ALL OPINIONS MUST BE SENT TO ARMSG4000@gmail.com FOR PUBLICATION
The Role of the FSA in our Débâcle
Many of you will have read, as I did, the statement from Rockingham/Steve Hunt with a sense of disbelief.
The statement clearly indicates that it was the intervention of the FSA in June 2010 that denied Rockingham the opportunity of renewing their PI Insurance. This would leave, in the writers opinion, the FSA to answer to investors for leaving us without any insurance cover protecting us from the ‘toxicity’ that they were supposedly fighting on our behalf! They must also have been aware of the fact that Rockingham’s Insurer is not liable for retrospective cover and are therefore guilty of leaving us exposed to potential losses.
But what readers may find truly unbelievable in view of the above is that the Newsletter we issued had been subject to several minor re-writes at the request of the FSA, and we corrected what they described as “inaccuracies”. If readers would care to look at Item 3 entitled“TO ACCEPT OR NOT ACCEPT AN OFFER? they will see the following passage:
“Whom will they make a claim against? The first port of call, if an investor feels he has received incorrect advice will be a complaint against the IFA who sold them the ARM bond, and they may be able to make a claim against the point of sale which effectively means the insurers of that IFA.”
So the FSA allowed us to put out this inaccuracy, presumably to slow down our discovery of the facts.
One more item to add to FSA Hall of Shame.
MARGARET COLE RESIGNS, OR WAS SHE PUSHED?
A personal view
It had all the drama of a noticed pinned to the gates of Buckingham Palace and it read:
15 Feb 2012
The Financial Services Authority (FSA) today announced that Managing
Director and Board member, Margaret Cole, will leave the organisation
later this year, after nearly seven years at the UK regulator.”
I’m sure many of you like me will have had a tear in your eye as you read the glowing tributes from the colleagues who didn’t think she was quite up to the job of running the replacement agency but none the less bid her a fond farewell and clearly think she was worth the £336,000 per annum salary she received for her efforts. I’m certain you will also have acid indigestion when you contemplate the final salary, inflation proof pension she will possess, which you will pay taxes on your meagre savings and investments to pay for. It is a sobering thought that the person who did such damage to a whole asset class, on which thousands of people had staked their retirement, causing a run on companies like EEA before decamping on an extended winter holiday enjoys a monthly stipend around 4 times the annual average private pension.
“Margaret Cole, said:
“I joined the FSA to help in the fight against wrongdoing within thefinancial services industry and I believe a lot has been achieved in my time here. “We have shown the FSA is not afraid to take on difficult cases and will not shy away from pursuing criminal prosecutions, however difficult to prove. It’s painstaking work and the legal process takes a long time but there are people sitting in prison now because of our commitment. And the next 12 months will see more trials and more convictions as the pipeline of our cases comes to fruition in the courts.”
Obviously I do not wish to detract from genuine successes achieved in her time in post, but wonder why none of those sitting in prisons are the bankers who wrecked the financial system under her and her bosses supervision? Remember we are told that the FSA didn’t have the competent staff to oversee disasters like RBS and we know to our cost that no one at the FSA understood the business model for SLS based investments. As many of you invest your small portfolios in the stock market, desperately trying to earn better than a negative return on your diminishing capital, you might ask why “not being afraid to take on difficult cases” did not included regulating the AIM market which despite operating under the FSA’s rules resembles the Wild West more than a regulated market.
As you worry about this winters gas bill, and loss of coupon, I’m sure we will find Ms Cole popping up in yet another bureaucratic job, maybe something in the EU, but certainly somewhere were she will be protected by the tax payers from the real world we live in. I’m certain you will wish to join me in wishing her a fond farewell.
THE CSSF STRIKES AGAIN
From the FT Advisor article on the front page readers will deduce that the CSSF has maintained it’s stance of seeing liquidation as the only solution to dealing with what it considers to be the ‘problems’ of SLS investment products.
“The CSSF, Luxembourg’s financial regulator, last week blocked any further efforts to preserve the solvency of the portfolio by proposing to remove its license to trade – the first step towards liquidation.”
As the FSCS paid out to Keydata investors in recognition of the FSA’s failure to regulate in this matter this means that the FSCS as Lifemark’s main creditor, after compensating Keydata investors, will have to bear the losses incurred by liquidation and will seek to reclaim at least a portion of this sum from those who sold the policies. Presumably faced with this burden many of those will simply file for bankruptcy. A good example of a loose loose policy.
The comments by Keydata’s founder Stewart Ford, who failed in multiple attempts to broker bailout deals for Lifemark last year are telling, he has been reported as stating that “a ‘fire sale’ liquidation of Lifemark would lead to 90 per cent losses for Lifemark bondholders.”
“Liquidation of Lifemark will mean a fire sale, and nobody will get their money back,” Mr Ford told Investment Adviser in October 2011. “This option is in no one’s best interests. It is tantamount to commercial suicide.”
So is this yet another example of a regulator unable to manage a fund it purports to regulate?
The Keydata experience is not identical to ours in that ARM was not subject to any criminal activity, that we have ever been made aware of, and there has been zero evidence provided that ARM were insolvent. This may explain the CSSF setting in motion a process which would deny the Company access to further investment and by the process of ‘death by a thousand cuts’ ensure that it eventually became insolvent.
However there is another way of looking at the disaster at Keydata and it is a two edged sword. On the one hand it reduces the value of our fund should our policies also be placed into a ‘fire sale’, but on the other hand it makes the SLS policies very cheap to buy. So if Insetco, or another interested party, were to convince E & Y of the soundness of their business plan it would be possible to pick up further policies at knock down rates and boost the ultimate value of the fund.
Readers will be in no doubt of the writers preferred choice of these two options.
(This title is credited to Emile Zola’s original paper)
What do people do when they make mistakes? The answer is it depends on the people.
Most of us at some time of our lives have made a serious mistake, if we are lucky and we are honest, we will try to put it right. We know that we can make genuine errors of judgement, but if we have any sense of honour we will do the right thing, and admit we were wrong. Human nature being what it is, will more often than not, forgive those who have made “honest mistakes” and are willing to admit their error and try to rectify the damage done. I think most of us would be people in this camp.
What of those who can’t admit their errors, whose mistakes are compounded by deceit and coverups. Most bureaucratic institutions can at some time be subject to procedural irregularities. Normally, internal, secretive and highly confidential investigations will take place, the subject of which, will normally be on extended leave with full pay. The outcome if proved positive will result in the subject leaving employment, often on full pension. These internal reviews make no recompense to those who have been offended against by the actions of those who committed those procedural irregularities.
This simple term, “Procedural irregularities” can cover what those outside of the bureaucratic world would recognise as being conspiracy to mislead. Such initial actions perpetrated within any organisation initiates an element of fear as it’s main weapon of control. It finds easy self justification by at first, withholding the facts, which secondly, leads to the telling of lies, which thirdly, leads to the perversion of justice, which exponentially leads to greater crimes of intimidation, corruption, fraud, and instigating false arrest and imprisonment. Each increment of control is designed to silence witnesses. Cower whistleblowers, and cover up the real Truth at any cost.
We all recognise that I could be talking about any of the troubled countries and regimes that have deposed their leaders in recent days for the same or greater variety of reasons. Justice, thankfully it seems, has a long ARM and those “Procedural irregularities” that Mubarak in Egypt, Saddam in Iraq, Gaddafi in Libya, committed, have resulted in severe consequences for those particular leaders. With Assad in Syria continuing to be in denial and continuing to pursue his particular brand of “Procedural irregularities” he and his administration are facing the same outcome.
What has this to do with our own current situation, and the ARM Bond? Tyrants always try to bury their mistakes. The trouble is, those dead bodies come back to haunt them. You can’t hide mass graves and the atrocities committed for ever. Of course there are the survivors who have all the evidence, the ones the tyrant failed to eliminate. So we can see any person or organisation that practices coverups is beginning to follow a well trod road to tyranny.
How do we define a tyrant, and what do all these and future tyrants have in common?
“Tyrants believe that the sacrifice of innocent people is a justifiable course of action to preserve and protect their own position irrespective of the hurt and destruction it causes.”
So to take a leaf out of another chapter in the casebook of history, the case of Albert Dreyfus. The writer Emile Zola wrote a paper exposing and denouncing the corruption and coverups within the French Military, and the Judiciary, the paper was called J’accuse.
History has a habit of repetition to a lesser or greater extent.
Those who are guilty, and they know who they are, will one day stand accused of these deliberately willful actions, in trying to destroy the SLS investment asset, and with it the hopes and futures of countless thousands of investors.
“AN UNEXPECTED ABSENCE”
From Bob Sharpe: 13/12/2011
Many of you will be as surprised as I was to learn today that Margaret Cole the Managing Director of the FSA, having dropped her ‘toxic’ bombshell on the whole SLS asset class has already left for her Xmas break.
In the middle of a consultation period which ends 23 January 2012, when her actions may have caused considerable damage to the pensions and investments of thousands of people and which have certainly caused a great deal of worry to elderly and vulnerable people she is absent on leave.
Now it is possible that this holiday was planned months ago, but if it was it is my personal opinion that a rescheduling of her arrangements might have been in order. The cynical reader might be forgiven for thinking that another reason for a long vacation at this time might also be possible.
I’m sure you would all like to join me in wishing her the compliments of the season as many of us are forced to choose between food and heating during the coldest part of the year.
Happy Christmas one and all!
(Understanding the relationship between Financial Institutions and the Public)
We are all looking for reasons why our financial world has been turned upside down. When we bought our investments, we considered ourselves smarter for having discovered the ARM bond and it’s wonderful return of 10%, where every other institution was only offering at best 4% to 6% at the time.
Did we make a mistake? Did we fall into the trap of not recognising “If it’s too good to be true, it can’t be true?” I believe none of those apply to the ARM Investors. SLS bonds are currently still being marketed in the USA as low risk investment, for the reasons explained earlier. I believe the only thing wrong with these bonds is that they are too good.
My reasoning surrounds several salient points, one of which was made by the FSA.
When trying to analyse the reasoning behind Margaret Cole’s discussion document, in what is now being seen by many commentators, as an opinion, biased towards the wilful destruction of this financial vehicle, we must seek out the possible motives behind it.
It is easily believable that these profitable investments, designed for ordinary investors, were considered by some, an extremely dangerous threat to the continued profitability of other institutions which were either unable or unwilling to match these returns.
I can only surmise that the FSA has been put under extraordinary pressure these past years by the very same institutions who found it impossible to compete with these fair rates of return to ordinary investors. This pressure I believe led to the condemnation of these bonds as being toxic for retail sale, but apparently non toxic for large institutions such as banks, pension and investment funds. The very same group of institutions who could not, or would not compete on interest rates given to savers and investors.
It would also be reasonable to believe this pressure has been exerted on all the regulators, especially those who have had an affect on the smooth running of our investments. One of the main pillars or better described as buffers in the relationship between financial institutions and the general investing public is the concept of “Managed Expectations.” The whole idea is based on giving the investor or saver the poorest return within acceptable limits, which in turn maximises the profits generated by the institution to the detriment of the investor. This is a behind the scenes manipulation of funds, that conceals the true worth of the investors investment.
How have those perceived “Managed Expectations” affected the small saver and investor? Regarding our own situation, where our ARM bonds in 2007 were being offered at 10% and the best that other institutions could offer was around 5%, it is no wonder that such a differential could not be allowed to exist. We as investors were told from the start or could have researched the modelling that Deliottes had done to demonstrate the potential profits. As many of you will know that figure was around 19%. We also know the bond was doing very well and was exceeding those expectations by up to 5 percentage points
ARM Securities, like others in the same market were happy to return 50% of those profits as a coupon payment if you were prepared to invest for 10 years. As the FSA has now signalled, when these bonds are taken up by large institutions they will still be making a 20-25% low risk profit, but will probably now be marketed as an annuity or investment bond under the “Managed Expectations” concept at interest rate returns below inflation.
FSA MOVE THE GOAL POSTS
Many of you will be aware of the furore caused by Margaret Cole and her toxic comments on investment in SLS policies. (FSA/PN/102/2011) We are hoping to have some items from other companies and IFAs involved in their sales as a front page in the next day or so.
In the meantime it is probably time to at least consider the view that options other than Insetco or the liquidator are becoming rarer than snowflakes on Mid –Summers Day. There will be no third path via an alternative bidder if the entire asset class is to be eliminated from the U.K.
The FSAs, wholly unwelcome, intervention has the potential to reduce the value of your investment in ARM Bonds. If other companies marketing such products are forced into unplanned sales of policies to meet redemption requests this will inevitably lead to a reduction in their saleable value. It may also have a negative effect on provision of credit from the banks for the purchase of such policies.
This will have a knock on effect on the value of your investment as the policies will be independently valued before the issue of Insetco Bonds and shares. Any substantial loss of value will be recognised in the number and value of the Insetco bonds to be issued.
The only positive thing we can offer today is the observation that those of you who take up the Formal Offer from Insetco will no longer be investing in SLS policies but in Corporate Bonds issued by a company which invests in SLS policies. This is entirely different to the retail investment that the FSA seeks to ban.
TRADED LIFE POLICY INVESTMENTS
Please remember this is an opinion or discussion document and that you have 8 weeks to send them your responses, be they for or against.
On a couple of readings it would appear that it is a bit of an exercise in stable door shutting a little late in the day, and while we can be pretty certain that its author, Margaret Cole is sincere in her wish to protect retail investors there are quite a number of assumptions contained in it which are debatable.
Matters are further confused by the multiplicity of names which are used for similar products, and branding them all ‘toxic’ smacks of ‘tarring with the same brush’, newspaper reports in the last couple of days, quoting the FSA as the source, mention the figure for UK investment as £1bn (this has even been described as a small market), and figures of 50% in trouble are being quoted. But, if the above figure is correct, it follows that there are therefore 50% which are not ‘toxic’.
Michael Fugler, deputy chairman of the European Life Settlement Association, has been quoted as saying: “I strongly agree with the FSA that historically many product structures sold to retail unsophisticated investors have been complex and opaque and a number of the past products were toxic” but he argued that properly constructed and sold life settlements “could be a stable, alternative, non-correlated investment”. (Source FT.com)
The opinion is titled “traded life policy investments” and newspapers have even described them as “death bonds” but we all believed we invested in ‘low risk’ Senior Life Settlements”, and no one has yet produced any evidence that they were badly selected or managed, in fact there is ample evidence to show we were invested in high quality policies, a high proportion of which are on lives over 80 years of age. Again there is no evidence that ARM were involved in trading policies or fractions of policies in the manner of junk bonds or sub-prime mortgages, which would have been high risk.
There is, sadly, plenty of evidence that having had the working model broken by the CSSF, they have been unwilling sellers of around a quarter of the fund in order to keep the remaining fund afloat. Re-reading of the risk factors at the time we invested has, as far as we can ascertain, discovered no warning that this might be a possibility.
To cover some of the other FSA Key Risk points as quickly as possible, but please read them all for yourselves:
• Longevity risk –
The FSA correctly detailed these risks.
There are both bonded and un-bonded SLS investments available. Bonded ones pass on the longevity risk to the Bonder. Ours were only ‘bonded’ by the sustenance of new investor’s money. We understand that under the model that ARM used it would need this until 2015 when critical mass would have ensured the funds prosperity without further investment. It is therefore understandable that the CSSF might have had concerns that the model might fail, and they could properly have sought answers. But did this justify the actions they took?
• The underlying assets are located offshore –
“This means there is an exchange rate risk, both in terms of the costs of meeting ongoing premiums and the final payout for the underlying insurance contracts. Currency hedging instruments may be used by TLPI providers, but these may pose additional risks and involve extra costs.” ARM had an inbuilt currency hedge due to taking deposits in 3 currencies so it was self hedging until the CSSF stopped the sale of policies. We will probably never know if this would have been a problem in the future.
• Many TLPIs sold in the UK are operated by firms based offshore –
“This means investors may have limited or no recourse to the Financial Services Compensation Scheme (FSCS) if things go wrong and the product fails. They may also not be covered by the Financial Ombudsman Service (FOS) if they have a complaint about the operation of the TLPI. Customers would be able to complain to the FOS if, for example, the advice they have received from UK distributors was unsuitable or if a promotion from a UK provider or distributor was unfair, unclear or misleading.” No argument there.
• Parties involved in the TLPI may become insolvent –
“For example, if an insurance company becomes insolvent and is unable to meet claims upon the deaths of the original policyholders.”
This has to be challenged as documentation shows that ARM had spread the asset pool over a large number of companies with the majority representing under 2% of the pool. In addition we have read that there has been no failure to pay out by a USA Insurer in the last 100 years, in any case the US regulators have guarantee funds to meet residual claims should this event occur.
The following Key Risks are most certainly worth reading, but again, with the exception of the fund being outside FSA jurisdiction, were they available to us when we made our investment decisions?
• Awareness of authorisation/compensation arrangements –
Many TLPIs are operated by firms based abroad and outside of the FSA’s jurisdiction. There is evidence that providers and advisers have not fully understood or conveyed to investors the risks involved in how or whether the client’s product will be authorised and what compensation arrangements apply.
1.13 These factors could result in a significant risk of loss of capital (and any income provided) for customers.
1.14 We have also found evidence of poor practice in a number of firms including:
• Authorisation –
“Some firms have not obtained the correct authorisation with other regulators, leading to the failure of the product.”
But ARM clearly spent 2 years attempting to resolve this problem.
• Cross-subsidy risks and lack of segregation –
The structure within a number of TLPIs is such that investors’ monies and the assets purchased with those funds are pooled and there is no segregation between tranches. Should conditions deteriorate, investors who redeem early might get a fuller return at the expense of those who remain invested.
• Use of inappropriate underlying assets –
“Not all underlying life policies are structured on a whole of life basis. Some firms use term assurance policies.”
However we have not seen any evidence this applies to ARM.
We feel that for reasons best known to themselves, the FSA seems to wish to emulate the actions of the CSSF. Having failed to understand the business model or work out how to regulate the asset class they have decided to destroy it. As a result of the FSA rhetoric, EEA yesterday had to suspend dealings in their £600m Life Settlements fund due to a run of redemption requests. EEA clients have all had 9% per year reliably returned in coupon
The ARM bond, as was stated earlier, was categorised as a bond based on Senior Life Settlements.” The business model was developed by Deloittes and the bond was invested in high quality policies, a high proportion of which are on lives over 80 years of age. The policies were all with AAA or AA rated US insurance companies and there has been no failure to pay out by a USA Insurer in the last 100 years, in any case the US regulators have guarantee funds to meet residual claims should this event occur.
We believe the only real problem with the ARM investment occurred when the CSSF intervened for reasons which are still largely unclear, and about which as yet they have been unable or unwilling to answer or clarify any of the questions we have asked.
FSA warns against ‘toxic’ traded life policy investments
28 November 2011
The Financial Services Authority (FSA) has issued guidance to warn that traded life policy investments (TLPIs) are high risk, toxic products that are generally unsuitable for the majority of UK retail investors and should therefore not be promoted to them.
TLPIs are known as ‘death bonds’ because investors are putting their money into a pooled investment or fund which invests in US life insurance policies. Basically, a TLPI investor is betting on when a particular set of US citizens will die and if these people live longer than expected then the investment may not function as expected.
Evidence from the FSA’s work to date has found significant problems with the way in which TLPIs are designed, marketed and sold to UK retail investors. Many of these products have failed, causing loss for UK retail investors.
Margaret Cole, FSA managing director, said:
“TLPIs are toxic products which pose significant risks for retail investors.
“The failure of these products in the past has led to significant consumer detriment and we fear new investors will suffer unless we take the necessary steps now to prevent their sale and distribution.
“We are issuing a strong warning to the industry not to market these products to UK retail investors. Ultimately we aim to ban TLPIs from being marketed to UK retail investors, and we intend to consult on this next year to help erase the risks they pose.
“Firms should not be selling these high risk products to retail investors, and so our guidance reminds firms of the importance of assessing whether a product is suitable for a customer and whether promotional material makes risk warnings clear enough.
“Products such as TLPIs are not a simple problem for the FSA to address as many of them are based outside of the UK, and so are outside the FSA’s jurisdiction. There are also considerations under EU law that will affect what we can do. However, the FSA is engaging in discussions in Europe around the MiFID review, AIFM Directive and with other European supervisors to find a solution to give greater consumer protection against these products.
“For now, we want to make our message about these products clear – they are completely unsuitable for most UK retail investors.”
What the FSA is asking firms to do:
Consider the significant risks of TLPIs and be aware that they should not be promoted to UK retail investors;
Conduct extensive research and be able to provide robust justification in the unlikely event they think TLPIs might be suitable for a particular retail investor;
Be aware of underlying assets within the investments they recommend. For example, know whether a TLPI is an underlying asset within another investment e.g. a fund of funds; and
They should not recommend products they do not fully understand.
The key risks of TLPIs are outlined in the guidance paper and can be found on the FSA consumer section of the website.
Key risks include:
The product structure is complex and opaque, involving several firms working together, often in different jurisdictions. The different roles and legal responsibilities are not always clear and so there is a risk that firms may not be meeting their obligations. For instance, offshore entities may require the approval of local regulators and it may be difficult to ascertain if the correct approvals have been given;
The underlying assets expose investors to high levels of risk:
If the people whose lives are assured live longer than expected, perhaps because of incorrect actuarial assumptions or new medical advances, the investments may not be able to function as expected;
We have found that some TLPIs lack sufficient liquidity to meet ongoing costs if the people whose life policies they’ve bought live longer than expected;
If the TLPI provider needs to sell assets to raise funds, they may find it difficult to sell the underlying policies at a reasonable price, due to the small market and its specialised nature, and this may lead to losses for investors;
If the firm needs to sell the assets and cannot find a buyer quickly, this could also mean that investors find their money locked into a TLPI for longer than expected; and
If the underlying assets of the TLPI are based offshore there is also an exchange rate risk, both in terms of the costs of meeting ongoing premiums and the final payout for the underlying insurance contracts.
Investors may have limited or no recourse to the Financial Services Compensation Scheme (FSCS) and Financial Ombudsman Service as many TLPIs are located offshore.
The guidance consultation is open for feedback until 23 January 2012.
From Bob Sharpe: 25/11/2011
Yesterday’s results were:
– 60.30% of the holders of the ARM Bonds, Tranches 1-8 voted in the poll of which 94.51% have voted in favour of the Proposed ARM Offer.
– Holders of 73.06% of the ARM Bond Tranches 9-11 voted and of those, 62.07% have voted in favour.
Therefore in total, holders of 54.6 percent of the ARM Bond have indicated that they are in favour of the Proposed ARM Offer.
While I’m disappointed that there was not a greater response, let us look at the above figures in terms of the recent referendum on extending the law-making powers of the National Assembly for Wales which was held in Wales on 3 March 2011. The results of the referendum were announced on 4 March 2011.
Overall, 63.49% voted ‘yes’, and 36.51% voted ‘no’.
The overall turnout was 35.2%.
First Minister Carwyn Jones, welcoming the result, said:
“Today an old nation came of age.”
So on the basis that we had a 19.4% higher turnout than the Welsh referendum I think I may justifiably write that the ARM investors “came of age” in the first step towards saving our investments from the liquidator.
Thankfully the next step, which is engaging with those who did not vote, will be made easy as copies of the Formal Offer by Insetco, together with voting papers will be posted to every investor. This happens with every IPO, takeover or placement on the London Stock Exchange.
The full details of the proposal will be in the Offer paperwork and Investors will then be free to make up their minds or seek advice and vote their wishes.
From Bob Sharpe: 24/11/2011
A splendid result, which will end much of the uncertainty and allow us to move forward towards a positive conclusion.
The reverse take over should now proceed to a Formal Offer, and it is good to read that:
“Negotiations are continuing between the parties, and with therelevant regulatory bodies to seek an appropriate extension to the agreement,”
We are now on our way.