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  • Sep 21, 2014
  • Updated: 1:40am
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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
To clarify: If Chung Yan pays $1000 HKD per month for 25 years into Harvest 101, and the underlying funds perform at 11.5% per year, her ILAS account will be worth $875,868 in 25 years (according to Standard Life's Illustration Document). If Chung Yan cuts out the middleman and avoids the ILAS fees, and her funds perform at 11.5% per year, her investment will be worth $1,572,613 in 25 years. That's the easy calculation you can do by yourself with the calculator I referred to above. So, after doing the math, would any rational person choose to invest in ILAS? Of course not. Other than greed and a lack of conscience, there's no reason for Convoy to be recommending this product to any client.
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.
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
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.
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.




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