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.

So any investor who needs to redeem the policy or who misses a payment within the first few years, may find they get almost nothing back despite having paid many monthly premiums.

Advisers rarely emphasise the high cost of early redemption, which is why the Consumer Council recently issued a warning.

Now for the scandal. It was revealed two weeks ago that a team of insurance brokers had been taking advantage of these front-end commissions to scam the insurance companies. Some of the brokers are believed to work for the insurance company's own sales forces.

The brokers went from firm to firm signing up bogus long-term policies and pocketing the commissions. Once the commissions had been paid, the policies were cancelled, leaving the victims, which allegedly include seven high-profile insurers, among them Standard Life, New York Life and CMG, nursing holes in their balance sheets.

The Office of the Commissioner of Insurance (OCI) says losses amount to $80 million, but industry sources suggest figures in excess of $390 million. The regulator's figures show new business added in the investment-linked insurance category was $8.7 billion in the first half of this year.

This investment-linked business also experienced an 18.3 per cent growth in policy terminations over the period, presumably related to the scam. Given that commissions paid out can be 50 per cent to more than 100 per cent of first-year premiums, the industry-sourced figure would seem to more accurately reflect the potential losses.

Similar scams, albeit on a smaller scale, have been perpetrated in the past and they will continue as long as insurance companies pay those up-front commissions. But there are a number of ironies to this particular situation.

First, it seems some of the firms taken in by the scam had been warned about what was going on. But few could resist taking on these hot-shot brokers with their dazzling sales records. The lure of all those new policies and the aggressive nature of Hong Kong's insurance market got the better of them.

Secondly, insurance companies have always benefited from loose regulation, particularly when it came to selling investment products which would be much more rigorously regulated if sold by non-insurance sales people.

Low barriers to entry and lack of independent regulation have kept costs of training and compliance down for the insurance firms. But it has also meant there was little to prevent unscrupulous people entering the industry.

This has been bad for consumers, who may not get the best financial advice, bad for the standing of the industry and bad for the many excellent brokers and agents who find it hard to distinguish themselves from the sharks. Now insurance companies have also suffered as a result of their lax standards.

A final irony is the lack of involvement by the OCI, which has done little more than tell the insurance companies to watch out for such scams in the future.

Regulation has been kept deliberately weak by a government under pressure from the insurance lobby and this has left many aggrieved consumers frustrated. Now the insurance industry has run into a bit of a problem of its own making, they likewise find that there is little regulators can do. Talk about being hoist by your own petard!

The faults in the system have been there for all to see. Investment products sold by the insurance sector go almost entirely unregulated as neither the OCI nor the two industry bodies are geared up to enforce the rules.

Regulators acknowledge the issues in private but the relevant government department - the Financial Services and Treasury Bureau - turns a blind eye. Until now, the only victims have been individuals. Now that big business has been a victim and the regulatory regime called into question yet again, the bureau should think again.