1 January, 2015 is a date that will be remembered by all IFAs in Hong Kong as a game changer. I’m sure there will be some who, in 12 months, will look back and wonder what all the fuss was about, but the speed at which change has been forced upon us and the lack of responsiveness from those handing down the changes has been frustrating to say the least.
Late last year I had to review the final version of guidance notes from our regulators so our sales process could be finalised and we could get everybody up to speed. We would have liked more time to prepare but it wasn’t to be.
So exactly what are these changes, why are they being made and how will they impact the IFA community?
There are three (for now) and they are all driven by the Office of the Commissioner of Insurance (OCI) on behalf of the Hong Kong Government. The first, which sees an increase in the death benefit on ILAS policies from the current 101% to a minimum of 105%, is the one that least affects IFAs.
The change is driven by the OCI, which wants to differentiate insurance products from buying mutual funds or unit trusts directly. The cost of this increase in life cover is, thankfully, being absorbed by the life companies.
The second change relates to commission disclosure, or an initiative that passes off as one. Current ‘broad brush’ regulation dictates that brokerages need to seek permission from investors/policyholders in order to receive a commission from the respective life company when arranging a policy for them.
Alongside these two commission-related disclosures, the OCI also believes a policyholder needs to be informed of an ‘approximate’ amount they will pay to an insurance company if they decide to buy a product via a specific distribution channel.
What that actually means is that a client who shops around and speaks to an IFA, a bank representative and an insurance agent, all of whom recommend the same product, will receive the same brochure detailing the product charges as identical, but will have three different disclosure figures based on which channel the product is bought through.
My view is that clients will likely become more confused rather than better informed.
The third and perhaps most significant of these changes is the ban of indemnity commissions on Class C or ILAS business. On 30 July, 2014, the OCI published GN15 which was a further attack of ILAS products.
The guide is littered with words like “treating customers fairly, value for money, managing expectations, ensuring highquality advice, product suitability” and many more.
Then with point 9.3 comes the real kicker – indemnity commissions will be banned from 1 January, 2015 and commissions on Class C business must be paid on an earned basis.
Adopt and adapt
An industry which has thrived and prospered on a particular way of remuneration for the past 25 years, has been given five months to adapt to these sweeping changes.
At the same time that GN15 was published, the OCI told product providers they didn’t like the total fees and charges on most of the then-approved products. So providers have been hurriedly swinging between the drawing board and the OCI for approval of their new, keener-priced products, most of which are not available for sale as of 1 January.
Divide and conquer
Post-1 January, what are IFA firms doing in order to survive once the indemnity tap is turned off?
They look set to expand their general insurance books, considering the Mandatory Provident Fund as an additional revenue stream, and seeking assets under management from new sales.
IFA firms will also operate a more service-orientated model, which brings in clients from competitor companies and diversify into property. Diversification has always been important but never more so than now.
One thing is certain and that’s much more insurance will be promoted (which is what the OCI wants) and for some of us that will bring a sense of déjà vu as we are actively encouraged to sell endowment policies.