New insurance rule far from transparent on fee disclosure
HK trails major markets in the disclosure of commissions on investment sales. An insurance industry rule due April does little to change that
The Hong Kong insurance industry will raise its disclosure on fees in mid-April. However, buyer beware, most consumers will not notice a difference.
In a nutshell, brokers must disclose fees on insurance sales only if it is higher than that "customarily paid", or so says a circular from the Confederation of Insurance Brokers, a trade body.
At stake is the degree to which sales people are required to disclose commission income on insurance products.
This has special relevance for one particular product: investment-linked assurance schemes, which are common pension plans sold by banks and financial advisers to individuals.
When a consumer buys such a scheme they often commit to large annual payments for at least five years, maybe as long as 25 years. It's a huge cash commitment that can involve steep fees.
Insurance firms package the schemes with big fees partly so they can pay the agents and brokers a big commission. It's a strong incentive to sell a plan, but it invites questions about whether a sales person has a customer's needs fully in mind with the sale.
Indeed, the insurance industry has been worried in recent years that their high commissions on the products exposed them to accusations of bribery.
That was exactly the thrust of a landmark 2011-12 Hong Kong court case in which businessman Jeremy Hobbins sued his financial adviser, Clearwater, to reclaim losses on the instruments. Hobbins said he paid about US$1 million in fees to Clearwater over eight years after buying a large volume of such plans sold by Royal Skandia, Zurich, Generali, Aviva and others.
Hobbins alleged that "Clearwater was not acting in Mr Hobbins' best interests but acting solely so that Clearwater could profit from commission and fees paid by Skandia and other insurers," said Justice Anselmo Reyes in his ruling.
Reyes ruled against Hobbins. In so doing, he spelled out the minimum the industry needs to do to avoid future bribery accusations. Reyes said it was acceptable for a broker to take commission on insurance sales to clients, so long as it disclosed to the client it was receiving a commission, and the commissions did "not exceed the usual market rate".
If insurers and brokers met these criteria, they met what Reyes described as "minimum good practice", and were protected from bribery accusations.
The insurance industry spent much of 2012 pondering this judgment. Industry bodies disagreed on the interpretation of the Hobbins ruling, says the Office of the Commissioner of Insurance, adding that they held "diverse views on how to go about the issue of disclosure". The bodies reached agreement in October last year, paving the way for the new disclosure rule coming next month. They decided on some basic language for contracts and to ensure that clients know that brokers will be receiving commission on insurance sales. But, as noted, they decided against a clear disclosure of the commission in a dollar amount so long as the fee was within the "usual market rate" - however this was defined.
Critics say the rules insulate the industry from bribery allegations, but do little for consumers.
"Nothing has changed … this is very disappointing," says Rick Adkinson, a financial adviser.
For example, most people buy investment-linked products through a bank. Sales staff in banks are not insurance brokers and are therefore not covered by the new disclosure rule. Indeed, insurance agents selling the poducts in banks are under no requirement to disclose fee income to customers in banks, says the Hong Kong Monetary Authority.
"A small part of the sales community has moved slightly up the spectrum on commission disclosure because they had a pineapple up their a** called the Prevention of Bribery Ordinance," says Glenn Turner, who last week stepped down as chairman of the Independent Financial Advisers Association.
Hong Kong is behind other markets with regards to commission disclosure. Britain has banned financial advisers from taking commission income for the investments products they recommend to clients. Australia requires full disclosure on fees, and Singapore is close to implementing strict rules on such disclosure.
However, Hong Kong, after a long discussion among regulators and various industry bodies, is a long way from full disclosure on fees on insurance products and ILAS in particular.
"While it is an international trend to move towards increasing transparency regarding disclosure of remuneration … Hong Kong's insurance industry is moving in the same direction incrementally, starting with the brokers' new practice in April," says the Office of the Commissioner of Insurance.
But there is one positive development. The new rules require brokers to reveal their full commission on insurance sales, if a client asks. So just ask.