The Professional Insurance Brokers Association (PIBA) is a group of Hong Kong brokers who’ve been entrusted with the responsibility of “self-regulating” themselves since 1995. Johnson Chow (周忠信), the CEO of Centaline Financial Services, is the current chairman.
PIBA’s Code of Conduct requires members to act in the best interests of their clients. However, most PIBA members, including Centaline, blatantly disregard this regulation.
For years, these members have been flogging investment-linked assurance schemes (ILAS) embedded with indemnified commissions. These indemnity products have been outlawed in many developed countries and were recently banned in Hong Kong. One local expert describes the products as financially toxic, and another says they are scams.
Whenever a Hong Kong consumer has been scammed by a PIBA member, the consumer has no independent regulator to turn to. If he or she files a complaint, the complaint must go to PIBA.
Since PIBA exists “to serve and to protect” the interests of its members, consumers have virtually no chance of their cases being handled in a fair, impartial, and just manner.
Scammers are always safe, while victims are always screwed.
The Story of a Centaline Victim
Yip is a young Hong Konger who works as an auditor at a bank. In early 2014, he was assigned a task that required him to do research on the regulation of ILAS.
As he was studying, he realized that he had been mis-sold an ILAS by a friend and former colleague, Melanie, who worked at Centaline Financial Services—Johnson Chow’s company.
Melanie had breached several industry regulations, including one that prohibited selling ILAS to investors who have no insurance needs.
By the time Yip figured out that he was screwed, he had already contributed $12,000 HKD per month for 12 months—$148,000 in total—to an ILAS with a 25 year payment term. If he stopped making payments, his policy would be automatically terminated and charged with an 86% exit penalty. He’d only get roughly $20,000 of his money back.
The remaining $128,000 would be pocketed by Melanie, Centaline, and the insurance company that designed the ILAS, Standard Life.
Yip later learned that Standard Life had paid his friend, Melanie, and her company, Centaline, a secret upfront indemnified commission of $165,600 for luring him into the policy.
Due to its extraordinary size, Standard Life’s secret payment likely violated Hong Kong’s anti-bribery laws. An offense is punishable by up to 7 years imprisonment.
“I Don’t Sell, I Advise—Provide Valuable Advice La!”
In early 2013, shortly after Melanie had been hired by Centaline, she and Yip chatted about the nature of her new job. She said it involved giving people investment advice about “bonds, stocks, commodities, etc”. She did not mention insurance:
When Yip later playfully suggested that she was a salesperson, Melanie strongly denied it, insisting that she was an adviser:
In fact, Melanie was neither qualified nor licensed to give investment advice. She only held a license to sell insurance policies.
Nevertheless, from February to July of 2013, she sent Yip numerous WhatsApp messages offering advice on stocks, bonds, and mutual funds, trying to convince him that she was knowledgeable about investments and that he should become her client.
By pretending to work as an investment adviser, Melanie was likely committing an offense contrary to Section 114 of the Securities and Futures Ordinance. Yip has since filed a complaint with the SFC.
What Melanie really aimed to do, as opposed to giving “valuable” investment advice, was to earn a massive commission by selling Yip an ILAS policy.
Yip now says:
“Had I known that Melanie was not a SFC licensed advisor and that her advice to me was biased toward insurance products (since she could not sell any investment products)…I would not have purchased anything from her.”
A few weeks after the mis-sale, Melanie claimed in a Whatsapp conversation that she held an SFC license:
Melanie eventually obtained an SFC license, but SFC records show that she did not yet have one when the above conversation took place.
A $50 Million Dollar Plan
Melanie told Yip that her team of colleagues at Centaline had helped several clients “win” a lot of money, and she wanted to help him too, “as a friend”.
Yip finally agreed to meet her on 17 July 2013 at a restaurant to discuss her services. She brought a document labeled, “Financial Analysis”, which is shown below:
Although she only had a few months of training as an insurance broker (and no SFC license), she was confident that she could help Yip pick investment funds that would earn an average of 15% annual returns—after deducting all fees—over the next 25 years. She predicted his savings would grow into nearly $50 million HK dollars.
Her rate of return assumptions were more than double the historical average. According to the research of Wharton Professor, Jeremy Siegel, stocks have averaged only 6.5% to 7% annual returns after inflation over the past 200 years. As a whole, actively managed funds, such as Melanie was promoting, necessarily underperform the stock market average, a phenomenon which is explained by Stanford Professor, William Sharpe, in his essay, “The Arithmetic of Active Management“.
When active funds are wrapped in an ILAS policy, the multiple layers of additional high fees put a further, very significant drag on returns.
Melanie’s promise of consistent far-above-average returns were therefore unrealistic and seriously inappropriate. She maybe did not realize this, since she was inexperienced, unqualified, and unlicensed to give investment advice.
A Plan to Extract Maximum Commission
Melanie’s “Financial Analysis” (shown above) projected exactly 25 years into the future. This was probably not a coincidence.
Most ILAS savings plans have a payment term ranging from 5 to 25 years. Although the same amount of work is required to sell policies with different payment terms, insurance companies secretly pay 500% more upfront commission to brokers when they convince victims to sign on for 25 years, as opposed to 5.
Insurance companies immediately recoup this commission by pocketing their victims’ first 18 months of savings (sometimes more). Victims never know what hit them. Their policy’s account value shows that they are earning big profits, when in fact, all of their savings has disappeared. (More info HERE.)
The Broker’s Financial Needs
At their meeting, Melanie gave Yip a financial needs analysis (FNA) form. In theory, this form is used to determine which, if any, financial products are “needed” by a client. In practice, it is used to deceive clients into thinking they “need” whichever ripoff product the broker wants to sell. This is exactly how Melanie used it.
The questions in Section 1 were aimed at determining how much money Yip had, i.e., how much money Melanie and Centaline could get their hands on.
The final part of Section 1 was labeled “Recommendations and Reasons for Recommendations”. Melanie left this area blank:
She later filled it out sometime after Yip had signed all the forms. In the blank space, Melanie wrote: “Saving plan is recommended for wealth accumulation“.
She could have added that it was a savings plan recommended for her wealth accumulation, not Yip’s.
After Yip answered the questions in Section 1, Melanie immediately handed him Section 2, which was labeled, “Only Applicable to Investment-Linked Policy”. She never explained why investing in funds through an insurance policy was preferable to the much cheaper and more flexible option of investing in ETFs or using a regular fund platform like Fundsupermart.
Section 2 contained a question which asked, “What is your target horizon for insurance policy / investment linked assurance scheme?” It contained another question which asked, “For how long are you able to contribute to an insurance policy and/or investment plan?”
For both questions, Melanie told Yip he should tick 20+ years so he could “get the maximum bonus”, meaning his account would be credited with extra “free” fund units.
Melanie did not disclose that a 20+ year policy would earn her the maximum upfront commission. She also did not explain that the bonus was deceptive and imaginary, since the “free” fund units would be taken back by fees.
When Yip agreed to ticking 20+ years, he says he had no desire to be “locked up” in an ILAS for that period of time. He thought he was just indicating that he planned to invest for 20 years or more, like anyone else his age. Neither Melanie nor the FNA form had mentioned a 20+ year lock-in.
The next part of the FNA was labeled “Risk Profile Questionnaire (RPQ)”.
The RPQ stated that no product should be recommended before the questionnaire was completed. However, an ILAS had already been recommended, as the entire form was labeled “for ILAS only”, which meant that the RPQ was inherently flawed and self-contradictory.
Additionally, the RPQ began with a loaded question, asking, “What are your purposes of buying insurance product?” Yip had no intent at this point to buy an insurance product or any product, even though the form was telling him that he did. He was under the impression that his financial needs were being analyzed.
Yip ticked that his “purposes of buying insurance product” were Savings and Investment. He did not tick any option, such as Life Protection, which would have justified his buying an insurance policy.
Over the past several years, four different Hong Kong regulators—SFC, HKMA, HKFI, and OCI—have all issued circulars stating that ILAS policies are not suitable and should not be recommended to investors who have no insurance needs. Unless all of those regulators were mistaken, Melanie should not have recommended an ILAS to Yip.
The Harvest Wealth Investment Scam
Based on her “analysis” of Yip’s financial needs, Melanie concluded that he should purchase a 25-year Harvest Wealth Investment Plan.
For a “limited time only”, Standard Life was offering free fund units equivalent to 62.5% of all contributions paid during the first 18 months of the plan. These “free” units would make the account value show an instant 62.5% profit.
In the coming days, Melanie would pressure Yip to hurry before the offer expired:
She did not explain the fraudulent nature of the “bonus”, possibly because she did not understand it herself.
Cheaper than Buying Stocks!
Yip had some experience buying stocks and bonds, but he had never invested in mutual funds and had never heard of ILAS.
According to Melanie, ILAS was a “great bargain” because it allowed free switching of mutual funds. She told him that he would save money on transaction costs if he stopped buying stocks directly and instead bought stocks indirectly via mutual funds in an ILAS.
She was wrong. Yip could not possibly save money by paying additional fees to her, Centaline, Standard Life, and various active fund managers—fund managers who incur their own stock trading fees which would then be passed on to Yip.
Nevertheless, Melanie gave Yip a flawed and misleading fee comparison allegedly showing how he would save over 40% in fees if he switched funds every single day of the year:
She never explained why it made sense to actively trade fund managers when the fund managers were being well-paid to actively trade for him.
Nor did she mention that regular fund platforms allow free fund switching at a tiny fraction of the cost of ILAS. For example, Standard Life’s upfront fees were more than 600 times higher than iFAST Central’s.
My Client Earned 18% in One Month Investing in Super Safe Stuff!
Several days after Melanie recommended the ILAS, before Yip had made a decision about whether to follow her advice, she sent him a Whatsapp message boasting about having helped another client earn 18% in one month, “net of all charges”, investing in “super safe stuff”:
She showed him a snapshot of her client’s account statement to “prove” that she was telling the truth:
The account statement showed the returns of a few funds. One fund had gone up by 3%, another by 6%, and only one had gone up by 18%. It wasn’t clear whether it had gone up 18% in one month or in one year (probably the latter).
The fund that earned 18% was a biotechnology fund—far from “super safe”.
“All of Our Clients Earn Annual Fees Back in a Few Days!”
When Yip expressed concern about the ILAS policy’s high fees, Melanie sent him the following WhatsApp message:
Yip’s first ILAS payment would be $12,000. Melanie claimed that he would earn back the annual fees in just a few days. If that were true, he’d need to get a return of 1,380% just to recoup Centaline’s secret $165,600 commission.
Suggesting that anyone could earn so much money so quickly is utterly preposterous, so presumably Melanie did not mean that Yip could earn back Centaline’s commission in a few days. Instead, she probably meant that he could earn back the ILAS fees of over 6% per year. If so, then Yip would need to earn at least 2% per day in order to recoup 6% “in a few days”.
Melanie spoke as if this were guaranteed. If so, then “all of her clients” would be earning about 730% per year (2% per day x 365 days per year), which is also preposterous. Perhaps this is why Melanie encouraged Yip not to “focus on the fees”.
She told him to instead focus on “what really mattered”, i.e., her investment advice. She failed to mention that was not licensed to give investment advice.
“We Are Remunerated for Providing Long Term Advice”
The day after Melanie sent the above WhatsApp message, she sent Yip an email in which she elaborated even further on the fees that her company collected. She claimed:
“This is a long term relationship and our remuneration is structured that way to provide incentive too. Unlike insurance agents, we are not agents. We are consultants and are remunerated for providing long term advice. We have the incentive to provide good advice as we will receive a % of your account value. Rest assured that, it won’t deduct from your investment income. Standard Life shares their fee income with us. The only expense you need to pay for is the platform fee to Standard Life. NO advisory fee to us, NO fund fee to fund houses. Standard Life will share with us.”
The entire paragraph was loaded with lies, misrepresentations, and contradictions. Standard Life did not just share fees, it advanced the fees in a form akin to bribery. The remuneration structure was designed to incentive high pressure sales tactics, not a long-term relationship or good advice. Melanie and Centaline would keep Yip’s money whether or not they provided the 25 years of service they were secretly paid for in advance.
Melanie Quit Her Job Within Months of Pocketing 25 Years’ Worth of Fees
All of Melanie’s lies and unrealistic forecasts eventually had the desired effect on Yip. She convinced him to sign the paperwork for a 25-year ILAS.
Standard Life immediately paid her and her company a $165,600 commission. Standard Life would recoup this commission by deceptively pocketing Yip’s next 18 months of payments.
Although Melanie had been pre-paid for 25 years of work, she had no obligation to return the money if she did not finish the job. As long as Yip made payments for 18 months, she’d face no clawback. If she wanted to, she could take Yip’s money and run, which is exactly what she did.
She quit her job at Centaline less than a year after selling Yip a “long term relationship”.
Yip claims that the funds Melanie recommended dropped in value by about 15%, precisely the opposite of the 15% annual profits she had predicted.
“Too Stubborn to Get It”
In early 2014, after studying ILAS regulations for his banking job, Yip realized that he had been mis-sold. He immediately confronted Melanie:
Although Melanie claimed that she told Yip that ILAS was an insurance product, in her email correspondence, she exclusively referred to it as a “platform” for investing in funds.
Perhaps realizing that Yip’s allegations were true, she defended herself by saying that ILAS was an insurance product that “has no insurance protection”:
After Yip pointed out that the regulations forbid her from selling ILAS to him, given that he had no insurance needs, Melanie claimed that, from her “professional perspective”, Yip did in fact have insurance needs, but he was “too stubborn to get it”, suggesting that it was ok for her to misrepresent the insurance element of the policy, since this was the most efficient way to convince Yip to buy what he allegedly “needed”:
No Evidence of Mis-Selling Or Negligent Conduct
Over the next few months, Yip did a lot more research on ILAS and considered his options. By summer, he decided he had no choice but to stop contributions, file a complaint, and demand a refund. On 12 August, Yip met with representatives from Centaline to explain how he had been mis-sold and why he deserved a refund.
Three weeks later, Centaline sent him a short reply:
“After truly reviewed all the documents, considered all the information, and contacted with Ms. Melanie for her confessions, we concluded that there is no evidence showing that Ms. Melanie, our ex-Consultant had mis-selling practices or any negligent conduct. Ms. Melanie performed her duty in compliance with our internal policies and statutory requirement. If there is no additional information, no action will be taken for this issue.”
Yip was angry that Centaline, without explanation, had disregarded all the evidence he had provided. He demanded a better response. After more phone calls and another meeting, Yip finally received a more detailed reply letter from Centaline’s compliance officer, Lomax Wong.
Unfortunately, Lomax’s letter was deeply unsatisfactory. It contained multiple factual errors, misquoted the regulations, and continued to ignore some of Yip’s points.
The letter’s main takeaway was that Melanie’s conduct was irrelevant. Even if some of the things she said were blatantly false, misleading, and unreasonable, Centaline would never give back his money. The company would forever point to the fact that Melanie conned him into signing a statement saying that he agreed that the ILAS was suitable for him. It did not matter that his belief was based on Melanie’s lies and misrepresentations.
Yip Contacts Johnson Chow
On 26 September, Yip sent the following email to Centaline’s CEO, Johnson Chow:
By way of introduction, I am a customer who purchased the ILAS policy from Centaline last year in July, in which I believe I was mis-sold by your Company. Accordingly, I reported my complaint to Lomax Wong in August 2014.
The reason why I am writing this email to you is because Lomax Wong has not been handling my complaint in a fair manner and he also appears to be not familiar with the regulation.
As you are the CEO of Centaline and also the Chairman of PIBA, I believe you would be very familiar with the regulation and would look at my case in an objective and fair manner, and therefore I would like to discuss my complaint with you directly to seek your views. Attached are my letter to Lomax Wong, and his reply letter to me.
Can you please suggest a time to meet and I can discuss with you my case directly
To Yip’s surprise, Chow agreed to a meeting on Oct. 6. Lindell Lucy, author of this blog, was present at that meeting.
Johnson Chow: “Even if the sales process breached the regulation, so what? Maybe get penalized by PIBA? It’s ok.”
At the beginning of the meeting, before any discussion had taken place, Chow immediately told Yip that he would not refund his money. He then refused to speak in English, apparently in an attempt to silence Lindell, who had been outspoken in a previous meeting with Lomax Wong.
The whole meeting with Chow lasted almost an hour, but Yip summarized it in five key points in a letter which he cc’d to the Office of the Insurance Commissioner a few weeks later:
On 3 November, Lomax replied to Yip’s letter, stating:
“We do not agree with the points stated in your letters as we believe that they were all garble statements with incomplete information. We will not confirm the information stated in those letters.
Based on the information we have found, as well as the evidences after meetings with you, we believe that we had already done our best to solve your inquiries.”
Chow has welcomed Yip to file a complaint with PIBA if he is unsatisfied with Centaline’s decision.
Seeking a Viable Route to Justice
Yip does not believe that PIBA would fine Centaline, since PIBA is headed by Chow. Even if PIBA did fine Centaline, Chow has already stated that he does not care. He will just pay the fine and keep Yip’s money.
Consequently, Yip has had to explore other ways to pressure Centaline to give back his money.
Securities and Futures Commission (SFC)
Yip believes that Melanie and Centaline have broken some of the laws contained in the Securities and Futures Ordinance (SFO), not just in their dealings with him, but in their dealings with other clients as well. Yip has written to the SFC, shared his information, and has asked for an investigation. In one of his letters, he says:
“I understand that SFC does not have the legal power nor can SFC arbitrate a dispute between an investor and a third party. However, I do believe that SFC has the power as a regulator to influence the captioned entities to do the right thing for the public’s interest. In substance, the ridiculously high commissions earned by Centaline Financial Services Limited are the hard-earned saving of its customers, and it got its customers into purchasing ILAS by violating the SFO. I hope that SFC will utilize such power, shall SFC conclude that the captioned entities indeed violate the SFO, to remediate the damages that they had done to the public.”
Office of the Commissioner of Insurance (OCI)
Yip has also filed a complaint with OCI against Standard Life. Yip argues that Standard Life obtained his money by breaching the industry’s Code of Conduct.
In a letter to the Insurance Commissioner, Annie Choi, Yip has said:
“The HKFI Code of Conduct [Section 44 and 45] requires Standard Life to conduct its affairs “honestly and fairly and in a manner consistent with the public’s interests” and “should seek to promote and enhance (and should not damage) the insurance industry’s reputation and standing as a responsible service provider and good corporate citizen”…
In its letter [to me], Standard Life did not even attempt to explain why its product and remuneration structure were considered fair and consistent with my best interests. Obviously, the remuneration structure only served Standard Life’s and Centaline’s interest.
If all the regulators in HK agree that ILAS should be sold to someone who has insurance needs, I would expect that any ethical company that is fair and concerned about customers’ interests would accept a refund request from a mis-sold customer. Standard Life is absolutely not complying with HKFI’s Code of Conduct in this regard. I believe it is concerned about its own interest in retaining profit, rather than the public’s interest.”
Independent Insurance Authority (IIA)
When the IIA is established within the next few years, ILAS victims will be able to file complaints with it, rather than self-regulatory organizations like PIBA.
Officials from OCI have told Yip that the IIA will not investigate cases that PIBA has already closed. For this reason, Yip has instructed both OCI and SFC to not refer his case to PIBA. He wants to wait to send his complaint to IIA—even if that means waiting three years—so that Chow and PIBA do not get a chance to screw him.
So far, SFC and OCI have allowed Centaline and Standard Life to go unpunished for scamming Yip and thousands of other Hong Kongers. Yip is justifiably outraged, and he is sharing his story with any news organization that is willing to listen. He hopes that media coverage will shame Centaline, Standard Life, and the regulators to do the right thing. Journalists who wish to speak with Yip may contact Lindell at email@example.com.
Below are copies of all Yip’s ILAS documents. Some of his personal information has been redacted.
Financial Needs Analysis (FNA)
Important Facts Statement (IFS) and Declarations
Harvest Wealth Investment Plan – Brochure
A pdf copy of the September 2012 version of the brochure can be downloaded by clicking HERE. This is the version that was given to Yip.
Melanie’s Explanation of ILAS, Centaline’s Services, and Related Fees
Melanie’s Email about Dollar Cost Averaging
Example Fund Switching Confirmation
Harvest Wealth Investment Plan – Application Form
Email from Melanie Asking Him to Print and Sign the Illustration Document
Cooling Off Notice
Below are copies of letters that Yip has sent and received from Centaline, Standard Life, SFC, HKFI, and OCI.
Early Emails with Centaline and Standard Life (Aug. 9 – Sept. 10, 2014)
Centaline to Yip (Sept. 2, 2014)
Centaline to Yip (Sept. 10, 2014)
Yip to Centaline (Sept. 15, 2014)
Centaline Compliance Officer, Lomax Wong to Yip (Sept. 24, 2014)
In Point 1 of his letter, Lomax misquoted HKFI regulations, leaving out the words, “as in (b) above”, perhaps in an attempt to conceal what he believed to be a blatant regulatory violation. Here is a screenshot of the regulations:
Yip to Centaline CEO, Johnson Chow (Sept. 26, 2014)
Yip to Centaline CEO, Johnson Chow (Oct. 7, 2014)
Yip to Centaline (Oct. 27, 2014)
Centaline to Yip (Nov. 3, 2014)
Yip to Centaline (Nov. 7, 2014)
Yip to Centaline (Nov. 11, 2014)
Yip to Centaline (Dec. 2, 2014)
Centaline to Yip (Dec. 5, 2014)
Yip to SFC (Dec. 15, 2014)
[This letter has been temporarily removed as of May 3, 2015.]
SFC to Yip (Dec. 24, 2015)
Yip to SFC (Dec. 31, 2014)
[This letter has been temporarily removed as of May 3, 2015.]
SFC to Yip (Jan. 23, 2015)
Yip to SFC (Jan. 30, 2015)
[This letter has been temporarily removed as of May 3, 2015.]
Correspondence with HKFI (Nov. 19 & Dec. 11, 2014)
Correspondence with HKFI (Feb. 6 & March 4, 2015)
Yip to Standard Life (Sept. 9, 2014)
Standard Life to Yip (Sept. 12, 2014)
Yip to Standard Life (Sept. 15, 2014)
Standard Life to Yip (Sept. 19, 2014)
Yip to Standard Life (Sept. 22, 2014)
Standard Life to Yip (Oct. 30, 2014)
Yip to OCI (Nov. 13, 2014)
OCI to Yip (Nov. 20, 2014)
Standard Life to Yip (Dec. 19, 2014)
Yip to OCI (Dec. 20, 2014)
Standard Life to Yip (Dec. 30, 2014)
OCI to Yip (Jan 2, 2015)
Yip to OCI (Jan 2, 2015)
OCI to Yip (Jan 9, 2015)
Yip to Standard Life (Jan 12, 2015)
OCI to Yip (Jan. 16, 2015)
Yip to Standard Life (Jan. 29th, 2015)
Standard Life to Yip (Jan 29, 2015)
Standard Life to Yip (Jan 30, 2015)
Standard Life to Yip (Feb. 6th, 2015)
Standard Life maintains that Melanie’s ILAS recommendation to Yip was compliant with the HKFI regulations in effect at the time. Those regulations stated:
“If the [financial needs] analysis result indicates that the potential customer has investment needs and his/her personal and financial circumstances may be suitable for investing ILAS product(s), then insurance intermediary may propose the potential customer to consider suitable ILAS product(s).”
As early as 2009, various Hong Kong regulators have issued circulars stating that ILAS is not suitable for investors who have no insurance needs. Consequently, Standard Life’s argument that Melanie’s recommendation was suitable for Yip and thus complaint with HKFI regulations is not supported by the facts.