RESPONSE TO FEEDBACK RECEIVED - POLICY CONSULTATION ON REGULATING THE DISTRIBUTION OF TRADED ENDOWMENT AND LIFE POLICIES

Invitation for comments on 1.1 & 1.2

1 MAS proposed regulating the distribution of traded endowment policies (TEPs) and traded life policies (TLPs) under the Financial Advisers Act (FAA). We further proposed licensing TEP/TLP distributors under the FAA. In arriving at this proposal, we noted that investors in TEP/TLPs face a number of risks including life extension risk, liquidity risk, credit risk, exchange rate risk and legal risk. We also noted a high incidence of fraud associated with such products.

2 Some respondents from the life insurance industry raised moral and philosophical objections to TEP/TLPs, and were of the view that such products should not be regulated, but banned completely. It was pointed out that trading of life insurance policies bypasses the requirement of insurable interest for life insurance. It was also put forward that it is not morally right for an investor to benefit from someone's death.

3 Most respondents however were in favour of regulating the distribution of TEP/TLPs under the FAA to ensure investors are provided a competent level of product advice with their personal financial needs taken into consideration by trained professionals.

4 Several respondents highlighted at length the distinction between product providers and product distributors. Product providers were described as entities arranging the buying and selling of insurance policies on an execution-only basis. They did not interact with investors, other than through an appointed intermediary, and did not provide financial advice. Respondents noted that while they agreed product distributors should be regulated under the FAA, they were of the view that product providers should be regulated under an alternative regime.

5 Respondents went further to suggest how product providers of TEP/TLPs should be regulated. Their suggestions covered areas such as

• Registration
• Capital requirements
• Disclosure requirements
• Money-laundering requirements
• Handling of client's money
• Dispute resolution mechanisms
• Cooling-off periods

MAS' response

6 We disagree with the view expressed by some respondents that TEP/TLPs are illegal because the investor does not have an insurable interest in the life policy. We concur with other respondents that a life insurance policy can be considered personal property, and can be assigned, and that the principle of insurable interest need only exist at the time the policy is effected. It is not required for any subsequent assignment of the policy.

7 We note that some members of the public have moral and philosophical concerns with TEP/TLPs. However, this does not justify denying such products to the general investing public, so long as the personal safety of the insured party is taken care of and her privacy respected. In this respect it is important that the investment products being distributed here originate from jurisdictions where laws are in place to protect the well-being of the insured party.

8 We acknowledge the valid distinction drawn between product providers and product distributors. We agree that it would be inappropriate for product providers to be regulated under the FAA. We are of the view that the appropriate framework for regulating product providers needs to be studied in greater detail, and comments provided by respondents have provided us with a useful start in this respect. We encourage entities interested in acting as product providers for TEP/TLPs to approach MAS so we can discuss further the regulatory framework to be put in place.

Invitation for comments on 1.3

9 MAS proposed definitions for TEPs and TLPs as follows:

A traded life policy means an agreement that confers onto an investor, or other persons, an interest in the death benefits or benefits under one or more life policies that is entered into for the purpose of deriving an economic benefit.

A traded endowment policy means an agreement that confers onto an investor, or other persons, an interest in the death benefits or benefits under one or more endowment policies that is entered into for the purpose of deriving an economic benefit.

10 Respondents that currently act as distributors of life settlement products argued for a distinction to be drawn between life settlements and viaticals, instead of grouping the two under the term TLP. They noted that the characteristics of the two products are different and several states in the US have introduced separate rules for these products. They noted that the term "traded life policy" is a misnomer because life policies are not currently traded in any organised way. They highlighted that life settlements have not been as prone as viaticals to instances of fraud.

11 Respondents that currently act as distributors of TEPs highlighted the distinction between traded endowments and traded life policies, and argued that there were grounds for these two classes of products to be regulated differently. They highlighted that unlike TLPs

1. TEPs have a fixed maturity date, and are thus not contingent on the life expectancy of the insured party

2. TEPs may be structured such that investors are assigned ownership of a policy, as opposed to the TLP model where benefits are assigned to the investor, but a trustee holds ownership. In the TEP model therefore the investor has a "clear title" over the policy and an enforceable contractual relationship with the life insurance company

3. A TEP solicitor is involved in ensuring a "methodical assignment process" from the original owner to the TEP investor, where checks are made for fraud, money laundering and other encumbrances on the policy that might interfere with the investor's legal rights

4. TEPs originate from life insurance companies in the UK, which are are regulated by the UK Financial Services Authority (FSA), and enjoy high credit ratings. Investors in UK TEPs also enjoy the protection of the Financial Services Compensation Scheme (FSCS) in the event of insolvency of the life company, and the Financial Ombudsman Service in the case of a dispute with the product provider (known in the UK as 'market makers').

MAS' Response

12 We find no compelling reason in the arguments provided by respondents for regulating the distribution of life settlements and viaticals differently. We feel the higher incidence of fraud associated with viaticals as opposed to life settlements is due to historical circumstance rather than any intrinsic difference between the two products¹.

13 However, for greater clarity, we propose defining the terms viatical and life settlement under the FAA. This will facilitate the application of different rules in future, if so required. We will retain the definition of 'traded life policy' to refer collectively to both viaticals and life settlements.

14 We found arguments for drawing a distinction in the regulatory treatment for TEPs vis-୶is TLPs more persuasive and will permit the distribution of overseas manufactured TEPs to a larger group of investors than initially proposed. We intend to allow retail investors access to such TEPs provided minimum initial subscription amounts are no less than $20,000. This should exclude those less able to bear the risks involved  from dealing in TEPs without considerably impeding the development of a legitimate market in TEPs in Singapore.

15 Distributors of TEPs will also only be permitted access to the retail market provided certain additional conditions are met. These conditions may include, but are not limited to, the following:

• Recognised Jurisdiction - The TEPs distributed here must be manufactured in a recognised jurisdiction. Conditions for recognition may include, amongst other things, the availability of insurance and market conduct regulations similar to Singapore's.

• Regulation of Life Company - In considering whether to recognise a jurisdiction MAS will consider, amongst other things, whether the life insurance company underwriting the policy is within the ambit of a regulatory authority with information sharing arrangements with MAS, and whether investors will have access to a policyholder compensation scheme should the life insurance company become insolvent.

• Regulation of TEP Manufacturer - The product manufacturer must also be within the ambit of a regulatory authority with information sharing arrangements with MAS.

• Dispute Resolution - The life company and product manufacturer must be part of an affordable dispute resolution scheme and access to the scheme is available to non-residents.

• Representative Office - The product manufacturer must have a representative in Singapore who can facilitate the investor in the settlement of any dispute with the product manufacturer, and who can furnish MAS with information or records regarding the product manufacturer as may be required.

• Sales and Advisory Process - As such products will fall under the FAA it will be necessary for product distributors here to ensure that the sales and advisory process meets the standards we require of other regulated investment products.

Invitation for comments on 1.4 & 1.5

16 MAS proposed that TEP/TLP distributors in Singapore be restricted to selling TEP/TLPs manufactured overseas to non-retail investors². MAS further proposed additional safeguards be put in place to ensure that TEP/TLP distributors take adequate steps to ensure their products are authentic, legally obtained and manufactured in recognised jurisdictions. We sought views on the rules that could be put in place to ensure that TEP/TLPs being distributed here were authentic and legally obtained. We also sought views on the criteria that should be used to determine whether TEP/TLPs from a jurisdiction are suitable for distribution here.

17 Respondents that currently act as product distributors of TEP/TLPs were strongly against the proposal to restrict TEP/TLPs to non-retail investors. They were of the view that such products are not exceedingly complex and Singaporean retail investors should be mature enough not to require excessive protection by the Government.

18 In contrast, one respondent questioned the validity of restricting such products to accredited investors as this seemed to imply that it is satisfactory for a wealthy individual who is not experienced financially to be less protected than an individual of lesser means. This respondent went on to suggest that MAS should disallow such products completely.

19 Respondents offered a number of suggestions on the safeguards that should be put in place to ensure that TEP/TLPs distributed here are authentic and legally obtained, and the criteria to be used for determining if products from an overseas jurisdiction are suitable for distribution here. These include:

1. Trust and insurance laws in the overseas jurisdiction must be well-established as most TEP/TLPs are funded through established trusts and backed by the assets of insurance companies.
2. Regulatory authorities in the overseas jurisdictions must be well-established.
3. Insurance and market conduct regulations in the overseas jurisdictions should be similar to Singapore's.
4. The overseas jurisdiction must not be on the NCCT list of the FATF.
5. Life insurance companies underwriting the policy should be rated 'A' or above.
6. The overseas jurisdiction should have "reciprocal enforcement of judgement" legislation or arrangements to allow a Singapore investor to take and enforce action against the overseas manufacturer.
7. The overseas jurisdiction must have laws that recognise the concept of transferral of ownership and there should be no legal restriction on foreign ownership of TEP/TLPs.
8. Overseas product providers wishing to appoint a distributor in Singapore should be registered with the MAS, and MAS should assess the credibility of such companies before allowing them to appoint local distribution agents. Such product providers should inform MAS of any pending lawsuits in any other jurisdiction.
9. The overseas jurisdiction should provide non-contestability protection³.

MAS' response

20 As stated in our Consultation Paper MAS prefers not to be prescriptive in determining which products are suitable for investors, so long as clear and adequate disclosure of all pertinent risks is provided. However, in the case of TEP/TLPs manufactured overseas we find that adequate disclosure alone may not offer investors enough protection. This is because there is considerable variation in the way product providers of TEP/TLPs are regulated overseas, which makes it difficult for an investor to assess the authenticity and quality of the products being distributed here. Investors must also contend with the legal systems of overseas jurisdictions in enforcing their contractual rights against life insurance companies or product providers situated overseas.

21 In the case of TLPs, restricting such products to non-retail investors does not imply that MAS is of the view that it is acceptable for such products to be distributed to accredited investors without adequate safeguards being in place to ensure the products are authentic and legal. However, we feel an accredited investor should have sufficient resources to be able to enforce his legal rights in an overseas jurisdiction, hence we are prepared to allow such investors access to such products provided certain conditions are met.

22 MAS agrees with most of the suggestions made on the safeguards that should be put in place to ensure TEP/TLPs distributed here are legally obtained and authentic, and the criteria to be used for determining if products from an overseas jurisdiction are suitable for distribution here.

Other comments

23 Several respondents highlighted the benefits of developing a secondary market for TEP/TLPs in Singapore. They noted that several of the risk factors highlighted in the Consultation Paper would not apply to TEP/TLPs manufactured locally, for example:

• there are no exchange rate risks as benefits would be paid out in Singapore dollar;  
• there are no legal settlement risks, as such transactions would be subject to Singapore laws.

24 Respondents also noted that the availability of a local secondary market for life and endowment policies could benefit Singapore policyholders as policies will become more liquid, and policyholders can expect a price that is closer to the fair market value for their policies than the policy's surrender value.

25 In addition respondents highlighted that TEP/TLPs have a low correlation to traditional investments like stocks and bonds and can thus be a useful investment asset class for investors wishing to diversify their portfolios.

26 One respondent, a consortium acting on behalf of a number of product distributors and interested parties here, recommended a number of changes to existing legislation to enable the development of a local secondary market for life and endowment policies, including:

1. Amending Section 73 of the Conveyancing and Law of Property Act (Cap. 61) to state that the mere act of mentioning wife (husband) and/or children in the beneficiary column does not result in the creation of an automatic statutory trust in favour of the beneficiaries⁴.

2. Allowing the use of CPF monies for investments in locally manufactured TEP/TLPs and approving TEP/TLPs as an investment instrument under SRS.

3. Providing a tax exemption on insurance benefits and proceeds paid out by insurance companies from investment in local TEP/TLPs.

4. Amending the Insurance Act (Cap.142) to require life insurance companies and their intermediaries to inform policyholders considering surrendering their policies to be informed that they may be able to trade their policy locally instead.

MAS' response

27 As stated in our Consultation Paper, MAS has no objections to the development of a legitimate secondary market in life and endowment policies. We acknowledge the benefits that could accrue to policyholders and investors from the availability of a local secondary market in such policies. We further acknowledge that several of the risk factors associated with TEP/TLPs as highlighted in our Consultation Paper, would not apply if these TEP/TLPs are manufactured locally.

28 However, we also recognise that additional safeguards will need to be put in place if a local secondary market develops in Singapore. For example, it may be necessary to ensure policyholders are kept aware of the potential intrusions in their personal affairs should they choose to engage in such transactions. Local insurance companies also need to have in place the necessary systems to ensure such transactions are not used to perpetrate fraud, or conduct money-laundering activities.

29 To the best of our knowledge, there is no formal secondary market for life and endowment policies in Singapore, and there are no entities interested in acting as product providers arranging the buying and selling of local life and endowment policies. We encourage entities interested in acting as product providers for TEP/TLPs to approach MAS so we can continue the dialogue on the appropriate regulatory framework to be put in place in developing a local secondary market for life/endowment policies.
 

MONETARY AUTHORITY OF SINGAPORE
29 June 2004

LIST OF RESPONDENTS TO POLICY CONSULTATION ON REGULATING THE DISTRIBUTION OF TRADED ENDOWMENT AND LIFE POLICIES

• Consortium⁵
• Provident Alliance
• InvesTEP Pte Ltd
• Investment & Wealth Advisory Pte Ltd
• Policy Selection Limited
• Life Insurance Association, Singapore (LIA)
• Insurance and Financial Practitioners Association of Singapore (IFPAS)
• Mr Lee Y K

¹ Viaticals pre-dated life settlements, and appeared at a time when such products were still unregulated. Regulations have only recently been put in place in the US to curb the abuses associated with both products.

² Non-retail investors will be taken to mean accredited, expert and institutional investors as defined in MAS consultation paper on amendments to the SFA and FAA issued in Sep 2003.

³ For example, policies in the US are non-contestable after being in force for 2 years, but there is no similar non-contestability protection in Germany.

⁴ It was suggested that separate forms could be created for those individuals wishing for a trust to be created for the benefit of beneficiaries. However, these individuals should be informed that they will not be the real owner of their policies, and cannot take a loan, surrender the policy or assign or mortgage the policies except when it is for the benefit of beneficiaries

⁵ Members of the consortium are

1. Mr Alvin Lim, ANS Enterprise Pte Ltd, Pac Tech Pte Ltd

2. Mr Peter Foo, IPP Financial Advisers Pte Ltd, Great Eastern

3. Mr Tom Kua, Actuarial Consulting Group

4. Mr Sam Ang, Investep Pte Ltd, Prudential

5. Mr Tony Tan, Investep Pte Ltd

6. Mr Joseph Lee, Pac Tech Pte Ltd

7. Ms Charmaine Lin, IPP Financial Advisers Pte Ltd