Forced disclosure clause in draft insurance bill could kill industry, insiders complain

Industry players upset over vague clause on information about product commissions made in proposed bill to set up independent authority

PUBLISHED : Thursday, 26 June, 2014, 9:38am
UPDATED : Friday, 27 June, 2014, 12:41am

The insurance industry is buzzing about a clause buried in a draft bill that will launch the Independent Insurance Authority.

The clause in the 478-page document says: "The Authority may … require a licensed insurance intermediary to take specified steps to ensure that disclosure is made to its clients of any commission or advantage that the intermediary receives or is to receive in relation to the policy recommended to the client."

That is a mouthful and also a potential bombshell for the industry. That means anyone selling insurance may be required to quantify and disclose all fees to the client before a sale.

"There is a lot in the bill that is questionable and controversial. This is one of many items," said Adrian King, a former chairman of the Confederation of Insurance Brokers.

The industry still has very strong views against disclosing commission

Although the bill could be applied to all insurance products, industry insiders expect it will only used for the problematic investment-linked assurance schemes (ILAS).

In an irony that would be appreciated by ILAS clients who have complained about the instrument's frequently opaque fee structure, the industry is upset that such a major rule change has been buried in vague language in the bill's fine print.

They also complain that the rule could kill the HK$17 billion industry.

"The insurance industry still has very strong views against disclosing commission … If you don't present the fee properly, the client could think it is a huge amount. People are worried that people will only focus on commissions," said Chan Kin-por, the legislator for the industry.

A spokesman for the Financial Services and Treasury Bureau, which drafted the bill, said the bureau would not require the new authority to use the rule. They are just codifying their power to force disclosure on ILAS should they wish to.

Industry insiders are sceptical. They believe that full automatic fee disclosure is coming, it is just a question of when.

"My only unknown area is how they will transition to it, so how long it will take to put in place is also a correlated mystery," said Glenn Turner, a former chairman of the Independent Financial Advisers Association.

If implemented, the disclosure rule will have followed a tortured path to implementation.

In 2012, Jeremy Hobbins, an executive director of trading firm Fung Holdings, sued his financial adviser, Clearwater International, over its recommendation of ILAS plans. Hobbins alleged that, in paying US$1 million in fees to Clearwater over eight years, ILAS vendors such as Royal Skandia Life Assurance bribed Clearwater to sell him plans that did not serve his interests.

The court ruled against Hobbins but the case sparked debate about whether ILAS fees exposed the insurance industry to bribery allegations. The industry spent three years debating the matter.

Last year, a compromise was reached whereby agents would be required to tell clients of the fees they received if clients asked, a state of play that continues.

It is not even clear if the proposed disclosure rule in the bill would go beyond this half measure - the language is ambiguous by design.