Is There Still Life In Life Settlements?

12.01.12

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Many of you may have read on the internet about the UK Financial Services Authority?s (FSA) decision to “?strongly recommend that Traded Life Policy Investments (TPLIs) should not

Many of you may have read on the internet about the UK Financial Services Authority?s (FSA) decision to ??strongly recommend that Traded Life Policy Investments (TPLIs) should not reach ordinary investors in the UK. We are telling firms that they should not be marketing, recommending or selling these products to the mass retail market?.

So, what is a TLPI?

Sometimes called ?death bonds? or ?seniors policies? or ?viaticals?, they are life assurance protection policies taken out by Americans. For a variety of reasons the policyholder will sell their policy in return for a lump sum. The new owner will keep the policy and pay the ongoing premiums until the death of the original policyholder, at which time the current owner will collect the life cover.

This sector has been considered an emotive subject. On one hand you have those who promote these as life policies that the original owner doesn?t need anymore and decides to sell. On the other hand others believe that Americans are being forced to sell whatever they have because they have no other assets to pay for their healthcare. As is often in life the truth is probably somewhere in the middle.

TLPIs can be purchased directly, or through a fund or through a structure, which promotes a given return.

This is not an asset class that I have ever been involved with, not least because it has proven very difficult to carry out sufficient due diligence to be able to determine exactly how safe our clients? money would actually be. Not withstanding that, many advisers have been drawn to this type of investment and according to the Financial Times on 28th November 2011 it would appear that more than 1,000 firms in the UK distribute TLPIs. It?s difficult to determine how many overseas advisers recommend them but I?ve got to assume many more.

If you have an adviser who likes these type investments, then you have probably heard ?absolute return? and ?not linked to the value of share?. However, in a speech by Peter Smith, Head of Investment Policy, Conduct Policy Division of the UK FSA in February 2010, he described a list of other risks.

Furthermore the FSA went on to publish a statement on 28th November 2011 expressing the views that –

?TLPIs are usually marketed as offering strong returns that are unrelated to stockmarket performance, which makes them appear attractive at a time when more traditional investments are not doing well.

?In actual fact, TLPIs are high-risk investments. In particular:

?They use complex investment strategies based on calculations about how long people will live. With medical advancements and people living longer and longer all the time these calculations can easily be proven wrong, meaning that the strategy may not work as promised and returns may be lower than expected.

?If the investment manager needs to raise extra funds by selling some of the life assurance policies before the death of the original policyholder, they may struggle to do so. It might not be possible to sell them at all or they may only be sold at a significantly reduced value. This might happen at any time because it is important for TLPIs to maintain a certain amount in cash to keep the investment running. Where this becomes a problem, it can place significant strain on the investment and might mean that investors are prevented from withdrawing money for a time or face significant falls in the value of their investment.

?They often involve several firms in different countries working together and taking responsibility for different aspects of the product. This makes it difficult for firms to manage the product in a way that ensures customers are treated fairly, and it is generally difficult for investors (and even those selling the products) to fully understand how these products work and what the risks are.

?The products can fail entirely and customers can lose a significant amount of money.?

For individuals already holding these investments, the FSA advises:

?If you were advised to invest in a TLPI, your financial adviser should be able to explain why they thought the investment was suitable for you. If you invested in a TLPI without advice, you may wish to seek independent advice on it and on what your options may be.?

?If you believe you were mis-sold a TLPI, you should contact the firm that arranged the investment for you and raise your concerns. They should have a procedure to follow to resolve matters with you. If you are not satisfied with their answer or proposed resolution, you can take your complaint to the Financial Ombudsman Service. If the adviser?s firm has gone out of business, the Financial Services Compensation Scheme (FSCS) might be able to help.?

Are ?death bonds? covered by the Financial Ombudsman Service and the Financial Services Compensation Scheme?

The FSA?s view is that: ?It depends on where the firm is based that holds the customer money. Most of these products are offshore and so are outside of the FSA?s regulatory scope. This means investors are unlikely to be protected by the FSCS if things go wrong. They may also not have access to the Financial Ombudsman for this reason. It may still be possible, however, to complain about advice given or marketing material produced in the UK by an authorised firm.?

The fall out

On 1st December 2011, FT Adviser reported that ?Trading in the $995m (?668m) EEA Life Settlements fund has been suspended by the company?s board after a wave of investors tried to withdraw their assets, potentially throwing the fund?s solvency into doubt. The suspension means the existing investors are effectively trapped in the fund until the board decides that it can resume paying investors their money back whilst ensuring the fund?s solvency?.

The FSA are reported as saying that: ?Many of the traded life policy investment (TLPI) products in the market were already in difficulty at the time we published the guidance, and because these products tend to be based offshore and therefore outside of the FSA?s jurisdiction, we are limited in what we can do.?

If you own TLPIs or TLPI funds, speak to your financial adviser as soon as you can.

By Bill Blevins, Managing Director, Blevins Franks

5th December 2011

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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