The rumoured plans to find a way to introduce new controls on open architecture products were under discussion before Sin Chung-kai, a lawmaker who was instrumental in drafting Hong Kong’s current investment legislation, went public last month with the view that the current regulation is not sufficient.
He said this was in part because of its “two-tier system”, whereby self regulated insurance bodies currently oversee investment-linked assurance schemes (ILAS products), while mainstream securities investments are regulated by the Securities and Futures Commission (SFC). It is understood that the restrictions under consideration would limit sales of open-architecture products, such as PPBs, to “professional investors”, beginning as soon as next year.
A spokesperson for the Hong Kong Federation of Insurers told International Adviser: “At the moment, the regulatory environment surrounding open architecture products such as PPBs is being examined.
“However, no firm conclusions have been reached as to the future of this type of structure in Hong Kong.”
Insurance industry executives and financial advisers say such regulations could be a blow to those Hong Kong-resident expatriate investors who find personal portfolio bonds and similar open architecture products to be among the best suited to their needs.
“Personal portfolio bonds are very important to us,” said Mark Rawson, chief executive of the Henley Group in Hong Kong, an expat-focused advisory firm.
“We recommend them mostly to expats, who require broader asset class [choice] and/or currency options than are offered by SFC-authorised funds alone.”
Under the plan said to be under consideration for reducing the risk of investing in open architecture bonds, individual Hong Kong-resident retail investors who don’t meet the requirements to be considered a “professional investor” – generally defined as a person who has an investment portfolio worth hk$8m (£614,000, $1m, €746,000) or more – would be permitted to hold in their personal portfolio bond only securities, including mutual funds, that have been authorised by the SFC.
The apparent confusion surrounding rumoured plans to introduce new restrictions on PPBs and related investment products marketed by insurance companies in Hong Kong comes as the insurance industry there is about to undergo a major change in the way its intermediaries are regulated.
The existing Office of the Commissioner of Insurance is due to be replaced next year by an Independent Insurance Authority (IIA), as an existing self-regulatory regime for insurance intermediaries is replaced by a new, statutory licensing system.
The confusion is also taking place at a time of some rather intense local hostility to the general idea of ILAS products, in the wake of a number of highly publicised product failures and mis-selling scandals.
A number of observers, including the Henley Group’s Rawson, concur with Enoch Yiu, a financial columnist for the South China Morning Post, who wrote that the best way to protect the interests of investors in investment- linked insurance wrappers would be to move them “under the regulation of the SFC”, rather than keeping oversight of their sale in the hands of the Insurance Authority.
In the meantime, life companies will probably focus their efforts on other markets, according to RL360° chief executive David Kneeshaw, who said this is what it has been doing for the past five years.
“We realised early on that the SFC would have a lot of work to do, to restructure the regulatory framework for ILAS products after the minibond crisis in 2008.
“For this reason, we have not been marketing our products in Hong Kong since 2009, even though we’re licensed there, and have an office and staff there.”
