CAPE TOWN – Clients who were advised by FNB to invest in the EEA Life Settlements Fund are still waiting for the bank to provide some clarity on how it intends addressing their concerns. This is despite the CEO of FNB Financial Advice, Corne Burger, assuring Moneyweb that investors would be presented with a proposed solution by the end of May.
Burger made the commitment last month when approached by Moneyweb to provide an explanation for why FNB had been promoting this fund, what due diligence had been conducted on it, and what steps it was taking to ensure that capital that had been invested on its advice would not be lost.
The EEA Life Settlements Fund is a traded life policy investment registered in Guernsey that was suspended in November 2011 due to a chronic lack of liquidity. The fund has since reopened and some investors have received a small portion of their money back, but most of it remains locked up.
After Moneyweb raised the investors’ concerns last month, Burger approached this journalist to request a meeting to explain FNB’s position. He however cancelled this meeting the day before it was meant to happen, with the explanation from FNB being that:
“The EEA Settlement Fund Investment issue is of the highest priority to us, as a result a very comprehensive internal process to bring finality to this matter is still under way. Due to the fact that our internal process has not been concluded, we feel that it is therefore premature to speak to the media regarding this matter and will not be able to continue with our discussion tomorrow.”
On Thursday 28 May, Moneyweb sent an email to FNB requesting that any communication sent to investors also be sent to us. An FNB representative phoned this journalist on Friday 29 May to request that they be given until Monday 1 June to provide this information.
However, nothing further has been communicated to Moneyweb and an investor in the fund who was advised by FNB has confirmed that he has not received anything from the bank either.
FNB not the only ones implicated
Following the first Moneyweb story on local investors who had been advised to invest in the EEA Life Settlements Fund, it has emerged that FNB was not the only local company that sold this investment. Moneyweb is following up information that at least one other major financial institution also sold it to its clients.
It remains unclear how large financial institutions failed to identify the risks associated with such a fund. FNB has opted not to provide any details on how it came to approve it.
Traded life policy funds work by buying active life policies from terminally ill US citizens at a discount. They continue to pay the premiums on these policies until they pay out and realise a profit.
This is sold as a low risk strategy, however investors argue that what has transpired with the EEA Life Settlements Fund is exactly what any proper due diligence should have flagged as the likely result of a run of withdrawals. There is a very limited secondary market for life policies, so the liquidity risk is high.
There is also substantial longevity risk involved. Inaccurate estimations of the life expectancies of the insured can have a big negative impact on the ultimate return.
This is perhaps best illustrated by information from the fund itself. In a communication dated 6 May 2015, the fund noted that at 31 March it held 401 life insurance policies with a total net benefit of $1.11 billion.
During the first quarter of 2015, however, only 11 policies matured, for a total benefit of $11.3 million. This is over a period in which its revenue forecasts anticipated benefits of $80 million assuming that maturities would happen at anticipated life expectancy.
On top of this, premium payments for the year to the end of March came to $68 million. That will decline slightly as policies mature, but a simple calculation suggests that the benefits received by the fund in the first three months of this year were lower than the premiums it paid on the other policies it still holds.
So where’s the regulator?
Given that millions of dollars of South African investor money was put into this fund on the advice of local financial institutions, one would expect that the Financial Services Board (FSB) to take an interest. However, its responses to requests for information from Moneyweb suggest that it is unlikely to take a stance on the matter.
Manasse Malimbe, the head of department for FAIS compliance told Moneyweb that the regulator has not issued any directives with regards to traded life policy investments. This is despite the Financial Conduct Regulator (FCA) in the UK banning advisers from promoting them to most retail clients in the UK.
The FSB also failed to answer a follow-up question as to whether it had engaged with the FCA to discuss why the UK regulator had implemented such a ban and whether it would be appropriate for the FSB to rule on the marketing of the products in South Africa. Malimbe simply indicated that if investors feel they have a claim against the adviser for mis-selling the fund, they should either approach the FAIS Ombud if the amount was less than R800 000, or the High Court if it was above that.
It would therefore appear that investors cannot rely on any support from the regulator. This is in stark contrast to the UK, where the FCA has encouraged investors to lodge complaints against advisers who they believe mis-sold them the product and provided details on the steps that can be taken.