Reforms on insurance-linked investment products bring shake-up
Reforms that ban upfront commissions on controversial insurance-linked products will have a major impact on a sector plagued by bad practice
Primary school teacher Jayne Ellis wanted an investment product that she could exit at any time. In June, Ellis complained to the South China Morning Post when she found out her savings were actually locked into several multi-year contracts, called investment-linked assurance schemes (ILAS).
Originally wanting to invest for one year and then review her account performance, Ellis said she had lodged a complaint with her advisory firm alleging she was mis-sold the products by her financial adviser. The 49-year-old now regrets not reading the product literature more closely.
Had Ellis known to wait until after January 1 next year, she would likely have a less stressful experience. New rules banning upfront commissions on products like the ones she has will have a major impact on how life insurance companies and agents operate, say analysts and senior industry executives.
They argue that commissions and product fees will drop and clients will not need to lock up so much of their money for the lifetime of the policy. This sounds like a good deal for consumers but the products will be less lucrative for agents as commission payments will be drip-fed to brokerage firms over many years.
The regulators wanted to "house clean" the insurance industry after years of complaints about mis-sales and bad practice, said Glenn Turner, a former chairman of the Independent Financial Advisers Association.
The ban will hit a cut-throat insurance savings plan industry that took in HK$19 billion in new premiums last year through products marketed to both expatriate and local investors. Such products combine life insurance, investment and estate planning structures and allow investors to spread small sums of money between different mutual funds.
ILAS is big business and any decline in current commission payments of up to 8 per cent of a policy's lifetime premium payments will affect the bottom line.
Last year, Convoy Financial Services Holdings made HK$776.7 million from ILAS commissions, accounting for 89.7 per cent of its local product sales revenue, according to the firm's annual report. The company employs close to 2,000 consultants and trainees in Hong Kong, according to the report.
A Convoy spokesman declined to comment, saying the firm had entered a media blackout period ahead of its first-half results release.
ILAS sales revenue at the wealth management divisions of other listed companies including Haitong International Securities Group, Sun Hung Kai and Midland Holdings was not included in their annual reports.
The most commonly sold ILAS products are long-term savings plans, identical to the ones bought by Ellis. Insurers recoup front-loaded commissions by imposing minimum payment terms and lock-ins on policyholders. Insurers have already started withdrawing these products from the market in order to restructure them and submit the revised versions for approval to the Securities and Futures Commission, the regulator overseeing investment product marketing materials, ahead of the New Year deadline.
"While some insurance companies may need to revamp their products or distribution strategy, others may only require minimal changes to their modus operandi," an Office of the Commissioner of Insurance spokesman told the Post.
Lower acquisition costs and quicker profit recognition would benefit insurers once commission payments were staggered, said Arjan van Veen, an analyst at Credit Suisse.
However, the trend in developed markets was to separate investment and insurance products, van Veen said.
The change in payment methods means insurance brokers may need to build out research and asset management teams, and pay commission-incentivised agents a higher base salary to compensate.
"Some agents will say it is not as profitable as in the past" and leave the industry, said Kenneth Lam Kin-hing, the chief executive of Quam Financial Services Group. He welcomed the changes, saying the existing upfront payment structure "induces people's greediness".
"In the past, income is only from commission. The focus must change from pure sales to providing a service. You need to rely on customers to make recurring income," said Kenny Tang, a securities division head at AMTD Financial Planning.
The new rules mirror regulatory changes in Europe and Australia that have swept away commission-paying products in favour of fee-based compensation. Earlier this year, regulators tightened ILAS sales procedures and commission disclosure rules.
Commission amounts would be spelt out to clients in the product literature come January, said Turner, who is also chief operations officer at Hong Kong insurance broker Altruist.
More stringent rules are already making an impact. First-quarter ILAS sales were down 40 per cent on the same period last year, according to insurance commissioner data.
Turner says ILAS sales will probably drop by 80 to 90 per cent next year as agents lose interest in pushing them. He also expects regulators to increase the capital requirements needed to open an insurance brokerage firm from HK$100,000 to about HK$5 million, the same amount the SFC charges securities houses.
The changes will make life tougher for some operators but will reform a sector long plagued by bad practice.
In earlier interviews with the Post, former advisers at various brokers said they were encouraged to sell ILAS products because these products paid the highest commissions, but the consultants said they were not fully trained in the product features and later learned they had misadvised clients.
One common error was to tell clients they could withdraw all their savings from the account once an initial mandatory payment period was completed, the former consultants said. In fact, premiums paid during this period are locked into the account until maturity unless hefty exit penalties are paid. This is the problem Ellis said she now faces.
Additional reporting by Enoch Yiu