked insurance policy whose predominant purpose is NOT life assurance. This logically implies that the predominant purpose of ILAS is investment.

SFC Defines ILAS as Primarily for Investment (Code on ILAS)

Screenshot of the definition of ILAS in SFC’s Code on ILAS.

The above definition contradicts the SFC’s description of ILAS in its 2009 circular, suggesting that the SFC fully understood the nature of ILAS when it made the false statements in 2009.

SFC Acknowledges that Most ILAS Products Provide No Life Cover

The SFC has also published a template of an ILAS Key Facts Statement (KFS) in which the SFC assumes that insurers will only pay a death benefit equal to an extra 1% of the policy’s account value.

Screenshot of SFC's ILAS Key Facts Statement Template.

Screenshot of SFC’s ILAS Key Facts Statement Template.

Given that the annual fees of an ILAS policy is generally much higher than 1%, the SFC is assuming that the life cover of a typical ILAS policy is essentially nil. This contradicts the SFC’s 2009 claim that ILAS is primarily an insurance policy “providing the policyholder with life cover”, and it also suggests that SFC was not ignorant when it issued the false statements in 2009.


For whatever reason, it appears that the SFC made a conscious decision to lie in its 13 August 2009 circular, in order to avoid having to take responsibility for regulating corporations and individuals who sell ILAS.

Now that the SFC has been caught, it needs to explain itself and take responsibility for its actions.

Well over one million Hong Kongers have likely been mis-sold unsuitable, exploitative ILAS products. This wouldn’t have happened if the SFC had performed its duty to protect the interests of the investing public.

Did the Lehman Minibond Scandal Contribute to the SFC’s Irresponsible Behavior?

Martin Wheatley was the CEO of the SFC in 2009. This was the period right after the Lehman Minibond disaster, when thousands of Hong Kongers were protesting in the streets, demanding that Wheatley “go home”. Protesters reportedly burnt a funeral effigy of Wheatley right outside his office.

As CEO, Wheatley is probably the person who approved the SFC’s 13 Aug 2009 circular, along with all of its lies. Given that the SFC already had one giant mis-selling scandal on its hands and was facing a public relations nightmare, it is conceivable that Wheatley decided that the SFC should distance itself as far as possible from ILAS and all of the problems that were associated with it.

As documented in the decade-old book, The Great Expat Financial Planning Ripoff, insiders have long known that many ILAS products are a scam. More disturbingly, about 2,500,000 of them had been sold in Hong Kong, whereas sales of Lehman Minibonds were capped at about 40,000.

The rubbish in the SFC’s 2009 circular may have been a self-protective response on the part of Wheatley and the SFC to avoid becoming entangled in another scandal, one that was far larger.

About sixteen months after the SFC’s 2009 circular was published, Wheatley announced that he was leaving the SFC to “go home”.

He is now the CEO of the Financial Conduct Authority, the main financial regulator in the UK.

Leave a Reply

Your email address will not be published.