A circular was distributed by the Office of the Commissioner of Insurance yesterday, which currently regulates the insurance market under the direction of the Insurance Authority, a government office, setting out new guidance for the sale of the controversial schemes.
The OCI stated that, due to the susceptibility of the products to “mis-selling and aggressive selling” and to ensure insurers do not create “misaligned incentives”, indemnity commission “or any standing arrangement that offers advance payment of commission, is strictly prohibited”.
Indemnity commission is where a life company pays commission to an intermediary based on the full value of the policy – a policy which could run for 25 years. The life company is however, entitled to take back some or all of the commission if the policy is cancelled.
Knock-on
The decision to ban the payment of indemnity commission is likely to have a big knock-on impact on many firms which rely on the injection of cash which the payments provide.
In addition, the guidance note was very prescriptive in describing what should be explained to clients during the advice process – stipulating that “after a client has considered the insurance options” and is considering using an ILAS, “he/she should be apprised of all the product features, particularly the fees and charges, surrender penalties (if any) as well as the product and investment risks”.
The OCI also said, after a client has decided to purchase an ILAS product, “he/she should be fully apprised of the key product features again, as well as his/her rights and obligations, such as the right to ask for details of the intermediaries’ remuneration, the need to complete the post-sale call, the 21 day cooling off period etc”.
Commission disclosure has been a requirement of financial advisers selling ILAS since 30 June last year when it was introduced by the Hong Kong Federation of Insurers.
At the time, the decision to request commissions be disclosed to clients, and that life companies ensured this had happened by calling the client, was not expected and was met with shock by some in the industry.
The guidance now issued by the OCI, while anticipated by the industry to some extent, takes those initial measures much further.
Click here to read reaction to the news last year
ILAS products have been subject to increased scrutiny over the past couple of years, due in part to some widely reported cases where they had been mis-sold. One of the more high profile cases was that of a kindergarten teacher who claimed to have been mis-sold one of the schemes.
The teacher’s boyfriend, an American and also a teacher named Lindell Lucy, has led a noisy media campaign to get his girlfriend’s money back.
Campaigns like this are largely responsible for the regulatory changes of the past couple of years.
Look out for further analysis of these latest changes on International Adviser over the coming days… In the meantime, tell us what you think using the comment box below or get in touch with me via twitter at @SimonDanaher1
