The Securities and Futures Commission (SFC), which regulates Hong Kong’s stock and futures markets, has declared that insurance intermediaries and brokers do not require an SFC investment advisers’ licence in order to advise policyholders on the selection of funds held in their life insurance policies.
The SFC’s statement, which was contained in a recent clarification of existing regulations posted on the regulator’s website, has surprised some in Hong Kong’s insurance industry, who pointed out that it comes as the SFC and other regulators are moving to increase regulations and transparency as part of a post-financial crisis, post-Lehman Brothers shake-up.
In its clarification, the SFC firmly states its right to oversee the content of marketing materials of insurance products containing funds, noting that the use of any unauthorised documentation in the “promoting, offering or selling” of such products “is likely to constitute a criminal offense”.
“It’s not a change in the regulations, but it is seen as a change in the SFC’s interpretation of the regulations," said one Hong Kong insurance industry executive, who requested anonymity, of the news that those who market insurance policies linked to funds do not require SFC licensing.
He added: “It’s a surprising statement, and it came as a bit of a bolt out of the blue.”
Until now, many in Hong Kong’s insurance industry had assumed an SFC licence was necessary for those involved in marketing insurance policies containing underlying funds, even for those intermediaries already regulated by the insurance industry’s two main regulators, the Confederation of Insurance Brokers (CIB) or the Professional Insurance Brokers Association (PIBA).
A source familiar with the SFC’s licensing regulations noted that those brokers and intermediaries who wish to continue to be regulated by the SFC may still do so, even if they are already licensed by CIB or PIBA.
Still, “this appears to leave a hole in the regulations,” said another insurance industry source who also asked not to be named, citing the subject’s “contentious” nature.
The SFC said it had a policy of not commenting on clarifications of this type.
At issue is a type of insurance product known as investment linked assurance schemes (ILAS), which are basically life insurance policies that contain a link to an underlying investment fund.
Because these ILAS are insurance products, a policyholder’s regular premium payments are not invested in the underlying funds, unless the insurance company providing the policy chooses to do so separately on behalf of its own account.
In the document on its website, the SFC notes that even though ILAS may “fall within the meaning of the expression collective investment scheme”, the insurance companies that supply them are not considered to actually engage in the business of advising or dealing in securities, because they do not directly benefit from their clients’ choices. Therefore, the SFC believes, they do not require SFC licensing.
Explains the SFC: “Advising or making recommendations concerning the underlying funds of ILAS does not stand alone as a discrete business carried on in its own right. It is an activity that is subsumed within the insurance business.”
At another point, the SFC adds: “Promoting, offering or selling ILAS involves carrying on an insurance business, which is not a regulated activity under the Securities and Futures Ordinance”.
However, some in the insurance industry argue that ILAS may be called insurance products but, in the words of one, they “basically remain investments linked to the [stock] market”.
There is speculation the SFC’s clarification on ILAS reflects a desire on the regulator’s part to shift some of its oversight burden to the insurance industry’s own regulators, at a time when its remit is being expanded in other areas.
At least one insurance company spokesman said it appeared there was nothing to stop insurance companies from choosing to sell their products only through SFC-licensed intermediaries.
Limits of regulation
One Hong Kong intermediary said there was a danger, in all the controversy about licensing, of forgetting that regulation alone is not a panacea.
After all, “the SFC authorised the materials [used by intermediaries to sell] Lehman Brothers products," he noted. "How did that help the world?”