City insurance authority bans indemnity commissions
Sales of savings plans will be hit as brokers are prohibited from earning commission on long-term policies upfront in move to protect clients
Hong Kong's insurance authority has banned upfront commission payments on long-term policies in a move to clean up a HK$17 billion-a-year business plagued by persistent complaints of unscrupulous sales practices.
The ban will hit a cutthroat insurance savings plan industry marketed to both expatriate and local investors, which combines life insurance, investment and estate planning structures.
Sales of these products typically fall between the various stools of the city's fragmented regulations that critics say agents exploit to engage in aggressive sales tactics to secure big commissions at the expense of client interests.
"Indemnity commission, or any standing arrangement that offers advance payment of commission, is strictly prohibited. Insurers should only pay commission on an earned basis," say the rules, due to come into force on January 1, 2015. "Commission payable should also spread over an appropriate duration to encourage good after-sale service and duly reward long-term relationship between intermediaries and policyholders."
Such policies pay brokers indemnity commissions of up to 8 per cent of an account's value immediately upon sale. The insurance firm is able to recoup these costs by imposing minimum payment terms and premium lock-ins on policyholders.
The changes were welcomed by some in the industry.
Advisers should make money through continuing fees rather than upfront "one-off injections of cash", said Mathew Bate, wealth manager at expatriate-focused advisory firm Private Capital. "We should be a service sector, not a sales sector."