The European Life Settlements Association has launched a code of practice designed to increase protection for investors in the expanding asset class of life settlements.
The publication of the code comes at a time of controversy for life settlements, which have come under increasing scrutiny from regulators and media alike as the asset class has spread further into the retail market.
The collapse of UK fund provider Keydata and the high profile under-performance last autumn of two Deutsche Bank funds have highlighted the need for greater transparency and education around life settlement investment risk, as well as for more rigorous risk mitigation.
Elsa claims its code delivers the clarity and firm direction required, laying down both high-level principles and more detailed provisions for participants in the industry to follow.
The UK Financial Services Authority, which Elsa consulted in formulating its code, has expressed particular unease over insufficient prominence given to risk in providers’ marketing literature and a general lack of transparency, as well as high commission payments to advisers and scope for inaccuracy in the measurement of longevity risk. Liquidity risk, fraud and the incentives structures within the complex life settlement value chain have also been highlighted as presenting potential pitfalls for unwary investors.
Elsa aims to provide a robust self-regulatory framework in these areas: members must either comply with the code or face suspension and ultimately expulsion from the association. Applicants for membership must demonstrate compliance with the code in order to be accepted.
Patrick McAdams, Elsa chairman, says: “As is often the case with new asset classes, teething problems – some of them serious – have occurred within life settlements. Sadly the better known of these problems have wrought painful damage on both investors’ pockets and the reputation of the asset class. They have also taught us some important lessons however, and these lessons form the foundations of this code. Compliance with its principles and provisions should significantly reduce and in some instances remove the risk of these failures recurring. The code also provides easily comprehensible guidance on how to ensure peace of mind when investing in this exciting, largely uncorrelated and potentially high-yielding asset class – an important feature given life settlements’ enormous potential to deliver the steady, predictable returns investors so dearly want having been rocked by a volatile equity market.”