Hong Kong IFAs await more regulatory certainty

There was widespread relief among independent financial advisers in Hong Kong after a late-February ruling on commission payments in favour of IFA firm Clearwater International, but confusion remains over regulatory treatment of investment-linked assurance schemes (ILASs) and commission disclosure.

More certainty is likely next year, when a single insurance regulator is put in place, says Mark Kirkham, chief executive of Platinum Financial Services and vice-chairman of Hong Kong’s Independent Financial Advisors Association

ILASs represent a large part of IFAs’ business – for some firms including Platinum, all of it – and are supplied by insurers such as Axa, Friends Provident, Generali, Royal Skandia, Standard Life and Zurich. They wrap funds from asset managers into a monthly-payment or lump-sum product.

However, Hong Kong’s Securities and Futures Commission (SFC) does not treat the underlying fund as a security, says Kirkham, so it has no interest in what IFAs do with ILAS products. “That’s why a number of new IFA companies are setting up in or looking to enter Hong Kong, because you don’t need an SFC licence to give advice on what in fact is a security within an ILAS product.”

The situation dates back to legislation put in place in 2003 – when the Securities and Futures Ordinance was last reviewed. IFAs had thought they needed a type 9 licence to give advice on securities including under an ILAS product, notes Kirkham. But the SFC said in August 2009 that this wasn’t the case and never had been.

Not surprisingly, fund managers are not happy about the situation and are lobbying for a change.

Things may indeed change when a convergence of insurance regulators takes place either in 2013 or 2014, says Kirkham.

There are currently three self-regulatory organisations: the Hong Kong Confederation of Insurance Brokers, Professional Insurance Brokers Association and Independent Insurance Authority (IIA). Most likely in early 2014, the IIA will take over as a ‘super-regulator’, and Kirkham believes the new body and the SFC will review the current legislation on ILASs, “because it’s clearly wrong – a security is a security whether it’s in an ILAS product or not”.

Meanwhile, IFAs may be breathing easier following the decision in their favour in the Clearwater case, but they are still waiting to see if the regulator is likely to impose rules on commission disclosure.

Jeremy Hobbins, a director of trading firm Li & Fung, sued Clearwater in December, arguing that the firm was not acting in his best interests but solely so that it could profit from commission and fees paid by Skandia and other insurers. (Sources say Hobbins had been urged by another IFA firm to bring the case.)

The judge ruled against Hobbins, saying Clearwater had made it clear that it would be charging commission on ILASs and that the amount was no higher than was normally paid to IFAs. “Fortunately the courts saw sense,” says Kirkham, “although I think there’s now an appeal being brought.”

However, what has happened as a result, he adds, is that “all the life companies have put an addendum in all our terms of business that puts the onus on us to tell the client we are satisfying the ICAC [Hong Kong’s Independent Commission Against Corruption] aspect of commission disclosure.” The regulators are yet to bring anything in relation to commission disclosure, he notes.

In an attempt to comply with section 9 of the Prevention of Bribery Ordinance (PBO), a group of life companies were, until March 1, complying with the insurance commissioner’s request and insisting that brokers explicitly tell policyholders, if asked, what they earn, says Kirkham.  

But brokers, for the time being at least, have been given time to come up with a way of dealing with the PBO requirement, he adds. Kirkham says he and other brokers are hoping the rules will cover large agency salesforces rather than just singling out small brokers.  

See the March 2012 issue of AsianInvestor magazine for an in-depth feature on the IFA industry, with a particular focus on Singapore.