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."
The new rules mirror regulatory changes in Europe, Australia and the United States that have swept away commission-paying products in favour of fee-based compensation.
Earlier this year, regulators tightened sales procedures and told brokers they would need to reveal the commission amount they earned from each product.
Some of the 70,000 insurance brokers registered with the Hong Kong Federation of Insurers are expected to be affected as many rely on the sale of upfront-commission-paying products to support their business costs and personal income.
"There will be an inevitable contraction in the market as in all markets there will be people who don't want to adapt," said Simon Parfitt, the Hong Kong head of wealth management firm Guardian Life Management.
The new rules appear to leave space for interpretation. Some industry players said it was not clear if they would apply to lump-sum investment-linked assurance schemes accounts, also known as portfolio bonds.
The rules also put the onus on insurers to develop products that "do not create misaligned incentives" between intermediaries and their clients. An "overly high" upfront commission was citied as one example of a "misaligned incentive".
The announcement coincides with the Legislative Council debate over the formation of an Independent Insurance Authority to replace the city's patchwork of competing regulators.
The Hong Kong Confederation of Insurance Brokers, the Professional Insurance Brokers Association and the Insurance Agents Registration Board directly oversee intermediaries. None have statutory powers and they have limited means to address complaints.
Additional reporting by Enoch Yiu