• Mon
  • Dec 29, 2014
  • Updated: 7:23pm
BusinessMoneyInvestment Products

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."


Related topics

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive



This article is now closed to comments

Lindell Lucy
(11) Attached to Chung Yan's Harvest 101 policy was something called a Bonus Allocation. It looks like an altruistic gift, a great bargain, but its whole purpose is to throw sand in your eyes while the insurance company picks your pocket (metaphorically speaking). It works like this: They place an extra 20% of your contribution into your initial account every month for the first two years. If you pay in $1,000, $1,200 goes into your account. The catch is that if you cash in your policy before 25 years have passed, they claw back all of the Bonus Allocation. Policyholders understand this. What they don't understand is that, even if you hold the policy for all of 25 years, the very high monthly policy fees and the combined management fees still claw it all back. The purpose of the Bonus Allocation is to trick investors into thinking they're getting a great deal, but really it's just there to lure them into a trap. You lose the Bonus Allocation regardless of whether you surrender your policy early or hold it till maturity.
Lindell Lucy
Kudos to SCMP for reporting on this, but I wish they wouldn't be so timid in speaking truth to power. All the ILAS products I am familiar with are such a bad deal for investors that advisers have no justification for recommending them to clients. Every time these products are sold, it means clients failed to understand what they were buying and advisers failed to introduce better alternatives. It might not be an exaggeration to say that every person who has bought one of these products has been ripped off. It's a major scandal that regulators have allowed this to go on for so long (at least 10 years, to my knowledge). These products should be banned, plain and simple.
SCMP watered down the above story a great deal. Lots of important and provocative details were left out. You can find those details at the blog I created: TheRapeOfHongKong.com. I would like to say more right now, but I am at work and need to go.
ILAS are, as the article writes, highly complicated instruments. For all sense and purposes, there is great risk for the general public to misunderstand these products. While the purported purpose of ILAS is to provide more options and greater benefit to consumers, in reality it is a product that is highly opaque and very difficult to understand by most (including those who sell them), and whose purpose is to guarantee profits for the insurers and banks while leaving consumers out in the cold.
The old adage "if it sounds too good to be true, then it probably is" and KISS apply. Life, medical, and other insurance are best kept as separate products from investment products. Cost savings could be implemented by way of a simple "bundle" deal (like 25% off if you subscribe to both medical insurance and life insurance). There is no need to mix insurance and investment elements into one product as it impedes transparency and understandability leading to far too much room for profiteering.
Lindell Lucy
(12) The fact that so many Hong Kong people have their retirement funds in ILAS poses a great risk to the Hong Kong economy. All those people are exposed to the credit risk of the insurance companies that created their ILAS policy. Suppose that in the future, a black swan event occurs, a Lehman event. When the US housing bubble popped, the giant insurance company AIG should have gone completely under, but because it was "too big to fail", the US government bailed them out. Suppose the Chinese housing bubble pops. Suppose that one of the consequences is that many insurance companies are on the verge of going bankrupt, just like AIG, but Hong Kong, with its famous free market reputation, decides to rule out government intervention. What happens to the retirement funds of thousands of Hong Kong citizens? Do they lose everything? If so, then what? Someone might argue that in such an event, even if investors were invested directly in mutual funds as opposed to ILAS, they'd still be facing huge losses. But huge is better than total. The US stock market only lost half its value during the worst of the recent financial crisis. Having half your retirement funds is much better than having none of it.
Lindell Lucy
(9) The above article left out some important points relevant to Chung Yan's case. It did not mention that, in addition to her medical condition, her low teacher's salary, and her massive credit card debt, her total liquid assets were only $5,000 HKD at the time of her ILAS purchase (which she reported on the forms). The article also did not mention the fact that Convoy sold her two health insurance policies at the same time they sold her the ILAS. Both health insurance policies gobbled up a chunk of her salary and neither would cover her pre-existing medical conditions. It should have been clear to Convoy that ILAS was not suitable for her. They say Chung Yan did not disclose her debt, but that's because they never asked. Chung Yan went to Convoy for help because she didn't know how to evaluate her own financial condition and needs, and she wanted their professional advice. Instead of getting help, she got screwed.
Lindell Lucy
6) I talked to a gentleman at a HK-based mutual fund, who has 15 years of experience here. He said ILAS was originally created to allow rich expats to avoid taxes in their home country. (Another way to say it is that ILAS was created to cheat foreign governments out of their tax revenue.) My understanding is that by disguising an investment as an insurance policy, capital gains taxes are avoided. The man I spoke to also said that the "tax benefits" don't exist for local Chinese, so Chinese should not be buying ILAS. The few small benefits of an ILAS (low minimum contributions and free fund switching) don't outweigh its heavy costs (exit fees, policy fees, management fees, credit risk, etc.). You don't need an ILAS to get low minimum contributions or free fund switching. You can get that by simply investing in an exchange-traded index fund, or a no-load mutual fund, or just by buying the stock of a company you like. People who sell ILAS probably won't tell you this. If anyone knows the answer, can you please tell me: Do the "tax benefits" for expats still exist? Or have the tax loopholes since been closed?
Lindell Lucy
4) There are many more reasons to hate ILAS than just the exit fee. There's a monthly policy fee, and usually at least 2 levels of monthly management fees, which are applied throughout the long life of the policy. Combined together, the total fees are far higher than what the underlying mutual funds are receiving. Why should the insurance company get more money than the mutual funds? They shouldn't. The fund managers are doing the real work, while the insurance companies are simply acting as middlemen. People can invest directly in mutual funds, index funds, and stocks without going through an insurance company (and paying all their fees), but a lot of people don't know this.
5) On the surface it looks like ILAS allows you to diversify your investments by placing your money in multiple mutual funds, but in reality, it is concentrating your investment. You are exposed to the credit risk of the insurance company. They own the underlying assets, not you. So if the insurance company goes bankrupt, you might lose everything. This is an unnecessary risk that people don't have to take on. If you are invested directly in a mutual fund and the mutual fund goes under, then you still own the assets that were under management, which is not the case with ILAS. Many people don't know this.
Lindell Lucy
Some important points:
(1) I'm guessing there are hundreds of thousands of ILAS victims, but most of these people have no idea that they are victims.
(2) Most people buy this product from a friend, so if they discover that they are a victim, they probably won't complain because they don't want to damage the friendship. I suspect this is one of the reasons that ILAS hasn't been discussed more openly in public.
(3) A lot of the people selling ILAS to friends and family don't understand how bad the product is, otherwise they wouldn't be selling it to their friends and family. After talking to Cat Lau, mentioned above in the article, it was clear to me that she did not understand either ILAS or the alternatives to ILAS, like mutual funds, index funds, stocks, etc. Chung Yan and I are not angry at Cat. We believe she was also taken advantage of by Convoy. I suspect Convoy hires new employees partly for access to their friends and family, as they are easiest to sell to and the least likely to complain after the fact.
Lindell Lucy
LOL! I was wondering the same thing!
Lindell Lucy
I did not name her. SCMP did. Check my blog. Her name is scrubbed from everything because I was purposely avoiding shaming her. Cat, if you are reading, I am sorry. But this was not under my control. I am not the editor at SCMP. They make their own calls on who they name.




SCMP.com Account