Wednesday, September 29, 2010

Britain's worst personal investment scandal in 20 years:

In a scandal which is the worst to hit Britain’s personal investment industry in two decades, thousands of British investors have sunk their money into a scheme based on rich, elderly Americans dying.

By the time the Financial Services Authority (FSA) closed it down, 100 million pounds had already gone missing and one of the men involved had turned up dead in Singapore.

The scandal, in fact, has sucked investors into a bitter battle involving Keydata Investment Services’ millionaire founder Stewart Ford, the FSA, Britain’s Serious Fraud Office, administrators, auditors, independent financial advisers and opportunist hedge funds sniffing around the vestiges of the remaining assets.

It throws a spotlight on the way in which attempts to regulate financial firms can compound rather than solve the problems -- and on what responsibilities regulators have to investors they are supposed to be protecting.

The scandal also exposes the potential conflicts of interest that occur when different arms of large accountancy firms act as auditors, investigators and administrators.

And it raises questions about whether -- and when - the government ought to wade in to protect investors. But how all this started?

Before knowing how all this started, we should know a little bit about this scheme, started by Keydata Investment Services, an award-winning UK company.

The Keydata product appeared tailor-made for people seeking secure and regular income. The product offered an eight percent return over a 7-year period, with no exposure to the stock market and a brochure promising an “almost guaranteed return of your original capital after seven years.”

So what the British investors bought into was a life settlement scheme, a relatively new and complex type of financial product based on purchasing the unwanted life insurance policies of wealthy Americans and then collecting the death benefits. The returns depended, in part, on when those Americans died.

Life settlement products first appeared in the mid-1990s. Typically, the market is fed by elderly individuals with life expectancies of between 3 and 12 years.

US settlement companies buy these life insurance policies at a fraction of their face value, but above their cash surrender values, picking up the tab for insurance premiums and collecting on the death benefit -- or policy maturity. The fledgling secondary market for life insurance policies -- also dubbed ‘death bonds’ -- started winning attention around 2005, especially in the United States.

As people live longer, the idea of cashing in a life insurance policy early in exchange for a lump sum appeals to some looking to supplement their longer retirement.

Industry proponents say that as long as the models used to predict the deaths of underlying policy holders are broadly correct, a suitably large portfolio should offer a healthy return, despite the industry’s often eyewatering commissions and fees -- as much as 10 percent upfront -- and the lack of generally agreed rules about how to value portfolios.

There are two men at the center of this story. Stewart Ford, founder and CEO of Keydata, cut his teeth in business selling sandwiches, worked as a camera operator and spent three years at a printing company in Edinburgh.

In 1997, he set up Keydata, an online and digital publishing company that provided fund research and performance ratings -- some of it from Reuters, now Thomson Reuters Corp -- to the investment fund industry. In 2001, Keydata branched out into investment products. At its height, the company had 2.8 billion pounds of assets under management.

David Elias sprung from altogether more privileged roots. Born in Singapore, he studied at Pembroke College, Oxford, and trained as a barrister before taking a financial job in the City of London. Elias proved adept at building fortunes and losing them. Ford and Elias met in the summer of 2005. Elias was on a mission to find a UK distribution channel for SLS Capital, a Luxembourg-based life settlement company he part-owned.

He was full of enthusiasm for the nascent life settlement market, which he said looked under-priced and offered a safe haven for investors seeking shelter from stock market volatility. He handed around an independent report by Wall Street firm Bernstein Research, which forecast that the secondary market for US life insurance would grow more than ten-fold to $160 billion over the next few years.
Source: ET

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