The latest toxic product
Life settlement funds are the latest investment products to get the "toxic" badge slapped on them by US politicians and some UK financial advisers.
The products relate to unwanted US insurance policies purchased and their revenue streams sold as debt issues. They are available to UK investors from small providers such as Policy Selection, Managing Partners and EEA Fund Management.
They are not regulated by the FSA and comparisons have recently been drawn to toxic sub-prime mortgages. Democratic congressman Paul Kanjorski says selling life settlement funds represents a "return to the casino culture", where people are sold complex products they don"t understand.
One independent financial adviser (IFA), who does not want to be named, says he is in "the middle of sorting out messes for clients left by these assets". He pulled his clients' money out three months ago, but now liquidity issues have arisen.
"These are semi-Ponzi schemes sold as the next big thing by men in pinstripe suits," he explains. "This is crooked dealing - middlemen nibble away at the returns and deliver a single-digit return to the retail investor. I wouldn't buy these if the Pope was selling them."
Another adviser, David Stephenson, director at Wise Investment, is concerned that these products are based on the US market. He says: "With the problems of AIG, I am reluctant to invest. I would never put a large portion of anyone's savings into something like this."
Policy Selection runs the Assured Fund, the largest life settlement fund in the UK. Finance director Andrew Walters argues it is a "great" asset class that investors can "buy and hold for capital gain".
He adds: "We"re hoping 2010 will be a good year for us as investors get out of cash."
He dismisses any similarity with sub-prime mortgages and any fears that the life settlement sector will explode, but admits transparency could be improved.
This article was originally published in Money Observer - Moneywise's sister publication - in November 2009
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.