TLPIs, sometimes known as “Death Bonds” are at heart an investment in death. Life insurance policies are purchased from individuals to release funds for them, then pooled and sold to hedge funds or investment banks to be packaged and transformed into securities which can in turn be sold to investors. The basic idea behind TLPIs is that everybody dies at some point; when the original policy holders die the fund receives the insurance payout which exceeds the amount the policy was bought for. Because the funds are not connected to stock markets, they are not affected in the same way as many other investment products in poor economic times. What could go wrong?
In December 2011 the FSA published guidance, confirmed in April 2012, recommending that TLPIs ought not to be recommended to retail investors in the UK. The reason for this was that there are a number of significant risk factors associated with TLPIs which many retail investors would lack the sophistication to appreciate. For example, the value of a TLPI investment fund has to rely on assumptions about the life expectancy of the original policy holders. In basic terms this is a cash flow problem: as medical technology improves and people live longer than anticipated these assumptions can be significantly inaccurate leading to poor performance of the fund, or possibly the fund having insufficient cash to meet required drawings by investors in the fund.
The unpredictability of the assumptions on which these funds are based can also have knock on effects on the liquidity of the fund. If a number of investors wish to exit the fund at once, the investment managers need to find a market to sell some of the underlying assets of the fund. It may well be the case that either there is no appetite to purchase or that the policies have to be sold below value.
An example of a fund which has run into difficulty is the EEA Life Settlement Fund. Trading has been suspended in the fund, an independent report has concluded that the true value of the fund is considerably less than considered to be the case by the fund directors, and investors face the choice of approving a restructure of the fund which is likely to see the value of their investments drop by around 10%, or possible liquidation of the fund.
These products are complex and the way they have been marketed and sold is also complex and may mean that the routes open for seeking compensation for losses incurred may be limited. Careful analysis is needed as to whether any investment advice was provided and if so, whether it was provided by an FCA regulated business. If so, the Conduct of Business rules which regulate the sale of investment products may be applicable, and it may also be possible to pursue a complaint to the Financial Ombudsman Service (FOS). The FOS saw an increase of 33% in complaints about portfolio management issues during the year to March 2013 and a number of these involved “Death Bonds”.
A number of TLPIs however have been marketed by off-shore companies which may mean that a complaint under FCA rules is not possible. Claire Collinson Legal specialises in advice in relation to financial product mis-selling and is able to advise on the potential mis-selling of products such as this, including advice on the appropriate forum for redress and the quantification of losses.
