Stephen Foley: New life industry rules will not insure against another financial crisis


US outlook The presidential ink wasn't even dry. Less than 24 hours after Barack Obama signed into US law the financial reforms that will prevent a repeat of the credit crunch, one of his government agencies laid the foundation for what could be the next great financial crisis.

Last time it was sub-prime mortgages, next time it could be life insurance. You really can't let your guard down for a minute.

Thursday's report by the Securities and Exchange Commission on the market for so-called "life settlements" – policies that are sold to investors, rather than surrendered – took a depressingly complacent tone. The market has stalled, declining from $12bn two years ago to $7bn last year, and some key proponents including Goldman Sachs have backed away, but these look like only temporary setbacks. The SEC took a neutral tone when it should have taken a sceptical one. Anything that breaks the link between the insured and the financial beneficiary of insurance has dangerous consequences.

Life settlements took off in the Eighties, when terminal Aids patients needed cash to pay medical bills that their health insurance refused to cover, and it grew exponentially over 20 years. Settlement investors take over the premiums and pocket the windfall on the policyholder's death, in return for an upfront payment that is substantially larger than the surrender value of the policy.

The development has already changed the nature of life cover. Many rich individuals now buy life insurance with at least half an eye on selling it before their death, treating it more like an investment. And increasingly, brokers are targeting senior citizens, asking them to take out insurance specifically in order to sell it on. Officially, "stranger originated" life insurance is banned in most states, but there are plenty of grey areas in which to build an industry.

The SEC's report can be seen in two ways. It proposes that life settlements be officially designated as securities and therefore explicitly brought under their regulatory remit. That will mean an end to ad hoc, costly and opaque trading between financial institutions, of the kind of that exacerbates financial panics when they start. But it also works to legitimise the market and to make the products more marketable to more investors. Paradoxically, the patchwork of state laws and regulatory uncertainty that the SEC proposes to sweep away are the very things keeping this dangerous market in check.

A companion report by the Government Accountability Office in Congress proposed similar standardisation and transparency at the sharp end, where settlements are arranged by brokers, many of whom are unlicensed, with policyholders and putative policyholders, many of whom may be vulnerable to exploitation.

Seeing the prospect of more standardised products to sell, the Institutional Life Markets Association – the lobby group set up by JP Morgan, Credit Suisse and other firms to promote life settlement markets – welcomed the thrust of the GAO report. That's worrying in itself.

Wall Street got its fingers, hands and forearms burnt by the sub-prime mortgage crisis, and the idea of structuring complex derivatives out of life settlements has thankfully been sent back to the drawing board. But it has not gone forever. On Thursday, the SEC issued an "investor bulletin" setting out the complexities of investing in life settlements. Maybe it thought it was warning investors off. It may just find it has given them a green light.



Smart, funny, sarcastic: Wall St fears Ms Warren

Will the White House nominate Elizabeth Warren, Harvard law professor, to head the new bureau of financial consumer protection, an agency she was first to propose in 2007 and which could turn out to be the signature achievement of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed this week? The stakes have got very high, so high in fact that not appointing her would hobble the agency before it even takes its first steps.

Having failed to prevent the creation of the agency in the first place, Wall Street is briefing against Ms Warren; consumer advocates and unions on the left are banging the drum on her behalf. Congressional confirmation hearings could be more fractious than for a Supreme Court nominee.

So Ms Warren is now central to the morale of the new agency, which must immediately launch into the task of ripping up screeds of legalistic small print in financial products and insisting on plain language, as is the case in the UK. There will be even bigger battles to come over the actual rules for loans and Ms Warren is among academia's foremost experts on this topic, having studied the causes and effects of personal bankruptcies throughout her career. As she put it when she first proposed setting up a dedicated consumer protection agency, you wouldn't be allowed to sell a toaster that had a one-in-five chance of exploding, so why should lenders be able to build a business harvesting penalties from one in five borrowers breaching their constantly-shifting terms and conditions?

I would add another qualification for Ms Warren: she is very funny. In her current role as Congressional watchdog over the government's bailout funds, her sarcastic schoolma'am act has been going down a charm on the chat show circuit. Sometimes she has dumbed down the complexities of high finance, but as a consumer champion, she is unsurpassed. By giving the new agency an in-demand public face, the White House will add to the pressure on banks to clean up their act.

This is not just about the finance industry taking its medicine after the abuses of the credit crisis. Protecting consumers is central to the task of restoring financial stability. There can be no confidence in banks built on shady practices or balance sheets built out of shaky products. With securitised loans flying round the global financial system, the quality of lending practices in the US affects us all.

News
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.
peopleThe idea has been greeted enthusiastically by the party's MPs
News
Michael Buerk in the I'm A Celebrity jungle 2014
people
Voices
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012
voicesAnd nobody from Ukip said babies born to migrants should be classed as migrants, says Nigel Farage
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
PROMOTED VIDEO
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
Happy in his hat: Pharrell Williams
people
Arts and Entertainment
Stella Gibson is getting closer to catching her killer
tvReview: It's gripping edge-of-the-seat drama, so a curveball can be forgiven at such a late stage
News
Brazilian football legend Pele pictured in 2011
peopleFans had feared the worst when it was announced the Brazil legand was in a 'special care' unit
News
i100(More than you think)
Sport
Brendan Rodgers seems more stressed than ever before as Liverpool manager
FOOTBALLI like Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
News
ebooksNow available in paperback
News
The Magna Carta
archaeologyContemporary account of historic signing discovered
News
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
Sport
Benjamin Stambouli celebrates his goal for Tottenham last night
FOOTBALL
Life and Style
Dishing it out: the head chef in ‘Ratatouille’
food + drinkShould UK restaurants follow suit?
News
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game