The letter also appears to say that general insurance sales by brokers are now to be bound by the need to disclose commission, rather than just sales of life and investment-types of products, a Hong Kong-based adviser told International Adviser.
The letter, a copy of which may be viewed here, was the latest in what is turning out to be a series of measures having to do with the way insurance products are sold to Hong Kong consumers.
It was followed this morning by a story in the South China Morning Post, headlined “Insurers pull back from disclosure policy as Commissioner defers issue”, in which Rick Adkinson, managing director of Private Capital, was quoted as saying: “The whole issue is a shambles and the industry is a laughing stock”.
In her letter to the industry, Annie Choi, Commissioner of Insurance, wrote that she “would urge CIB [the Hong Kong Confederation of Insurance Brokers], PIBA [the Professional Insurance Brokers Association] and HKFI [Hong Kong Federation of Insurers] to seek further legal advice and discuss the way forward”.
“I am sure that maintaining a constructive dialogue among the parties concerned would go a long way to working out a solution acceptable to all, and I sincerely hope that this can be accomplished and the differences resolved in the next two months, so that a new system could be put in place by 1 May 2012,” Choi added.
Tied agents not bound
As reported, many independent sellers of insurance products in Hong Kong have been frustrated by an industry agreement – which was said to be technically voluntary, if not, some say, in practice – that they inform clients whenever they were due a commission from the sale of insurance products. The frustration stems from the fact that their main rivals in the marketplace, insurance agents, which typically represent the major insurance giants, are not bound by the same obligation to inform clients about commissions, since their payment, such as it is, is embedded in the insurance premiums paid by their clients rather than paid out separately.
This transparency obligation is not new, having its origins in a 1997 law known as the Prevention of Bribery Ordinance. But pressure to abide by it has increased, in part as a result of a recent, voluntary industry agreement to disclose commissions received, promoted by what some brokers argue was a relatively small number of insurers.
A landmark High Court case involving commission disclosure, won by Royal Skandia and a local Hong Kong insurance broker, Clearwater international, in January, also brought the subject of insurance industry commissions to the fore. In that case, the judge found for the defendants, noting that “common law has long accepted the practice of an insurance broker receiving commission from an insurer, provided, as here, those commissions do not exceed the usual market rate”.
As the brokers see it, the commission disclosure requirement inflicts a major competitive disadvantage on them relative to the insurance companies’ tied agents, since, as mentioned, these operate under a different business model that lacks a visible commission element.
What is more, one independent adviser told International Adviser, the recruiting of Hong Kong IFA sales executives by insurance agencies there is a possible if not likely outcome of the commission disclosure inequality – the thought being that IFA reps could bring their clients with them and “churn” their existing policies, to the advantage of their new employers.
Those who object to the commission disclosure rules being imposed on brokers and IFAs argue that the "commission" tied agents of insurance companies receive for life product sales is a known entity, though if it were disclosed, it would be less than their commissions normally run, since, as one adviser told IA, "insurance companies pay for the rent and back office support for agents, whereas a broker has to pay for his own rent and back office support…because the broker has more expenses to pay, [he] naturally [receives more] in commissions".
This, he noted, is true even though the policy buyer, "whether he buys from an agent or a broker selling the same policy for, say, Manulife, will receive exactly the same cash values, sum insured etc for the same amount of premium.
"To say agents don’t know their commissions because they are ’embedded’ is actually a misunderstanding, I believe."
Not worried
Other IFAs, though, say they are not too worried. Among them is Howard Clark-Burton, managing director of the Financial Partners Group, which mainly focuses on expatriate clients, and which, possibly as a result, may not feel the threat from the tied insurance advisers as much as those advisers and brokers whose clients are mainly Hong Kong natives.
At Financial Partners, “we’ve always disclosed commissions in a general fashion, so being asked to disclose them wasn’t a big challenge for us,” Clark-Burton said, noting that any broker who is already disclosing commissions will not find the requirement to do so “particularly disturbing”.
“If you do your job right, and you come from an independent perspective – i.e., you have access to the full marketplace of products – then there’s no real concern about disclosing, because the client knows you’re acting in their best interests.”
A spokesperson for Convoy Financial Services, the publicly-traded, Hong Kong-based IFA group which recently acquired IPP Financial Services to become one of Asia’s largest financial advisory firms, said the company preferred not to comment on what the commission disclosure requirement’s likely effects would be on the company, "since insurers are still having different views on the issue". However, the company has told the regulator that it believes "insurance agents and brokers should be at the same level of the requirement" to disclose commissions.
‘Ignore directive’ Royal Skandia reported to say
Meanwhile, the South China Morning Post story this morning quoted from a Royal Skandia e-mail letter it said had been dated 1 March – and sent to financial advisers in the wake of Commissioner Choi’s letter – urging them to "ignore" an insurance industry directive issued in December, following the resolution of the high court case involving Royal Skandia, which told IFAs to disclose the income they earned on the sale of insurance-based investment products they sold to clients.
"As a result of this update [Choi’s letter] the requirements previously communicated that are due to be implemented with effect from today will be put on hold; and as such we will not insist on receipt of the individual ‘Declarations on Commission Disclosure’ in relation to the acceptance of any business received," the SCMP quoted Royal Skandia head of operations Mark Christal as saying in his e-mail.
In response, Royal Skandia, through its UK office, issued the following statement:"The original proposal stems from a set of recommendations issued by the HKFI to all insurers based on legal advice previously received. This has created much discussion across the differing bodies and business channels in the HK insurance Industry.
"The agreed initiative that was to be adopted by a number of insurers has, therefore, been put on hold for an expected period of two months, in order to allow the three self regulatory organisations (HKFI, CIB and PIBA) to agree a joint approach that can ensure full adoption across the industry.
"While the specific requirements previously recommended are on hold for a limited period of time, we understand that it is already common practice for many brokers to disclose their remuneration policy in their client agreements.
"We are supportive of this approach, and of any moves to an industry-wide practice on disclosure, on the basis that it should be applied fairly and correctly across the whole market and not just to business conducted by independent insurance brokers."
