The UK’s Financial Services Authority (FSA) is warning its regulated firms against selling or marketing traded U.S. life insurance policies investments (TPLIs) to retail investors because they are “high risk, toxic products,” it stated in a press release.
In an announcement from the other side of the pond Monday, the FSA said the so-called “death bonds” or death “bets,” whereby investors put their money into a pooled investment or fund which invests in U.S. life insurance policies, and bet on when the original policyholders will die, are highly problematic and did its best to make sure firms stay clear of them.
Evidence from the FSA’s work to date has found significant problems with the way in which the products are designed, marketed and sold to UK retail investors, the British regulatory body said. Many of these products have failed, causing losses for UK retail investors, it said.
There are many risks involved, including liquidity risks, the opaqueness and complexity of the product structure inherent uncertainty of underlying assumptions and exchange rate risks, and lack of direct regulatory oversight in the UK, the FSA stated in its strongly worded guidance to the industry.
“TLPIs are toxic products which pose significant risks for retail investors…The failure of these products in the past has led to significant consumer detriment and we fear new investors will suffer unless we take the necessary steps now to prevent their sale and distribution,” said Margaret Cole, FSA managing director.
Some in the settlement industry noted the guidance did not use the same, heavy-handed language, did not condemn life settlement securitizations as an asset class as the guidance was aimed at not institutional investors, but retail investors, who may not understand it because of its complexities and for whom it may not be a good investment, because it is not liquid.There are also concerns arising from companies who mismanaged funds, of course.
Pension funds and reinsurers, global market hedge funds and U.S. municipalities, such as Allegheny and Westmoreland counties in Pennsylvania, are interested in or are investing in this asset class, or at least buying up distressed asset pools, according to sources and news reports.
Life policy resale products had their heyday before the market downturn in 2008, while many so-called individual stranger-originated life insurance [STOLI] cases here in the U.S have faced court challenges.
The securitization of these products is the main concern in the U.K. Cole asked firms to be aware of TLPIs as underlying assets in other investments, and turn back from them.
She said that these and similar products are not a simple problem for the FSA to address because many are based outside of the UK, and so are outside the FSA’s jurisdiction and there are also considerations under EU law which limits action.
However, the UK is engaging with other European supervisors to find a solution to give greater consumer protection against these products, she stated.
Stateside, the American Council of Life Insurers (ACLI) recommends that the securitization of life settlements be prohibited by legislation or regulation.
“Securitization may encourage promoters of these packages to prey upon senior citizens urging seniors to settle their life insurance policies even if a settlement is not in their economic best interests,” said the ACLI of its bête noir.
“Securitization of life settlements will exacerbate the STOLI problem,” the ACLI states.