The Office of the Commissioner of Insurance (OCI) recently agreed to a meeting with ILAS victims. That meeting was held two days ago, on Monday, February 9th, 2015.
Several ILAS victims and OCI staff attended the meeting, including the Insurance Commissioner, Annie Choi.
I prepared a PowerPoint for the meeting. A modified version of it can be downloaded here:
(In the modified version, I have taken out people’s names, clarified on a few points, and corrected an error.)
Victims’ Cases Have Several Issues in Common
At the beginning of the meeting, the Insurance Commissioner claimed that OCI was a fair, unbiased regulator.
I do believe that OCI is objective, reasonable, and makes decisions based on facts. However, it was my impression that OCI, up till now, has not been informed of several important facts.
For example, the Commissioner immediately assumed (and stated) that all of the ILAS victims’ cases were different and couldn’t be regarded as having something in common.
In fact, I think that most of the cases do have several issues in common, including:
- Most victims had indicated no need or desire for insurance, which meant that the ILAS products were unsuitable for them. Current regulations clearly state that insurance intermediaries are not allowed to recommend ILAS products to investors who have no insurance needs. Brokers are supposed to act in the best interests of clients. An unsuitable product is by definition not in the best interests of a client.
- The insurance intermediaries hid information about their commissions, such as the fact that all or most of the commission was paid upfront and not spread out over the duration of the policy. This remuneration structure rewarded aggressive selling (and mis-selling) rather than the provision of long-term service that the intermediary promised (such as investment advisory service). The Prevention of Bribery Ordinance requires brokers to obtain permission from clients before receiving a kickback from product issuers. Most brokers either did not get permission to receive a commission or else they obtained permission by deception, i.e., by omitting material facts and/or by providing a misleading representation regarding how and when the commission was paid.
- Most of the victims’ insurance intermediaries were holding themselves out as investment advisers, which meant they should have been licensed by the SFC to give investment advice. Many of them weren’t SFC-licensed. In cases where intermediaries were SFC-licensed, the intermediaries likely violated SFC’s Code of Conduct (for example, by not fully disclosing their commission). Also, ILAS policies that contain minimal insurance content may fall under the SFO definition of securities (even CIB admits this), so selling such a policy may require an SFC license to deal in securities. Most insurance intermediaries did not have this license. Carrying on a business in an SFC-regulated activity (or pretending to do so) without an SFC license is a criminal offense.
The above issues were raised with the Commissioner. It was my impression that she was open to the possibility that many of the victims’ cases do in fact have these issues in common. Personally, I was quite surprised that she did not raise any objections when I argued that many ILAS sellers likely needed an SFC license. She admitted that OCI was discussing the issue with SFC.
Does a “Good” ILAS Product Exist?
At some point in the meeting, the Commissioner claimed that there were good ILAS products. I disagreed with her.
Obviously, some ILAS products are not as bad as others, but when comparing any ILAS to a pure investment product, ILAS fees are unjustifiably higher.
To illustrate: iFAST Central is a pure fund platform that offers more funds than many ILAS products. iFAST’s platform fee ranges from 0.1 to 0.3% per year. Every ILAS product that I have seen charges 1% or more (i.e., three to ten times as much).
Why are the ILAS fees so much higher? I think it’s because the insurers are overcharging.
It seemed that the Commissioner’s idea of a “good” ILAS product is one that is packaged with a significant amount of life coverage.
If so, then I would still disagree that such a policy is “good”. Buying a pure investment product and a term life insurance policy separately is better. The fees will be lower (especially commissions), and thus the investment returns will be higher.
If there is an ILAS product that is better than “buy term and invest the rest”, then I want to know its name. I do not think it exists.
The Real Termination Rate
The Insurance Commissioner denied that more than 90% of ILAS policies are terminated early (even 25-year policies).
If this is true, then OCI should publish the data to prove it, since experts quoted in the media have said otherwise. At the moment, no one knows who to believe.
Additionally, I think OCI should publish data regarding the percentage of policyholders who maintain payments for the entire premium payment term. According to data obtained by financial adviser, Hugh Stevenson, the average policyholder stops making payments after 7.2 years. This has negative consequences for policyholders.
ILAS Was Sold in Hong Kong as Early as 1977
The Commissioner claimed that ILAS policies were sold in Hong Kong as early as 1977. This was news to me. SFC’s website shows the first ILAS products being authorized in 1990.
If ILAS has been sold in Hong Kong for nearly four decades, then the number of mis-sold policies could be higher than anyone had previously suspected.
Portfolio Bombs Are the SFC’s Responsibility
When I raised the issue of whether insurance brokers needed an SFC license to sell unauthorized funds, even through a portfolio bond, the Commissioner agreed.
According to her explanation, selling a portfolio bond is one thing; selling or giving advice on the investment products to be placed in the bond is a separate issue. She specifically said that insurance brokers who marketed funds (such as the LM MPF) were acting as investment advisers outside their identity as insurance brokers. She said this activity would fall under the SFO, and she would refer any related complaints to the SFC.
The SFC has previously denied responsibility for regulating investment products wrapped in portfolio bonds. The Insurance Commissioner’s statements suggest that the SFC can no longer do this.
Next ILAS Victims Meeting to be Held with the SFC
After Chinese New Year, there will be another ILAS victims meeting with the SFC. The specific date and time is not yet confirmed. Victims who are interested in attending can email me for more information. (firstname.lastname@example.org)