Tag Archives: SFC

Securities and Futures Commission

Office of the Ombudsman Should Investigate SFC for Maladministration

Dear Connie Lau, Ombudsman, Hong Kong:

Connie Lau - Ombudsman

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:

Reply from Ombudsman Regarding Copmlaint Against SFC

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.

I believe there is an overabundance of evidence that SFC has been guilty of maladministration ever since it issued its 13 August 2009 circular on ILAS. (See this PowerPoint.)

I hope your office agrees that there are strong grounds for pursuing an investigation. I will send you a follow-up email shortly, providing additional information.


Lindell Lucy

SFC ‘Listens’ to ILAS Victims but Refuses to Answer Questions

Small SFC LogoThis 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’.

Unlicensed, Thailand-Based Financial Adviser Expands Illegal Business Operations Into Hong Kong

Neil Robbirt Profile

Neil Robbirt, CEO of Global Investments

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:

LM MPF Advertisement - Global Investments

Source: Page 5 of the 16 Sept 2011 Edition of AWOL

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.

Global Investments International - Website Home Page

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.

QROPS Direct Website

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:

Your Address Could Be Here!

Your Phone Answered As You Like

“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.

Clip 1

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.

Clip 2

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.

Clip 3

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.

Clip 4

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.

Clip 5

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.

Highlights from the ILAS Victims Meeting with the Insurance Commissioner

OCI Logo

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:

Presentation for ILAS Victims Meeting with OCI

(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:

  1. 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.
  2. 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.
  3. 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. (lindelll@gmail.com)

Regulators Say ILAS Is Not Suitable for Investors Who Have No Insurance Needs—Suggesting that up to Two Million Hong Kongers Have Been Mis-sold

Approximately two and a half million ILAS policies have been sold in Hong Kong over the past 15 years. Insurers have collected more than half a trillion dollars in premiums. According to an adviser interviewed by the South China Morning Post, approximately 75% of investment products sold to Hong Kongers were ILAS products, as of 2012.

Suitable for No One

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

In a 13 Aug 2009 circular, the SFC stated:

“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

According to a guidance note issued by OCI on 30 July 2014:

OCI - Unfair Charges (Underlined)

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:

Mis-selling and Agressive Selling

OCI - Frequent Mis-selling and Fraudulent Selling

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.

HKMA’s 14 March 2011 Circular

HKMA - No Need, No Sale

AI means “Authorized Institution”. HKMA is the Hong Kong Monetary Authority, Hong Kong’s bank regulator.

HKMA’s 22 April 2013 Circular

HKMA - No Mis-selling

AI means “Authorized Institution”. HKMA is Hong Kong’s bank regulator.

HKFI’s 22 April 2013 Circular

HKFI Regulation on ILAS Sales (April 22 2013)

HKFI is the Hong Kong Federation of Insurers, a self-regulatory organization.

OCI’s 30 July 2014 Guidance Note (GN 15)

OCI - Investment and Insurance Needs

OCI - First Assess Needs

OCI is the Office of the Commissioner of Insurance.

HKFI’s 8 Dec 2014 Circular

HKFI - ILAS Sales Flow

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):

2013 ILAS Distribution Channels

Source: OCI’s website. See here.

Data published by the Office of the Commissioner of Insurance. See here.

Source: OCI’s website. See here.

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.

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.

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. 

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)