There has rarely been a case that so neatly illustrates everything that is wrong with the way financial products are sold to consumers in Hong Kong. People who put money into what they thought were low-risk, protected with-profits investments and who now face diminished returns - and even losses - may be wondering what went wrong.
The answer lies in a dysfunctional system with poor oversight and a commission-generating fee structure that places financial advisers in conflict with their client's best interests.
Although products such as with-profits policies are investment not insurance products, they are issued by insurance companies. While the underlying assets may be equities, under Hong Kong regulations, the products do not necessarily have to be authorised or regulated by the Securities and Futures Commission (SFC). Clerical Medical International (CMI) had its with-profits products authorised by the SFC while Scottish Mutual International (SMI) did not.
On the distribution side, several investment products including with-profits funds and long-term savings plans may be sold by insurance agents and brokers as well as SFC-authorised investment advisers.
These insurance intermediaries are required to register with an industry body and pass simple exams covering insurance and investment-linked assurance products. After that, regulations allow them to sell several investment products, some involving 30-year financial commitments or heavy leveraging.
Many of these financial advisers favour these products because of the huge up-front commissions attached. And because Hong Kong, unlike Britain or Australia, does not require disclosure of commissions, the client will never know how much incentive the commission is providing. Investors in with-profits policies, for example, would not have known their adviser was earning a 7 per cent commission on a normal investment or up to 24 per cent on a geared one.