SEC Pans State Life Settlement Regs; GAO Mentions Federal Charter Option

THE FEDERAL CHARTER OPTION

Like the SEC task force, Brown says the GAO sees problems with the current state of life settlement market oversight.

"We recently developed a framework for assessing proposals for modernizing the financial regulatory system," Brown says. "One element of that framework is consistent consumer and investor protection: market participants should receive consistent, useful information and legal protection for similar financial products and services, including disclosures, sales practice standards, and suitability requirements. Another element is consistent financial oversight: the regulatory structure should ensure that similar institutions and products are subject to consistent regulation, oversight, and transparency, in part to help minimize negative competitive outcomes."

Under the current systems, some states have life settlement laws but some do not, and, even in the states that do have laws, licensing and disclosure vary, Brown says.

"Policy owners also can be afforded different protections, depending on whether the policy being sold is a variable policy subject to … federal sales practice rules or a nonvariable policy," Brown says.

Brown says the current financial crisis has led to debate about the potential for a federal role in the regulation of insurance.

"For example," Brown says, "the financial regulation reform legislation currently under consideration by Congress would, among other things, create a Federal Insurance Office, in part to monitor the insurance industry."

The GAO has encouraged state regulators to implement a consistent set of insurance regulations," Brown says.

"In providing a framework for assessing proposals to modernize the financial regulatory system, we recently reported that Congress could consider the advantages and disadvantages of providing a federal charter option for insurance and creating a federal insurance regulatory entity because of the difficulties in harmonizing insurance regulation across states."

When Congress is considering how best to reform the regulatory structure of the financial services sector, "life settlements offer another example of products that may lack clear comprehensive regulation," Brown says. "Therefore, Congress may wish to consider taking steps to help ensure that policy owners involved in life settlement transactions are provided a consistent and minimum level of protection."

LISA PRAISES THE REPORTS

The Life Insurance Settlement Association, Orlando, Fla., says the authors of the SEC and GAO reports acknowledge in the reports that life settlements provide a valuable alternative to surrendering a policy or letting it lapse, and it points out that the GAO had found evidence that consumers may have filed fewer than 20 complaints about the arrangements with state insurance regulators.

LISA says it is reviewing the recommendations of the SEC life settlements task force and may comment on them later.

"The GAO and SEC reports document that life settlements are here to stay, that they provide tremendous value to consumers and that the rapid development of state regulation of the market, while not always uniform, has provided strong consumer protection in life settlement transactions," LISA Executive Director Doug Head says. "LISA looks forward to continuing to work with all interested public policy makers to address the issues affecting our relatively small industry which has brought so much value to consumers in the face of great hostility from some historically large financial services players."