Julian Knight: It's not just personal morality that dictates it's best to steer clear of 'death bonds'
Sunday 04 December 2011
When should personal morality enter your financial decision making?
It's a question most of have to ask ourselves at some point. We all have our different red lines on the issue. Some have no problems investing in so called sin stocks such as tobacco, arms, betting and alcohol. Some turn a blind eye to this, allowing their investment fund or pension manager to take the tough decisions on their behalf. Others are set against it full stop and actively look for returns but with conscience.
One of my personal red lines has always been investment in life settlement funds. This trade involves the buying of life policies from people while they're still alive but often not in good health. The investor is gambling – and I think that is the right word – that the policyholder will die fairly soon. If they do, then the investor makes money, but if they defy actuary predictions and live longer then a loss is made.
The idea originated in the States and came about as a consequence of the 1990s Aids crisis, when relatively young people had far shortened life expectancies and needed ready cash for medical treatment, but it has now spread to all sorts of groupings. You can see why the trade earned the ominous monikers of "death bonds" or "death futures".
But with medical advances has come greater longevity, and the risks that the actuaries could get their sums wrong grows all the time. Therefore, the FSA has issued a stark warning that these funds could be "toxic" and are unsuitable for retail investors, that is, me and you. Within days of the warning, a £600m life settlement fund, EEA, ceased trading, prompting some IFAs – who have no doubt made a tidy sum in commission selling life settlement – to say the FSA's move had actually prompted a crisis in the sector.
This is nonsense. The FSA would not have acted if it hadn't had serious concerns over the solvency of some funds and the number of ordinary people for whom lower-risk investment would be more suitable. The fact that EEA went pop within days, if anything, shows how much of the industry has very rocky foundations.
Last week brought yet another warning of the dangers of trusting your finances to one of the heavily marketed fee-charging debt-management firms. Liquidators of the Somerset-based Debt Dr, which ceased trading in April, have found £600,000 of client money missing. This money was paid by people with serious debt problems and was meant to be passed to creditors. The firm was run by Jeremy Hockley, a former bankrupt, according to reports, under the trading name of Hermes Financial Solutions. Like other companies of its type, Debt Dr would offer to be a go-between with creditors, getting them to write off a percentage of the debt – taking a hefty lump-sum fee in the process. But when Debt Dr went under, client money that was meant to be protected went missing and, according to a statement, has been used "inappropriately".
The lesson in this is: never use a debt-management firm – even if it claims to be established or respectable or part of an industry scheme. You can get the same service, free of charge, from a debt charity such as the Consumer Credit Counselling Service.
A lost decade? We'll be lucky
There aren't many reasons to be cheerful at the moment. The Autumn Statement was in effect a mini-Budget, and the figures on Britain's debt are horrendous. At the time of the financial crisis I wrote that we would be lucky if we got away with a Japan-style lost decade, I think the chances of even that are receding. And the reason? It's not the cuts – they aren't even impacting the economy yet, that's to come – no, it's the eurozone crisis.
Complete political paralysis at the heart of Europe seems to be being replaced by grudging acceptance that closer integration is necessary. But this is going to be difficult to achieve in time to save the euro in its current form. The uncertainty is pushing us into recession – and the thing about recessions is that, almost invariably, they are worse than first predicted.
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