Two-tier regulation of insurance-related investment products is a receipe for trouble, a senior Hong Kong lawmaker involved in overseeing the sector has warned.

Insurance-linked funds, a sector in which licenced vehicles drew in $10 billion of new money last year, suffers from a two-tier regulatory regime in Hong Kong and investors are at risk, according to the South China Morning Post.

The publication quoted Sin Chung-kai, who was chairman of the legislative committee responsible for the Securities and Futures Bill, published in late 2000 and enacted in 2003. He told the news service that regulation of the financial sector in Hong Kong does not properly protect retail investors and should be tightened.

Regulators in Hong Kong are, according to the publication, looking to tighten controls on the sale and marketing of ivestment-linked insurance products, following losses and problems in part of the sector.

The comments by Sin Chung-kai add to remarks made by figures in the Hong Kong and Mainland China financial industry to the effect that services and products require clearer – although not necessarily harsher – regulation. The calls also add to nervousness about what is sometimes called the shadow banking system in the region and the proliferation of wealth management products seeking to offer higher yields than available in a background of low interest rates.

"I do not have any intention to escape my responsibilities. Supervising these selling activities seems to be insufficient," he was quoted as saying when asked about mis-selling scandals that have hit the wealth management industry in recent years.

Many unlicenced funds are marketed directly to retail investors by firms that take advantage of a two-tier regulatory structure that gives investors different types of protection depending upon which regulator oversees their adviser and investment account, the publication said.

Rules in Hong Kong assign supervision of certain investment products, known as investment-linked assurance schemes (ILAS), to self-regulated insurance bodies with limited authority, rather than the Securities and Futures Commission, which has powers to investigate cases and make seizures when necessary.

The publication cited the example of a collapse last year of Australian fund house LM Investment Management, which had a reported A$3 billion in assets before its implosion. Its flagship Managed Performance Fund is now valued at 5 Australian cents on the dollar. The firm is being investigated.