As former CEO of the Consumer Council, you developed a reputation as a consumer champion. I am writing to you about an issue which adversely affects the life savings of millions of consumers of investment-linked insurance products (ILAS). I hope you will take this matter very seriously.
At the beginning of this year, I filed a complaint with your office against the SFC. I alleged that the SFC negligently—and perhaps deliberately—abdicated its legal authority to regulate the conduct of individuals and corporations who sell ILAS products and give advice regarding the underlying investments.
Many of these products are outright scams, and there is no shortage of industry insiders who will verify that this is true. (Just browse through the info on this blog.) What all of these scams have in common is that the manufacturers of the scams—big international insurance companies—pay gargantuan undisclosed commissions to the ethically compromised individuals who sell the products.
If SFC had not abdicated its regulatory authority, these scammers would have been required to disclose the gargantuan commissions they received, which would have alerted many potential victims to the dangers of the trap they were falling into.
Actually, if SFC had been responsible, it never would have authorized scam ILAS products in the first place. The products never should have reached the market.
Consequently, I believe SFC should be held accountable for the plight of most ILAS victims (hundreds of thousands, if not millions). I also think the SFC ought to pay compensation to the victims. The SFC can certainly afford it. A recent news report states that the SFC is “drowning from too much money”.
In response to my complaints about the SFC, your office sent me the following reply:
Your office instructed me to give SFC a chance to address my questions. If SFC did not do so, or if SFC “revealed any evidence of maladministration”, the Ombudsman said it would then consider pursuing an investigation.
I have given SFC ample time to reply to my questions, but it has not done so. I even visited SFC’s office three weeks ago, accompanied by several victims and a member of the Legislative Council. At that meeting, SFC continued to refuse to answer any questions.
International Adviser’s most recent “Top Story” was about a Hong Kong adviser named Jessica Cutrera who made unusually honest comments about OCI’s recent ban on the payment of indemnity commissions—a practice which some regard to be a form of bribery.
One effect of OCI’s “ban on bribery” was the death of savings scams, like Zurich Vista, which have indemnity commissions embedded within them.
Commenting on the scams, Jessica Cutrera said, “These indemnified commission contractual saving plans which have been sold in Hong Kong for years – but are illegal in many other developed markets – are long overdue to be removed from sale.”
“I do think there will be a demise of the firms whose primary business was selling these very lucrative savings plans.
“These products are financially toxic and eliminating the sale and the seller is a good thing. Plenty of the IFAs in Hong Kong will survive and thrive, particularly those that have always offered a diverse range of products and services to their clients, not limiting themselves to selling savings plans, and who put their clients’ interests ahead of commissions.
“I sincerely hope that the sale of these or similar products that are harmful to investors does not ever recover.”
While it is laudable that International Adviser would publish a story about an adviser with the audacity to speak the truth, it must also be noted that International Adviser had no qualms about taking ill-gotten money in exchange for promoting a ‘financially toxic’ savings plan—RL360’s Quantum—on a giant banner right next to Cutrera’s scathing quotes:
Screenshot of International Adviser’s article about Jessica Cutrera, surrounded by a giant ad for RL360’s Quantum
Quantum is one of the most notorious savings scams in the Middle East. Numerous victims of the product have shared their horror stories on THIS discussion forum. One angry investor calls Quantum a “piece of shit” and advises other victims to “get out of this product today”.
Presumably, RL360 paid for ad space because it believes International Adviser’s main audience is the type of people who would sell “piece of shit” savings plans like Quantum. If that is true, then International Adviser should maybe consider changing its name to something more appropriate, like this:
Alternatively, International Adviser could, in the future, choose to have more scruples about the kinds of products it allows to be promoted on its website.
This morning, a large group of ILAS victims met with 8 representatives from the Securities and Futures Commission. One by one, each victim told his or her story. Afterwards, Lindell Lucy (author of this blog) gave a PowerPoint presentation which made the case that sales of ILAS fell under SFC jurisdiction—contrary to SFC’s persistent denial. A copy of Lindell’s PowerPoint can be downloaded HERE.
When an SFC executive was pressed to answer whether selling an investment fund within a portfolio bond was an SFC-regulated activity, he answered, “It’s not the right time or place to make a determination on these types of things.”
He was correct. The right time to make a determination on these types of things was at least two decades ago.
Some of the victims at the meeting had been sold a scam investment fund wrapped in an ILAS portfolio bond. These victims previously filed complaints with the Office of the Commissioner of Insurance, but OCI rejected their complaints, arguing that sales of investment funds (even within portfolio bonds) fell outside of OCI’s jurisdiction. In a meeting held on Feb 9th, Insurance Commissioner Annie Choi said that this activity fell under SFC jurisdiction.
An SFC executive declined to comment on Annie Choi’s position.
However, he said that SFC continued to stand by its position as stated in THIS 2009 circular.
When it was pointed out that many of the assumptions and statements in that circular were false, SFC made no comment—just ‘listened’.
In many parts of the world, commission-driven sellers of dodgy insurance policies and investment funds euphemistically describe themselves as “financial advisers”. Some stretch the truth even further, calling themselves “independent” financial advisers.
This misleading sales tactic has now been outlawed in the UK, but British insurance salesmen who expatriate to poorly regulated foreign countries continue to abuse the English language, as well as the gullibility of inexperienced investors.
Neil Robbirt, CEO of Global Investments, is one of these British salesmen.
Reckless Disregard for Thai Law
Global Investments has been headquartered in Thailand since 1994. The company’s website states that it has sold financial products to over 3,000 people, and that it is “proud to be one of the most reputable and well-established names in the financial services industry”.
An official from the Thai Securities and Exchange Commission (SEC) has confirmed by email that Global Investments and Neil Robbirt are not licensed to sell investment products in Thailand, a fact which can be verified by checking here on the SEC’s website.
The penalty for selling investment products in Thailand without a license is between two and five years’ imprisonment and a fine of 200,000 baht to 500,000 baht.
An official from the Thai Insurance Commission confirmed by phone that Global Investments is also not licensed to sell life insurance policies.
The penalty for selling insurance policies in Thailand without a license is up to 6 months imprisonment and a fine of 50,000 baht.
Ponzi Scheme Promoter
Global Investments has left a trail of evidence on the internet showing how it misleadingly and negligently promoted the LM Managed Performance Fund (MPF), an unregulated collective investment scheme which is now known to have been a Ponzi scheme. The South China Morning Post has reported that the fund paid upfront commissions as high as 15%. The commission levels were so far above normal that it immediately sent up red flags to numerous industry insiders, such as Martyn Terpilowski, who identified the fund as a Ponzi scheme 4 years before it collapsed.
Below is an advertisement which Global Investments apparently paid for, in its attempt to boost sales and cash in on LM’s juicy commissions:
The ad claims there were “no fees”, even though the fund manager (LMIM) collected 5-10% per year in fees and paid salesmen up to 9% upfront commissions at the time. The ad also emphasizes that LM was regulated by ASIC, while neglecting to mention that the MPF was not.
The ad appears to target the general public, despite the fact that the MPF was a “professional investor” fund, not intended or suitable for ordinary retail investors.
“Poacher Turned Gamekeeper”
One ex-client alleges that Global Investments sold the LM MPF to over 100 people.
An LM victims group leader says that the company “topped the league table of all unlicensed Thailand-based ‘financial advisers’—both in number of clients trapped in MPF and total value of losses caused.”
After the MPF collapsed, CEO Neil Robbirt joined hands with several other “advisers” who had been flogging the fund. Together, they formed the executive committee of the “Advisers Committee for Investors” (ACI), a group of salesmen purporting to be fighting for the best interests of the people they had screwed. (See here.)
One LM victim cynically describes the ACI as “poachers turned gamekeepers”. Many believe that one of the main objectives of the ACI is to deflect attention away from the executive committee’s own greedy, reckless, and in some cases illegal behavior.
Luring Retirees into High Risk Funds
In an article originally published in the Bangkok Post, Neil Robbirt claimed that most of his clients were retirees and that he convinced them to put their money in funds that were allegedly earning returns of 12-14%.
In the same article, he also plugged the LM MPF’s “fixed rate of return” of 8.32%, which was itself so high that it was too good to be true.
On his company’s website, Mr. Robbirt is quoted as saying, “discretion is guaranteed in the interests of each and every Global client, and we believe we have developed a renowned reputation based on integrity, professionalism and the provision of expert advice.”
A legitimate “expert” financial adviser should know that high rates of return are obtained by taking high risks. An expert adviser should also know that it is reckless for retirees to allocate large portions of their portfolio to high risk assets, as retirees cannot afford to lose a lot of money. Most retirees are too old to reenter the workforce and rebuild a lifetime of savings.
It is therefore hard to understand how funds allegedly earning 12-14%, or even 8%, could be construed as in the best interests of retirees.
A 100% Return Becomes a 100% Loss
In the same Bangkok Post article mentioned above, Mr. Robbirt boasted about a property fund he was recommending. He said he expected investors to double their money.
This particular property fund invested in a “luxury development outside Pattaya called Ocean’s Edge, [consisting] of 32 exclusive penthouse-style apartments with infinity pools developed by an Australian Team.”
After being introduced by a “friend”, one of Global Investments’ ex-clients says Mr. Robbirt convinced him to invest 2.5 million baht in the Ocean’s Edge fund in 2007. He was told he’d get his money back plus 100% profit within three years. He was also promised an additional 15% interest for each year that the money was not repaid on time.
As of 2015, no money has been repaid. The apartments remain empty, as no buyers have materialized.
The ex-client is not optimistic that he will ever see his money again.
Making matters worse, he says Mr. Robbirt also convinced him to sink tens of thousands of pounds in the LM MPF Ponzi scheme, and tens of thousands more in a Zurich policy which he eventually cashed in at a 60% loss.
Below is a promotional video for the unsold Ocean’s Edge apartments:
The ex-client claims that Mr. Robbirt put a deposit on one of the Ocean’s Edge apartments himself. He says Mr. Robbirt used this fact to underline his confidence in the inevitable success of the fund he was promoting. When he was finished promoting the fund, Mr. Robbirt withdrew from the venture and recouped his deposit back.
Mr. Robbirt now claims he never earned a penny promoting the fund, and he takes no responsibility for his clients’ losses or the fund’s failure.
How a “Financial Adviser” Earns His Pay
Another former Global Investments client, who was also introduced by a friend, says Mr. Robbirt convinced him to put over half a million pounds in the LM MPF. The victim describes his experience with Mr. Robbirt as follows:
“Our last meeting was in February 2013. The agenda contained an item expressing reservation over my [relatively high] exposure to the LM MPF. At the meeting the item was met with what could almost be described as a rebuke for suggesting I should decrease my exposure to LM MPF. In no uncertain terms was I assured of the depth, quality and strength of the fund and consistency of performance and he saw no reason to adjust my position.
Less than a month later 2/3 of my life savings had gone.
I raised every aspect of my complaint with him over email and I have asked that at the very least all the LM commission he earnt is returned to me. He would not reveal his earnings but in my estimation it is over £80,000. He has point blank refused to consider any return.”
Dishonest as Ever
Currently, the “About Us” page of Global Investments’ website says:
“Our philosophy is based on service through best advice. That means placing our client’s best interests at the heart of everything we do. As an independent company we are not tied to any one product or service provider. This translates into unbiased advice, fair and transparent terms and conditions, highly competitive fees and charges and a range of solutions from global financial institutions in highly regulated jurisdictions with routes of recourse and government backed investor protection schemes.”
Before trying to determine how many lies and half-truths are in the above paragraph, consider the following facts:
LM victims have had no “routes of recourse” in any jurisdiction, let alone a “highly regulated” one.
An “independent” financial adviser, as defined by British law, is one who has no conflicts of interest, i.e., one who does not accept commissions from product issuers and is licensed to give investment advice on all products available in the market. An “independent” financial adviser only receives payment directly from his/her client.
Global Investments once paid for advertising in a Thai magazine, but rather than try to sell unbiased advice, it attempted to sell a high commission investment fund (the LM MPF), acting as the de facto marketing division for the fund manager. Global Investments’ website features prominent information about high commission, ripoff insurance wrappers (portfolio bonds), but the website does not mention low-cost, no-commission investment products, such as ETF index funds.
Global Investments has withheld information from clients about the commissions it has received. In some cases, Global Investments has claimed that there were “no fees”. News reports indicate that the commissions received by Global Investments were exorbitant.
Global Investments Expands Into Hong Kong—Without a License
Recently, Global Investments upgraded its website, globalinvestments.net. The company purports to have an office in Hong Kong, situated in the famous and very expensive Two IFC Tower. Former clients say they were previously unaware that Global Investments had an office in Hong Kong.
Screenshot of the globalinvestments.net home page, taken on March 30, 2015
Global Investment’s main website links to an affiliated website, qropdirect.com, which contains information that aims to convince former British residents to transfer their life savings into high commission investment and insurance products.
Screenshot of qropsdirect.com home page, taken on April 2, 2015
There are no records that Global Investments, QROPS Direct, or Neil Robbirt are licensed to sell insurance and investment products in Hong Kong. Searches on the SFC, CIB, and PIBA websites come up empty.
The penalty for selling investment funds in Hong Kong without a license is up to 7 year imprisonment and a fine of $5 million HKD.
Selling insurance policies without a license is punishable by up to two years imprisonment and a fine of $1 million HKD.
Global Investments’ Hong Kong Office Is Merely “Virtual”
Global Investments’ Hong Kong address is listed as the 19th floor of Two IFC. A Google search for this address brings up links to a company called ServCorp, which offers a cheap service known as the “virtual office”.
Below are some ads excerpted from ServCorp’s website:
“A Business of Any Size Can Sound Like a Fortune 500 Company”
ServCorp openly admits that it helps small financial services companies dupe potential clients into believing that those companies are more well-established than they really are. The service is a godsend for fly-by-night operators like Global Investments, who do not have a license to operate legally.
“Your Calls Will Find You No Matter Where You Are”
ServCorp offers companies based in one country (such as one with a weak legal and regulatory system) the opportunity to appear to be based in another. Global Investments apparently found this service to be appealing and potentially lucrative.
A Phone Call with a “Global Investments” Receptionist
I made a few calls to the phone number listed under Global Investment’s Hong Kong address. I recorded those phone calls and have uploaded them below.
In the first call, the receptionist answered the phone saying, “Global Investments Hong Kong Limited. How may I help you?”
When I told her that her company appeared to be unlicensed, she tried to transfer me to “Mr. Neil”, the company’s CEO. I told her I did not want to talk to Mr. Neil, and that I instead wanted to talk to her. When I asked her whether she worked for ServCorp, she admitted that she did.
She then transferred me to Mr. Neil, so I hung up.
When I called again, I asked if ServCorp had a policy of checking whether its clients were licensed to do the businesses they were purporting to be doing. The receptionist said there was no such policy. She then transferred me to another receptionist who pretended that she did not work for ServCorp but instead worked for Global Investments.
At one point, she said she could not hear me and hung up. I am not sure if she was lying.
When I called again, the receptionist continued to pretend that she worked for Global Investments and not ServCorp, so I asked how long Global Investments had been selling investment products in Hong Kong. She said, “Since 2003”.
I repeated that the company appeared to be unlicensed. I asked her if she could tell me whether Global Investments was a “legitimate company”.
She said, “I cannot provide the information for you at this moment.”
I told her that information on the internet indicated that Global Investments had historically been based in Thailand. I asked whether Mr. Neil was currently in Hong Kong or Thailand. She said she didn’t know.
I was eventually transferred to Mr. Neil again, so I hung up.
When I called again, I pointed out that both Global Investments and ServCorp had exactly the same address. I asked the receptionist whether she worked for both companies. She said no. I told her I thought she was lying.
I pointed out again that Global Investments was not licensed to sell investment products, and I explained to her that selling investment products without a license was a criminal offense in Hong Kong.
I told her I wanted to know ServCorp’s policy regarding clients who were breaking the law. I asked whether ServCorp would continue to facilitate illegal activity, or whether it would terminate its business relationship and report illegal activity to authorities.
Before she could answer, we were cut off by a bad connection.
When I called back, the receptionist would not tell me anything about ServCorp’s policy regarding clients who were breaking the law. I concluded by telling her I thought ServCorp should stop doing business with Global Investments and report “Mr. Neil” to the authorities.
Ex-Clients Seek Justice
Many ex-clients of Global Investments have lost significant portions of their retirement savings. They have spent more than two years trying to recover their money, but so far, they have had no success.
Earlier this week, both the Thai and Hong Kong regulators were informed of Global Investments’ unlicensed business operations.
To date, the company has been allowed to operate outside the law for over twenty years without being held accountable.
Indignant ex-clients are hoping that regulators will finally bring Neil Robbirt and his company to justice.
According to insiders interviewed by The Sun, some unnamed insurers and corporate insurance brokers—with offices in both Hong Kong and Macau—have teamed up to lure unsuspecting victims to Macau, where regulators have not yet banned the corrupt practices and ripoff products which inspired the creation of this blog.
The scammers are specifically targeting mainland Chinese, baiting them with free plane and ferry tickets to Macau, where the victims can be fleeced with impunity. The Sun did not say whether Hong Kongers and local residents of Macau were also being targeted.
[Note: Macau is the “Las Vegas of Asia”, well-known for its casinos. It is just a one-hour ferry ride from Hong Kong.]
The Scammers Make Headlines in Macau
Two days after The Sun reported that mainlanders were being targeted, the Macau Business Daily ran an article titled, “Caution 101“, which is featured very prominently on the newspaper’s home page:
The article states, “Business Daily has approached the Monetary Authority of Macau and the Macau Insurers’ Association to verify the reported practice but had not received a reply by the time the story went to press.”
Media inquiries and headlines such as the one above are no doubt putting pressure on Macau’s regulators to bring the city’s regulations in line with Hong Kong’s.
Hong Kong is currently under pressure to bring its regulations in line with the UK’s.
Who Are the Unnamed Scammers?
The latest reports didn’t say which insurers and corporate insurance brokers were targeting mainlanders, but one of them is likely Convoy. According to Convoy’s 2014 Interim Report, it had 17 brokers in Macau, and its business was growing:
According to the Monetary Authority of Macau’s website, there are only four corporate insurance brokers authorized to sell ILAS in Macau (see red circles):
One of the four corporate brokers is Sun Hung Kai. A couple of years ago, an ILAS victim told the author of this blog that Sun Hung Kai was heavily promoting Zurich Vista (a very notorious ILAS) and promising so many “free” fund units that it would offset losses incurred by surrendering existing ILAS policies to pay for a new Vista policy.
According to MAM’s website, there are eleven life insurers authorized to do business in Macau:
Below are the provisional 2014 Macau life insurance business statistics for January to September, showing which insurers did the most life insurance business (though not necessarily the most ILAS business):
On Jan 29, Apple Daily ran an article about a Hong Kong Professor who has recently been very outspoken against ILAS. The professor was ripped off by the insurance company, AXA. He is concerned that thousands of other AXA policyholders may have been ripped off as well. The title of the Apple Daily article is 林本利買壽險遭誤導. So far, the article has gotten over 17,000 views and more than 100 Facebook “Likes”. Here’s a screenshot of the article, featuring a picture of Professor Lam:
Professor Lam writes a column every week for Next Magazine. Each of the past four weeks, he has written about ILAS. In his latest article, he cited this blog (to my surprise). Here are links to his last four articles:
On Feb 11, Mingpao ran an article titled 不良銷售投連險 議員促修例監管. The article describes the problems with the insurance self-regulatory system and mentions that LegCo member, Sin Chung-kai, has recently been helping about 20 ILAS victims. The article is spreading via social media and has so far received 40 Facebook “Likes”. Here’s a screenshot of the article, featuring a picture of Sin Chung-kai:
On Feb 12, the day after the above article was published, Next Magazine also ran an article on ILAS that included a number of victims’ stories. It was titled, 變種保險失控 食人唔lur骨. If you can’t read Chinese, it does not matter. The picture of victims caught in the jaws of a bear trap tells you all that you need to know:
Note: The above article is pay-walled, so you can’t read it unless you have an online subscription to Next Magazine. A hard copy of the magazine can be purchased at 7-Eleven or Circle K for $20 HKD. The article is four pages long and begins on page 66. (Send me an email if it is sold out and you can’t find it.)
One of my contacts, an ILAS victim, was recently interviewed by a Chinese news organization, different from any of those organizations cited above. There will likely be an article coming out soon. I will link to it below when/if it is published.
(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)
Most ILAS policies provide little or no life cover, which means they are not suitable for investors who need life cover. However, regulators say ILAS products can only be sold to investors who need life cover. This means that most ILAS policies are suitable for no one. It’s impossible to sell them without “mis-selling” them.
Note: I mis-borrowed this cartoon from Martin Shovel.
SFC Subtly Suggested that Many ILAS Products Are Ripoffs
“there are many pure investment products on the market which tend to have lower initial charges, are more negotiable than ILAS and do not give rise to the same penalties for early termination. These types of products would appear to be more suitable for, and attractive to, those who are principally concerned with investment and are unconcerned with the acquisition of life cover.”
SFC here pointed out that ILAS products have unusually high initial charges, long lock-ins, and high exit penalties. SFC implied that these policies are suitable only for individuals who need life cover.
However, most ILAS policies provide no life cover. According to SFC’s logic, such policies would not be suitable or “attractive” to anyone. This is a subtle hint that the products are ripoffs.
OCI Overtly Suggested that Many ILAS Products Are Ripoffs
Since most ILAS products have minimal insurance content and multiple high charges (often hidden), the products clearly do not meet the “fair treatment of customers” principal. In other words, the products are ripoffs. This is exactly why, as OCI pointed out, the products are “often” aggressively sold, mis-sold, and fraudulently sold:
HKMA, HKFI, and OCI Have (in Effect) Banned Most ILAS Products
In a series of circulars issued over the past four years, ILAS regulators have explicitly forbidden insurance intermediaries from selling ILAS products to investors who have no insurance needs. ILAS products can only be sold to investors who need insurance. Because most ILAS products provide no insurance, they can’t be sold to anyone. In effect, they are banned.
Below are excerpts from the relevant circulars issued over the past four years.
HKFI is the Hong Kong Federation of Insurers, a self-regulatory organization.
The Industry Continued to Flog ILAS even after the De Facto Ban
All insurance intermediaries are self-regulated, except for intermediaries who work in banks—they are regulated by HKMA.
In April 2013, HKMA forced banks to begin disclosing ILAS commissions. Since ILAS commissions are at an obscenely unjustifiable level, on par with robbery, banks decided to stop selling ILAS. It was too difficult to rob clients when the clients knew they were being robbed.
As sales of ILAS dried up in banks, the rest of the self-regulated industry (who did not require themselves to disclose commissions) continued to flog ILAS—even though most ILAS products had, in effect, been banned.
The charts below show the amount of premiums raked in since 2013 by the three main types of intermediaries (agents, bank agents, and brokers):
Up to Two Million Mis-sold Investors Deserve Compensation
About two and a half million ILAS policies have been sold in Hong Kong over the past 15 years. OCI has not published data for previous years.
Since most ILAS products provide no life cover, it’s likely that most policyholders have been mis-sold (i.e., ripped off). The number of mis-sales could exceed 2 million.
All ILAS victims have paid excessive fees (often hidden) and their investments returns have suffered (sometimes catastrophically). As a result, their retirement plans, college savings plans, and/or other savings plans have been negatively impacted.
As a matter of justice, these victims deserve compensation from the companies that fleeced them.
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.
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.
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.
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.
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”.
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.
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.
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:
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:
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:
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.
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.