FAQs – Publicly offered investment products: Investment-Linked Assurance Schemes

The Securities and Futures Commission of Hong Kong (SFC) has published revised frequently asked questions (FAQs) relating to Investment-Linked Assurance Schemes (ILAS), schemes under which life insurance policies are typically coupled with investment options (usually mutual funds shares). The FAQs address – among others – issues such as the application process for an ILAS product, documents to be provided in this context, time limits for supplying relevant documentation, fees applicable to the registration and authorization of ILAS products, or the authorization (process) of marketing material. The FAQs also summarize which regulatory authority is responsible for which part of the ILAS product (i.e. Insurance Authority, SFC, etc.).
This latest version contains two newly added FAQs in Section 4 of the document entitled „Additional Guidance on Internal Product Approval Process (the “Additional ILAS Guidance”)“, new Subsection „Investment advisory services in respect of ILAS policies“ which read as follows – as quoted:
Question 11, page 50: Policyholders may appoint intermediaries to provide them with service advising on, or choosing or managing, investment options in respect of their ILAS policies (the “Advisory Service”). What are the requirements on the ILAS issuers in connection with the Advisory Service?
Answer: In accordance with 4.6 of the ILAS Code, product issuers must ensure their products are designed fairly. In addition, pursuant to 3.6 of the Overarching Principles Section of the Handbook, product issuers, their counterparties and service providers shall avoid being placed in a conflict of interest position that may undermine the interests of the investors in the relevant product.
Currently, Advisory Service provided by intermediaries (i.e. insurance brokers) may include (i) advising on selection of investment options available under an ILAS or (ii) discretionary investment management whereby the intermediary will be given full authority by the policyholders to give instructions to the ILAS issuers to (a) switch investment options and/or (b) change premium allocation on behalf of the policyholders.
There are concerns that ILAS issuers’ involvement in arrangements relating to the Advisory Service will cause confusion to policyholders who may be under the
impression that ILAS issuers are engaged in the Advisory Service and that such service forms part of the product features and in turn give rise to actual or perceived benefits and conflicts of interest as product providers. Such arrangements include, for example, introducing the Advisory Service to policyholders when offering the ILAS and subsequently facilitating payments by deducting the relevant service fee to the intermediaries through the policyholders’ investment under the ILAS policy. The deduction of fee for the Advisory Service from the ILAS policies will also have potentially significant implications to the return on investment and benefits under the ILAS policies which will add further complexity from an investor point of view.
Given that the provision of Advisory Service is not a part of the ILAS product features, the ILAS offering documents should not contain disclosures relating to such service, the related service fee and its payment arrangements. Accordingly, to safeguard the interests of the investing public, issuers of new ILAS authorized under the enhanced requirements in the Additional ILAS Guidance will be required to refrain from engaging in any of the following arrangements in relation to their ILAS:
i. providing any service advising on, or choosing or managing, investment options available under the ILAS to any Hong Kong investors (i.e. the Advisory Service)
for a fee or other remuneration;
ii. introducing, promoting or recommending any Advisory Service provided by any intermediary; and
iii. deducting any fees for such Advisory Service payable to any intermediary from the ILAS policies.
Question 12, page 51: ILAS issuers may provide certain ancillary services to their policyholders from time to time such as provision of performance information of investment options and optional de-risking investment arrangements under PLP. Are these services regarded as Advisory Service as defined under Q11 in Section 4 above? Can the SFC provide some examples or guidance on that?
Answer: Ancillary service provided by ILAS issuers to policyholders would not generally be regarded as Advisory Service if it only provides general non-personalized information without giving any advice or comment relating to specific investment options or the corresponding underlying funds.
The following are non-exhaustive list of examples (which will be updated from time to time) that do not generally be regarded as Advisory Service:
i. Provision of non-product-specific information such as market news or updates, industry and sector trends, and education materials;
ii. Provision of lists of investment options or corresponding underlying funds that are selected using objective criteria (e.g. performance information, risk categories, research data);
iii. Provision of factual information such as offering documents, notices to investors, fact sheets and performance information of the investment options or the corresponding underlying funds issued by ILAS issuers or the underlying fund managers;
iv. Provision of objective filters for self-directed research on investment options or corresponding underlying funds (e.g. geographical location, underlying assets, performance information, risk categories and third party or in-house risk ratings);
and
v. Provision of opt-in investment arrangements to facilitate de-risking of investors that involve pre-set investment option selection based on matching of risk levels or other factual information as part of ILAS product features.
The above examples are non-exhaustive and for illustration only. ILAS issuers should consider their own circumstances having regard to all applicable regulatory
requirements.