SFC tightens regulation on investment-linked insurance policies to enhance investor protection
- The tightened regulation came after an SFC review found insurance companies were charging high fees and surrender charges
- There are 1.2 million investment-linked insurance policies outstanding in Hong Kong worth US$39.2 billion
Hong Kong’s securities watchdog on Monday introduced tougher regulations on investment-linked assurance schemes (ILAS) in a bid to enhance transparency and protect investors following a review of these products.
The Securities and Futures Commission’s new guidelines require insurance companies to provide greater transparency on the fee structure and design of these products. The companies have also been told to stop charging consumers excessively high fees and surrender charges.
The Hong Kong Federation of Insurers (HKFI), which represents 138 insurers, said it supported the SFC’s new measures.
The SFC tightened the rules after finding problems following a recent review of ILAS products. Many policyholders have complained that insurance companies paid high fees paid to salespeople for selling these products, with some agents getting the entire first-year premium as commission. Some agents, in a bid to get the high commission, allegedly sell these products without clearly explaining the associated risks, consumers said.
“The ILAS is basically like an insurance policy and fund product bundled together,” an SFC spokesman said. “We want to make sure the fees and surrender charges are clear and simple, and most importantly, they should not be much higher than other insurance and fund products.”
The new measures are the first updates to the guidelines issued in 2014, after these schemes were criticised for their high fees and charges.
Under the new guidelines, insurance companies cannot charge fees for ILAS policies that are higher than an ordinary term life product. They also are banned from charging fees for fund products that are higher than other regular fund platforms. In addition, insurance companies have to charge a low surrender fee for policies with low life protection value.
The new rules come into effect immediately for new ILAS applications made to the SFC, with the regulator providing an 18-month transitional period for existing products to comply.
Some 300 ILAS products have been issued by 31 insurance companies, with 49 ILAS products still available on the market, according to SFC data. A total of 1.2 million policies worth HK$305 billion (US$39.2 billion) were outstanding as of June.
The ILAS works like a hybrid life insurance policy and investment fund product. Unlike traditional life insurance policies where the insurer decides how to invest the premium paid by policyholders, the ILAS allows policyholders to invest in different investment funds. The policyholders who invest in these products may earn higher returns during a rising market, but they also risk incurring huge losses in case of a market downturn.
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“These regulatory documents would serve as the backbone for the revamp of existing ILAS products and new ILAS product applications,” said Selina Lau Pui-ling, the HKFI’s chief executive.
“It will be important to develop products that stimulate innovation and competition whilst ensuring fair treatment of customer and intermediary compensation. We anticipate insurers may need to revamp a portion of their on-shelf products in order to be compliant with the new requirements,” she said.
