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  • Dec 18, 2014
  • Updated: 9:58pm
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Hong Kong consumers angry after being sold complex insurance product ILAS

Financial advisers sell hard-to-understand schemes to bamboozled consumers, leaving many locked into decades-long contracts

PUBLISHED : Monday, 17 June, 2013, 12:00am
UPDATED : Monday, 17 June, 2013, 5:17am

In February last year, Leung Chung-yan, 27, had some potentially cancerous masses removed from her breasts. The kindergarten teacher did not have medical insurance to cover the operation and had to borrow money from her family to pay the bill.

Worried that she would have to undergo more operations - her aunt was losing a long battle with breast cancer - she decided she better save some money. Knowing little about investing, Leung met a friend, Cat Lau, who worked at Convoy Financial Services, an advisory firm.

Lau recommended Leung take out Standard Life's "Harvest 101 Investment Plan", an investment-linked assurance scheme, or ILAS. An ILAS is a complicated product with complex fees and charges. Instead of helping Leung to save money that she could easily access if she faced a medical emergency, the product locked up her money for 25 years.

If Leung tried to cash in her plan in the first year, she would have lost everything that she had paid. The penalty fell to 80 per cent of everything she had contributed in the first two years if she tried to access her money in the fourth year of the policy's term.

"Harvest 101 did the opposite of what I wanted. Instead of helping me have more money available to pay for a medical emergency, I had less money available," Leung says.

Convoy says the firm analysed Leung's needs. They say she said she wanted a retirement plan - not to save money for medical bills. They say Leung signed a document saying she wanted a plan to create "extra saving apart from MPF [Mandatory Provident Fund]".

Plans such as Harvest 101 are created by insurance firms and sold by banks and financial advisers, who receive fees from the insurers. It is a big business. The schemes generated HK$17 billion in new premium income in 2012, according to the Insurance Authority. They are a common source of grievances, accounting for about one quarter of Hongkongers' complaints about insurance, according to the authority.

Regulators are taking action. The HKMA, the Securities and Futures Commission, the Insurance Authority and the Hong Kong Federation of Insurers are changing the way ILAS plans may be sold. The changes will roll out in phases up to September.

Criticisms of ILAS focus on the high fees insurance firms pay those who sell the plans. The Hong Kong Monetary Authority says it is concerned about mis-selling of ILAS. Jeremy Hobbins, a Hong Kong businessman, went further.

He asserted the insurance firm bribed his adviser to sell him an ILAS, using selling fees as an inducement.

Hobbins sued his financial adviser, Clearwater, to recover the losses he suffered on an ILAS in a landmark case in 2011-2012. He said that his adviser did not act in his interests, and simply marketed the ILAS to him so it could reap about US$1 million in fees over eight years.

Hobbins lost his case but it forced regulators to think seriously about the issue of fees. He takes specific issue with the fact that advisers can claim up to two years of the contributions to a plan as a commission for making the sale. People who want to exit the plan early find their plans are worth much less than what they paid in, because so much money has already been paid to the adviser.

"The first two years' premiums are paid to the brokers [as a sales commission], often as a lump sum, within 14 days of the product being taken out. The cost of this is paid by the consumer in the form of early withdrawal penalties if they do not go full term. I believe this structure [ILAS] is fundamentally flawed and it lacks integrity," says Hobbins.

The HKMA this month will require bank staff selling ILAS products to make a full disclosure on the fees and commissions they receive. The SFC in May required those selling ILAS to disclose all their fees and charges in sales documents.

At the end of this month, the Hong Kong Federation of Insurers will ask consumers to sign a declaration form when buying an ILAS. The document will prompt consumers to ask their advisers how much of a commission they are making on an ILAS sale. Advisers will be obliged to disclose.

The document will also outline in clear language the risks of ILAS, including the long-term nature of the plans and the penalties for withdrawing early, which customers will have to sign.

"There will be a full-page document signed five times by the clients that details all the worst features of ILAS," says Glenn Turner, who recently resigned as chairman of the Independent Financial Advisers Association.

Those that sell an ILAS will have to make a post-sale telephone call to the consumer. The call will be on a recorded line. They will have to go over all the fees and risks of the ILAS they just sold, and ask the consumer whether or not they understand them.

If that sounds like a lot of regulation, that's because ILAS products are problematic. Many consumers regret buying them after they have committed to them. It can mean decades of regret, given the long-term nature of the schemes.

Leung, the kindergarten teacher, was advised to contribute HK$1,000 a month to the "Harvest 101" ILAS for the next 25 years, despite the fact that she was earning just HK$14,000 a month.

At the time she was sold the product, Leung had more than HK$40,000 of credit card debt, on which she was paying annual interest of around 45 per cent.

Convoy says Leung did not disclose her debt to the firm.

Leung says she did not understand what she was buying.

"I had no idea what I was taking out, but I trusted my friend … to make a good recommendation," says Leung.

Leung has asked Convoy to refund the HK$13,000 in premiums she has paid. She and her boyfriend, Lindell Lucy, are also campaigning against ILAS products on a blog. They have lodged complaints with Standard Life and regulators.

A Standard Life spokeswoman said: "We are investigating this case and will inform the policy owner and relevant regulatory bodies of our findings … We take all customer complaints very seriously."

Turner says banks, the main conduit for ILAS sales, are already steering away from the schemes, partly because of the new rules on fee disclosure. Hobbins says Hong Kong would be better off without the schemes.

"They [ILAS] serve to produce income for the insurance industry and their sales brokers, rather than serving the interests of consumers at large."


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This article is now closed to comments

Lindell Lucy
I will quote directly from one of my letters to the SFC. "Who is to blame? Is it the thousands and thousands of policyholders who signed? I guess you can blame them for being gullible, trusting, and stupid. But you can’t blame them for being evil. The title of evil goes to the insurance companies and the insurance brokers who create, promote, and sell this toxic sh**. It also goes to the regulators who make it possible."
Lindell Lucy
I've written a short piece called "The Case for Selling and Short Selling Hong Kong's ILAS Industry, Especially Convoy Financial Services Holdings (1019.HK)". You can find it at my blog. In summary, ILAS regulation is tightening, negative publicity is increasing, consumers are becoming more educated, which means ILAS sales are likely to fall. Convoy earns 89.9% of its revenue from ILAS. If ILAS sales plummet, their stock will plummet. You don't have to be a genius to understand this.
I couldn't care less what colour they are and don't see how that is relevant. I do wonder why the photographer decided to depict them just inches away from a KMB-induced death.
There is something I don't fully understand about this case. The victim of the alleged mis-selling, Ms Leung, was indebted to her family members for past medical expenses, and it is also specified she had a credit debt of HKD 40k, on which she was paying a whopping 45% pa interest.

Regardless of what Ms Leung may have been led to believe about this 'Harvest 101' misery, I am having difficulty comprehending why she was looking for a savings product at all. I don't think it takes much financial genius to understand that before you start setting money aside as savings in any way or form, you first pay outstanding debt. Especially if the debt is 40k of credit card debt at 45% pa interest. What am I missing?
Lindell Lucy
She didn't know what the interest rate on her credit card was until I saw her statements and explained it to her several weeks ago. She had been carrying this debt for almost two years without understanding it. In addition to the high interest rate, she was also paying lots of cash advance and late fees. After factoring those in, she was probably paying closer to 60% annual interest. There are copies of her credit card statements on my blog if you want to do the math by yourself. It is completely fair to say that she was a financial idiot. I asked her the same questions that you are asking. It seems to me that neither her family nor the Hong Kong public education system ever adequately drilled into her head the dangers of credit card debt. She never figured it out for herself because she never felt the pain. The credit card companies are masters of bleeding you slowly. She'd just make the minimum payment and move on. What she never realized is that she'd be making these minimum payments for eternity because the principal never shrank. I was the first person she ever revealed her credit card debt to because I was the first person to ever ask her.
First of all Lindell, kudos to you and Chung Yan for speaking out about this fraudulent scheme. I also feel sorry that she's had both medical and financial problems. However, I also would like to ask you and Chung Yan whether she feels she has any responsibility in this debacle. Should people educate themselves about what they are buying / doing before jumping in? Is 'Financial illiteracy' an excuse? Can anyone really complain 'the company took advantage of me (a functioning adult) because I was an idiot' and gain sympathy?
Lindell Lucy
According to the Office of the Commissioner of Insurance, PIBA, the self-regulatory body for insurance brokers, is supposed to handle Chung Yan's case. Before the above article was published, PIBA sent me a letter requesting Chung Yan to sign a confidentiality agreement, which would require her to stop talking to the media. I didn't find that letter until a couple of days ago, as I rarely check my P.O. Box. Today I confirmed with an executive at PIBA that they will not handle her case unless she signs the Confidentiality Agreement. This is a request that makes no sense to comply with because there's at least a decade of history proving that the regulators will do nothing to punish the real culprits if there's no external pressure. We think the only hope for justice is by talking to the media and hoping they find our story important enough to report on it. I want to see what the court of public opinion decides. Chung Yan and I are not going to voluntarily gag ourselves. I've written to OCI requesting that they take over our case, partly because we don't want to sign a confidentiality agreement, and partly because PIBA has given us reason to suspect that they are intending to help Convoy use Cat Lau as a scapegoat. See my blog for full details. The people who most need to be held accountable are the executives at Convoy who know what's really going on. They hire people like Cat to follow procedures (not to question them). Then they dispose of her when she's no longer useful.
Lindell Lucy
(7) Chung Yan has suffered a lot because she has gone public with her complaint. It is largely my responsibility because I pushed her to do it. Many of her closest friends are now angry at her. Some won't even speak to her. It's because they misunderstand her. They think she is valuing money over friendship and causing Cat a lot of trouble for no good reason. It is simply not true. I pushed her to do this because Convoy and Standard Life took advantage of her and thousands of others, and they shouldn't be allowed to get away with it. These companies and all the others who are selling ILAS (as well as the do-nothing regulators) need to be held accountable. This is more about principle than about money. Chung Yan is not in need of any money. I took care of her financial problems weeks ago. We are speaking out because it seems like nobody else is. If any of her friends are reading this, I want to say to you: Please, be kind to Chung Yan. I pushed her to do this. Don't treat her like a villain. What she has done is heroic. She has suffered great embarrassment and harassment by going public with her situation. I promise you, she didn't do it to get $13,000 HKD. She did it because she cared about the thousands of others who have lost far more money than she did. Chung Yan is a patriot.
It is quite typical for ILAS products to have lock in periods. Always read the fine print. Always remember "financial advisers", whether they be friends or not, may not necessarily have your best financial interests in mind. They definitely have their own financial interest in mind and the kind of commissions they earn by selling particular products. Therefore, take their advice with a grain of salt. As always, caveat emptor, before signing on the dotted line.
As for ILAS products, avoid them. You want an insurance policy, buy an insurance policy; you want to grow your retirement savings through investments, you buy investments products; but definitely don't mix insurance and investments. Investments and insurance may not necessarily have aligned objectives and time horizons.
Beside from the article, I don't like the projection of the white male and asian female. I know how Hollywood wants to exploit it but doesn't mean the local media has to follow.




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