SFC to step up oversight of investment-linked insurance

Tighter rules for investment-linked policies aim to protect investors from high pressure tactics

PUBLISHED : Wednesday, 21 May, 2014, 1:11am
UPDATED : Wednesday, 21 May, 2014, 5:01am

Hong Kong regulators are set to tighten regulation of insurance companies that created controversial investment-linked insurance life policies after scandals and high profile probes forced watchdogs to close loopholes that leave hapless investors at the mercy of unscrupulous high-pressure sales tactics, a senior government source told the South China Morning Post yesterday.

All insurance companies that create investment-linked insurance policies would need to sign a confirmation form by the end of July with the Securities and Futures Commission stating they have internal controls in place to ensure the products are fair to investors, according to the SFC circular seen by the Post.

The circular contains 14 new general principles to "remind product providers of their duty to consider investors' interests as part of the product-design process." Insurers must have internal committees to approve new products which in turn must have proper risk management in place. Fees should also be set at a fair and appropriate level. Failure to comply would lead to a ban in offering such products.

"It would be subjective on how to determine products that are unfair to investors. But it is common sense that if an insurance product that requires a policyholder to contribute for more than 10 years but then the policy would not pay back a penny to the investor, this is simply not fair to the investor," the source said.

The SFC circular comes one week before lawmakers debate details of a bill that would set up an Insurance Authority next year as part of major reform of the insurance sector.

This would tighten regulations for all 80,000 insurance salespersons by requiring them to apply for a licence from the Insurance Authority, which could impose penalties, including a maximum fine up to HK$10 million. "The proposed Insurance Authority would bring better regulation and better investor protection to policyholders," the source added.

Last year, the Hong Kong Monetary Authority tightened banks' sales of investment linked products. HSBC also changed policies by paying a fixed salary instead of commission sharing for staff selling these products.

Investment-linked insurance policies are a combination of a life insurance policy and an investment fund which allow policyholders to choose how to invest the premium among various funds. This is different from traditional insurance policies, where the insurer decides how to invest the premium and pays dividends to the policyholders.

Investment-linked policies offer higher returns in a bull market run but investors suffer huge losses during market downturns.

Christopher Cheung Wah-fung, a legislator for the financial services sector, supported the SFC move. "When these insurance policies are also investment products, the product providers and their salespersons should both be regulated to protect investors' interests," he said.

When the Hang Seng Index rose to a record high in October 2007, sales of investment linked policies hit HK$60 billion, three times that of traditional insurance policies. This has fallen since the financial crisis in 2009 to HK$15 billion, or about half those of traditional insurance policies.