Hong Kong’s insurance authority has banned upfront commission payments on long-term insurance policies in a much anticipated move to clean up a HK$17 billion a year business plagued by persistent complaints of unscrupulous sales practices.
The ban will hit a cut-throat insurance savings plan industry marketed to both expatriate and local investors which combine life insurance, investment, and estate planning structures.
Sales of these products typically fall between the various stools of the city’s fragmented regulations that critics say agents exploit to engage in aggressive sales tactics to secure big commissions at the expense of client interests.
"Indemnity commission, or any standing arrangement that offers advance payment of commission, is strictly prohibited. Insurers should only pay commission on an earned basis," say the rules, due to come into force on January 1 next year.
There will be an inevitable contraction in the market as there will be people who don’t want to adapt
Simon Parfitt, Guardian Life Management
"Commission payable should also spread over an appropriate duration to encourage good after-sale service and duly reward long-term relationship between intermediaries and policyholders."
Such policies pay brokers indemnity commissions of up to 8 per cent of an account’s value immediately upon sale. The insurance firm is able to recoup these costs by imposing minimum payment terms and premium lock-ins on policyholders.
The changes were welcomed by some in the industry.
Advisers should make money through ongoing fees rather than upfront "one-off injections of cash", Mathew Bate, wealth manager at expatriate focused advisory firm Private Capital told the South China Morning Post.
"We should be a service sector, not a sales sector," Bate said.
The new rules mirror regulatory changes in Europe, Australia, and the US that have swept away commission paying products in favour of fee-based compensation.
Earlier this year, regulators tightened up sales procedures and told brokers they would need to reveal the commission amount they earn from each product.
It is expected that some of the 70,000 insurance brokers registered with the Hong Kong Federation of Insurers will be affected as many rely on the sale of upfront commission paying products to support their business costs and personal income.
"There will be an inevitable contraction in the market as in all markets there will be people who don’t want to adapt," said Simon Parfitt, the Hong Kong head of wealth management firm Guardian Life Management.
The new rules appear to leave space for interpretation. Some industry players said it was not clear if they would apply to lump sum investment-linked assurance schemes (ILAS) accounts, also known as portfolio bonds.
The rules also put the onus on insurance companies to develop products that "do not create misaligned incentives" between intermediaries and their clients. An "overly high" upfront commission was citied as one example of a "misaligned incentive".
The announcement coincides with an ongoing Legislative Council debate over the formation of an Independent Insurance Authority, a new statutory body that will replace the city’s patchwork of competing insurance regulators.
Three industry bodies - the Confederation of Insurance Brokers, the Professional Insurance Brokers Association and the Insurance Agents Registration Board - directly oversee intermediaries. None have statutory powers and they have limited means to address complaints.
Source: Southth China Morning Post
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