Losses to companies through brokers' undisclosed-commissions scam is put at $390 million
I must admit to a shiver of schadenfreude on hearing about the latest scandal to hit Hong Kong's retail financial sector. This is unusual because the normal response to a financial scandal is a sense of outrage on behalf of the victims.
To set the scene, insurance companies have been paying out large and undisclosed up-front commissions to their brokers and agents who sign up clients for long-term investment-linked insurance plans.
The longer the term, the bigger the up-front commission, which is why clients are generally offered 25 or 30-year plans which can earn the adviser in excess of $200,000, when a shorter premium plan might serve them better.
Such commissions are a thing of the past in more transparent markets, but in Hong Kong, where the insurance industry is self-regulated, they are de rigeur.
Distributors benefit from these windfall fees and providers benefit by getting steady, long-term business. Until now, only the investor has been disadvantaged. Because the insurance company pays the distributor up-front commission, it expects to be repaid if the policy is terminated early.