Insurance product faces gloomy future
Regulators under pressure to ban contracts under investment-linked assurance schemes amid complaints about fees and mis-selling
Jasper Moiseiwitsch and Benjamin Robertson
It is hard to be a vendor of insurance-linked investment funds these days, as regulators come under pressure to outlaw sales of such products that are worth HK$17 billion a year.
Also known as investment-linked assurance schemes (ILAS), these products are on the ropes, with big banks such as Citi, Hang Seng Bank, Bank of China and DBS no longer selling them and other banks reviewing their sales.
Meanwhile, regulators are piling on rules governing how they are sold amid scores of consumer complaints about high fees, poor performance and mis-selling.
At stake is a business based on one of the most profitable instruments sold to the public by banks and financial advisers and one that accounted for about 23 per cent of the city's life insurance business last year, according to the Insurance Authority.
ILAS products are savings plans created by insurance companies that are billed as combining a mixture of investment, tax efficiency and insurance.
For a small outlay, typically starting at HK$1,000 a month, they allow savers to invest in a broad range of different mutual funds. The tax mitigation potential makes them popular with expatriates who may move between different jurisdictions during their careers before returning to their home country.
They have several fee levels and are designed for medium to long-term savers. However, their opacity and complex structure, as well as the payment of upfront commission to brokers, have led to criticism from clients and regulators.
At their heart, say complainants, the schemes appear to perpetuate a misalignment of interest between clients looking for long-term management of their money, and brokers, who receive commissions within a month of an account being opened rather than payment over the lifetime of the product.
Customers are also required to commit to a minimum payment period, typically 18 to 20 months, or risk losing their money, and are subject to lock-ups on part of their investment for the lifetime of the policy. This ensures insurance companies can recoup the cost of the commissions paid to brokers through guaranteed policy fees.
The broker's incentive is further skewed by the structure of the remuneration, which is based on the length of the plan and amount being invested. Unscrupulous brokers could be swayed to encourage clients to open long-term accounts even when the client is unsure of their future plans, or to encourage their clients to switch to a new plan once the compulsory payment period has passed, and so trigger a new commission payout.
Michael Ross, a director of life insurance consulting at advisory group Towers Watson, said: "It comes back to the integrity of the broker or financial adviser and whether they have other interests."
Earlier this year, the Hong Kong Monetary Authority, the Securities and Futures Commission and the Office of the Commissioner of Insurance issued new rules requiring brokers to conduct additional pre- and post-sales checks on the client's understanding of ILAS products. This includes a commission disclosure statement, although it only discloses the commission's existence, not its size.
A new government-run insurance regulator will soon be replacing the self-regulated industry bodies that have managed the city's insurance brokers.
"This may be the first step towards full commission disclosure," Ross said.
Roy Halliday, the Hong Kong chief executive of British insurer Standard Life, said ILAS could be salvaged but tougher rules were needed. "I'm very keen for regulators to take the initiative on this," he said. "I think it's the right thing to do."
Halliday said the recent changes were overdue but the rules still needed tweaking.
"The industry is fragmented … When you have the HKMA, the SFC, OCI and the self-regulatory bodies in there as well, there are a lot of people with a lot of opinions on different things," he said. "When you have that, gaining consistency is much more difficult."
In Singapore, the regulator has tightened the rules governing commission products and is reviewing ILAS sales procedures. In Australia, commission products have been phased out and replaced with a service-fee agreement similar to how a law firm charges its clients. In Britain, such products were banned this year.
"I would like to see this happen in Hong Kong," said Jeremy Hobbins, an executive director of trading firm Fung Holdings, who last year unsuccessfully attempted to sue his financial adviser over large commissions.
At the very least, Hobbins said, ILAS products should be placed under the auspices of the SFC, where they could be supervised as investment rather than insurance products, and the firms that sold them should be held to the same standards of accountability as the rest of the financial services sector.
"These products are in general, overwhelmingly savings and investment products with minimal insurance content, often only 1 per cent of the value," he said.
Halliday said ILAS fees should be paid out over the life of the contract. That way clients could decide whether they were getting good, continuing advice for their money and if an adviser disappeared or the client decided that his advice was not worth payment, he could simply stop paying fees, ending the advisory relationship.
This would mean that the insurers would stop paying firms, brokers and agents giant upfront fees to sell ILAS products, ending complaints about conflicts of interest and mis-selling.
Halliday's calls for tougher regulation make sense. From his perspective, it is better to toughen up the rules on ILAS, clean up selling practices and preserve a part of the market than to lose ILAS entirely as a product.
But that still leaves the nagging question of why insurance companies are selling investment and savings plans at all. As revealed in a recent South China Morning Post mystery shopper series, banks tend to minimise the insurance aspect when presenting the plans. They pitch ILAS as an investment, and whole-of-life insurance as a structured savings scheme.
Halliday was asked if it would be responsible for a bank to sell whole-of-life insurance or ILAS to a client wanting a savings plan.
"It depends on the circumstances," he said. "This is a question that is very difficult to answer. You can't answer in isolation without knowing someone's full circumstances. Only the adviser who is sitting in front of the client would know that.
"I'm not trying to dodge the question. But it's truly the case that one of the things about financial advice is that if you do take any single silo in isolation, generally speaking, you will probably get that wrong if you don't look at the wider context that a person needs."
One can understand why Halliday struggles with the question. Banks and advisers make more money selling insurance products than they would selling straight investments or savings plans because the latter would fall under the direct supervision of the SFC and HKMA, which would be a lot stricter on fees.
In other words, while Halliday is arguing for tougher regulation of ILAS, the instrument largely exists thanks to the regulatory arbitrage it enjoys with other investment products.
If ILAS and other insurance products are as toughly regulated as other instruments, banks and other vendors would have few incentives to sell them.
And that is the existential issue facing ILAS that insurance executives such as Halliday now need to address.