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FCA faces £8.5m legal claim from EEA Life Settlements investors

A group of 90 investors in the EEA Life Settlements fund are launching a class action against the FCA worth £8.5m.

The EEA Life Settlements Action Group has set a deadline of 14 February for investors to sign up to the action and says it hopes to reach £10m in claims.

The EEA Life Settlements fund has been experiencing difficulties since December 2011 when the fund was first suspended after the FSA labelled life settlement funds as “high risk, toxic products”.

Peter Lihou, who founded the group in February 2014, says the regulator’s statements were “factually incorrect” and caused a run on the funds.

He says: “The basis of the claim is that the FSA infringed human rights law by denying EEA Life Settlements investors access to their funds.

“We would urge any investors who wish to get involved to join the action before the deadline.”

Lihou says the group will send a formal letter to the FCA setting out the claim, and if a settlement is not reached with the regulator will take the case to the European Court of Human Rights.

An FCA spokesman says: “The FCA remains of the view that our intervention in this market was justified. The FSA issued guidance for consultation because it did not regard traded life policy investments as suitable investments for the mass retail market and was concerned that these investments may be reaching investors for whom they are not suitable.

“These concerns had been made public by the FSA a number of times before, but the industry had not heeded these warnings and the market showed signs of inappropriate expansion into the retail sector. The FSA issued the guidance for consultation to address urgent concerns about the growing risk of consumer detriment posed by the TLPI market.”

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. Pity it isn’t a class action against the government as it is the industry, and those investors who didn’t invest in EEA Life Settlements, that will ultimately pay through FCA fees to cover the cost of any court action and subsequent compensation if any.

  2. Interesting that the FCA took action on this product but remain reluctant to give advice/guidance on other products.
    Personally I believe that products not covered by the FSCS should not be made available (via a broker) to any except sophisticated clients. Then we would not be faced with continuous demands for compensation for totally unsuitable products sold by dodgy brokers who have gone bust together with the investment.

  3. I wonder what will happen when the FCA says that ‘Buy to Let’ is a toxic product, exacerbated by high gearing and the inherent risks which go alongside such speculative ‘investment’…. who will be launching the class action then!

  4. Were these EEA Life Settlements funds authorised and therefore supposedly regulated by the FSA/FCA?

  5. Ms Coles comments beggar belief; here original ‘statement’ also called TLPI’s ‘Ponzi Schemes’ (which was swiftly withdrawn, a step too far even for them but the damage had been done)……. So why are hedge funds, banks and the wealthy 1% buying so many??

    The regulators are there to regulate not annihilate ! The bigger question is why?

  6. Certainly an investment that requires the lives assured to die on time to maintain liquidity and cashflows, plus the risk of the insurer going bust is perhaps not suitable for the majority of investors, but nobody lives forever and the book will mature.

    Following this logic if we all bought annuities and lived to 120 would they be high risk toxic products? Not many life companies would be able to withstand such a hit to their reserves. It is possible with the new pension freedoms that there will be selection against the insurers as only white collar healthy clients will buy annuities.

    The FCA needs to be careful about what it says, remember Matthew Hopkins, if it looks like a witch it is a witch whether innocent or not.

  7. The FSA’s comments merely stopped new investors buying the fund. Existing investors (in a fund that was only supposed to be marketed to sophisticated investors) have got exactly what their advisers recommended they buy – an investment in iliquid assets that were over-valued by someone who benefited from a performance bonus based on the valuation they gave the assets!

    If advisers were too stupid to pick up this obvious conflict of interest, they probably also thought it was perfectly natural for the price to rise in a straight line that generated a 3% p.a. performance fee (on top of hefty standard charges) even though the assets were priced in USD and hedging costs would vary considerably over the periods shown.

    The fact the investment advisers/valuers had little experience (aside from the EEA Fund) in the sector and didn’t even bother to use any of their massive fees to pay an actuary to value the assets may have raised an eyebrow, or even the make up of the portfolio (pretty much exclusively made up of policies with renewable premiums). If advisers missed all of this then it doesn’t seem too harsh for them to compensate their clients, or for those sophisticated clients, who were presumably sophisticated enough to take all this into account but invested anyway, to lose access to their money.

    The good news is the FSA’s intervention means those IFAs who can read/think (or who can be bothered to) will have a reduced FSCS levy to cover those firms who (after pocketing some healthy commission) no longer exist.

    In the meantime, the fund is still in existence and will deliver returns equivalent to its true value to investors.

  8. At the risk of sounding extremely simple but the FCA had evidence that these were starting to reach people for whom they were unsuitable, why did they not go after the firms from which they gathered the evidence of wrong doing? Surely that would have been so much more effective and would not have let the sh*t hit the fan for ALL investors? Am I missing something with these thoughts? If not then the incompetence of these people really does start to shine through. Albeit the person in question has long since movers on.

  9. OOOH Clive Moore; aren’t you the smug cynical one.

    I suppose all of the first-class fund managers who bought the fund fit into the same stupid, cant’ think, can’t read, can’t be bothered bucket as well? Did you visit New York to examine these policies to determine all these details or are you having a self-righteous rant?

    Horrible man

  10. No need to visit New York, all in the marketing material and prospectus. I’m not sure any Fund Managers who bought this would be described as first-class.

    What’s horrible is the situation investors who need access to their cash find themselves in.

  11. I tend to agree with Clive Moore.

    There were many ‘first class’ investment managers who openly chose not to invest in this for very sound reasons, many of which have materialised. Do a quick search on the internet and you will find some high profile comments from well known firms well before the FSA’s comments. Concerns about valuation and liquidity are mentiond as well as the 75% performance fee failing the ‘sniff test’.

    There is also a clear record on the FSA website of detailed comments and guidance on these products in the year or more leading up to their ‘toxic’ comment so anyone surprised needs to do some navel gazing.

    The fund itself should be able to stand on its own two feet regardless of any comments and the only effect of this should have been the liquidity. Performance should not be dependent on new money. It appears that it had to re-price because it got the valuation of policies wrong – despite the claims about being conservative in it’s approach. Reading the prospectus raises some fundamental questions, not least was ‘what’s the sensitivity of fund performance against policyholders living too long?’. Very high as it turns out but this wasn’t quantified until after the event as far as I can see (when valuations were queried by the auditors).

    For all of that this was a legitimate investment for some clients who had an appropriate risk profile. In the long term it remains to be seen whether the fund delivers on the sort of returns it suggested it would.

    As for the court case, it looks a lost cause from the start – if successful then it would mean muzzling and restricting regulators across the EU. Unlikely at the best of times, in the curent environment it simply isn’t going to happen.

  12. Grey Area,

    Performance should not be dependent on new money…….

    The problem is, Ms Coles comments did not only stop new money but created redemption requests and few, if any assets of any type, including bank deposits can survive that, ask Northern Rock! Bottom line is Ms Cole knew absolutely that her comments would stop new money AND create redemptions. As sure as 1+1 = 2 (or will that now be disputed) calling an investment toxic and a Ponzi Scheme will = mass redemption requests.

  13. @Steve Smith
    The alternative is that if the regulator knows or strongly suspects there is a problem and it keeps quiet so as not to ’cause’ an issue. Can’t see that working too well, can you?

    The bottom line was that the regulator had been making open and public comments about its concerns with life settlement funds for over a year. Its research suggested that this was having little to no effect, indeed it was seeing an increase in their use. Having tried the softly, softly approach, what was it supposed to do?

    It’s been over three years since the FSA announcement. If the funds were worth what they purported to be then the situation would have ‘blown over’ by now. Indeed, institutional investors would have stepped in and bought the assets (thus creating liquidity). But, of course, there is no ready market for the those life policies and the ‘value’ placed on them by the fund was derived from an artificial formula rather than a mark to market value. In fact I think the EEA fund did try and arrange for a third party to buy units from investors to create liquidity but investors were only realistically being offered 30-75p in the £ which says a lot – the fund dropped the scheme in the face of protests from investors I believe.

    I wholeheartedly agree that 1 + 1 = 2, ordinary unsophisticated investors being placed in complex and risky funds (if for no other reason than it was very difficult to value and had obvious liquidity issues because of the underlying assets) = regulatory intervention. Expecting the regulator to keep quiet when it thinks there is a problem so as not to rock the boat is 1 + 1 = 3…

  14. What I find obnoxious is the self-righteous glee oozing from Clive Moore at the prospect that advisers who were caught up in this unfortunate maelstrom should be out of the business. That is simply haughty and odious nastiness when you consider the human cost of a lost career or business. Bear in mind that PI insurers renewing since the fund closed excluded cover for future EEA claims.

    Sweeping, uninformed, judgmental assumptions belong in the tabloid press.

  15. Grey Area, may I ask if you and Ms Cole are related?

    Now I see why OJ Simpson survived his murder trial, seems the truth can always be distorted!

    These are exact quotes from the Life Settlement ELSA conference in London in the summer of 2010.

    Question from the floor :

    Do you have an opinion on the percentage of a client’s portfolio which you would adapt as a maximum to invest in marketed products [TLP’s]? ….. in other words, you insist upon nothing like 25%?

    Answer from Peter Smith – head of investment policy at the FSA at the time and this is an exact quote:

    …… “Capital protection is the thing for some people, as much capital growth as possible is the thing for others. So I wouldn’t want to put a number on it.”

    He categorically did not say, when asked the specific question – none –

    Debbie Harrison, now and for some time directly involved with the regulators actually said of Key Data and I quote “In terms of risk, for income investors the Plan (Key Data) is less secure than deposits but would compare favourably with the more aggressive bond funds”

    In another exchange with the ‘FSA’ a leading barrister asked the FSA for their evidence and workings to prove the asset ‘high risk’. They had none and the barrister themselves was asked to evaluate the risk!

    There is far more to this……

    Finally the only beneficiaries from the FSA’s ‘final solution’ for TLP investment for retail clients has been lawyers/consultants and institutional investors. You ask why the policies were ‘undervalued’ it’s because the only people left to buy them were institutions who had now a total monopoly on the market and now, thanks to the FSA total and complete control of the price. Any asset is only ‘worth’ what someone is prepared to pay for it. Wipe out all the buyers and the value plummets and who did that? Oh it was the FSA.

    There is no question that TLP’s were being sold to the wrong people in the wrong proportion but you don’t stop a man from speeding by cutting off his legs! Unless you have a mate with a prosthetics factory!

    Now where did Ms Cole go on to work after she ‘speedily’ left the FCA?

  16. Certainly not glee on my part, in fact a legacy holding in a business I’m involved in means the situation will cost me money! Advisers weren’t “caught up” in this – they caught themselves up, and their clients. If my blunt frustration means advisers will pay a bit more attention when recommending investments in future then it will have done some good. Lots of people make mistakes in their professional life, but blaming others doesn’t help.

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