The life settlement market is regulated in 43 US states – Alabama, Missouri, South Carolina, South Dakota, Wyoming being the naysayers (Michigan and New Mexico regulate viatical settlements but not life settlements) – and each state follows one of two model acts, NCOIL or NAIC, or a hybrid of both.
Regardless of the model used by a state that regulates the industry, two commonalities are that a licensed life settlement provider must be the purchaser of the life insurance policy from the original owner (often, but not always, the insured), and, when a consumer works with a broker to sell their policy, that broker be licensed as well. But still, unlicensed firms have been known to be active in the space, something that carries risk to the policyholder / seller because there would not be any consumer protections by going down this route. And there would be risks to the potential buyer as well – if a life settlement were not conducted through the correct process, the transaction may be voidable.
“It’s long been a frustration of mine that these unlicensed firms somehow slip under the radar,” said Chris Conway, Chief Development Officer at ISC Services. “I’d urge anyone in the life settlement market – from institutional investors conducting due diligence on asset managers, to individual consumers doing research on selling their life insurance policy – to only work with licensed firms.”
US broker-dealer regulator the Financial Industry Regulatory Authority (FINRA) would seem to agree. The organisation published an article, What You Should Know About Life Settlements, on July 31st, seemingly aimed at American seniors who might be looking to exit their whole or universal life insurance policy. The article mentions the various factors for American seniors to consider when deciding if a life settlement is right for them, but notably, it flags a recommendation for the policyholder to: “Check with your state insurance commissioner to see whether the life settlement company or settlement broker you’re dealing with is properly licensed—and whether either has a record of complaints. If you’re working with an investment professional, use FINRA BrokerCheck to learn about their professional background, registration status and disciplinary history.”
Some might say that the timing of FINRA’s article is interesting. It’s a consumer advisory notice first and foremost, and it comes at a time when the direct-to-consumer channel – where life settlement providers advertise on television, or radio, or the internet, soliciting policyholders to contact them directly for a quote to purchase a policy – is growing its share of deal flow in the industry’s secondary market.
Others might say that, given FINRA regulates broker-dealers, it’s eyebrow-raising that it should be publishing something like this at all, as any activity by the organisation that relates to life settlements would normally involve broker-dealers only. But FINRA says that the driver of the decision to publish the piece was simple.
“FINRA updated the piece as part of a larger initiative to keep our content current. There was an old Investor Alert article on life settlements that included some dated material. Because life settlements are still offered and tend to be targeted to seniors, FINRA wanted to have an updated overview and tips available on our site for this population and the general investor community,” wrote a FINRA spokesperson in an emailed response to a Life Risk News request for comment.
Indeed, Conway says that, whilst the timing may seem interesting on the outside, people shouldn’t start putting two and two together and making five just yet.
“I’d say that the market didn’t know that FINRA was going to publish this, as there was no chatter about it beforehand. It is interesting that they’ve done it, sure. But whatever their motivations, it’s actually a welcome statement by an influential organisation. As I said, working with licensed brokers and providers is key for the consumer because of the protections that our industry – a heavily regulated one – offers them. You have to take these things at face value, and unless, or until, FINRA follows this up with something else, there’s nothing here that’s of major concern,” he said.
US nationwide regulators haven’t waded into the life settlement market for a while. Way back in 2009, the SEC created a taskforce to look at the life settlement market, which never produced any conclusions, and the CFTC isn’t applicable to the industry. Insurance is regulated at the state level in the US, and most activity in the legal and regulatory domain involves litigation, as opposed to developments in regulation. Indeed, FINRA’s most recent regulatory notice in the life settlement space is from 2009.
Simply publishing a consumer advisory article as FINRA has here is arguably not an example of a regulator amping up its efforts in the space. But regardless, for an industry which touts itself as a consumer ally, coverage by influential bodies can only be a good thing.
“What’s important to understand is that there are still too many instances of senior insureds simply letting their whole or universal life insurance policy lapse, or accepting the surrender value, when in many instances, their policy would make a good case for a life settlement, where they would receive more money,” said Bryan Nicholson, Executive Director at trade body, the Life Insurance Settlement Association. “Something like this might seem on the surface to raise eyebrows, but the added awareness for our industry from what is essentially a consumer advisory notice is a good thing.”