The life settlements industry is not new but it is still young and evolving. As such, its regulation is not uniform from state to state. The natural evolution of the industry has led to the introduction of new lines of business within the industry and changing roles for industry participants that regulators and, in fact, participants in the industry could not have foreseen.
In any evolving industry, established roles will change and new business service opportunities will arise.
This poses a challenge for regulators and industry participants alike. Regulators must ensure that their intended consumer protections and regulation of the industry encompass all facets of the industry. And industry participants whose roles have changed or merely emerged since the introduction of regulation must be especially vigilant in researching industry regulation.
Too often those in new or changed roles gloss over regulation based largely on their previous understanding developed in their former roles. This tendency, while common in evolving industries, results in overlooked regulation and, by default, non-compliance.
Lack of compliance, resulting from poor compliance research or flawed understanding of the regulation is still a violation of regulatory requirements which may be punishable by fines, penalties and suspension or even revocation of licenses.
Consider, for example, the evolving role of funders or ‘Financing Entities’ in the industry. In the early years of the industry these entities provided funds to licensed settlement providers under financing agreements that specified the types of policy purchases the financing entity was willing to fund and the cost of such funding. Following various incidents in the financial markets, these financing entities felt compelled to control more of the transactions they were funding. It is their own due diligence. However, in expanding their control over the transaction in which the insurance policy is purchased, they expand their role in the settlement and reach beyond the National Association of Insurance Commissioners’ Viatical Settlements Model Act’s definition of a financing entity which has been widely adopted by the states:
“Financing entity” means an underwriter, placement agent, lender, purchaser of securities, purchaser of a policy or certificate from a viatical settlement provider, credit enhancer, or any entity that has a direct ownership in a policy or certificate that is the subject of a viatical settlement contract, but:
a. Whose principal activity related to the transaction is providing funds to effect the viatical settlement or purchase of one or more viaticated policies; and
b. Who has an agreement in writing with one or more licensed viatical settlement providers to finance the acquisition of viatical settlement contracts.”
Today’s financing entities may dictate the contract forms utilized (their own), that they handle all tracking and monitoring of insureds under contracts they have purchased, what entity will serve as escrow agent and other activities previously within the definition of ‘Viatical Settlement Provider.”
(Note: The terms ‘viatical settlement’ and ‘life settlement’ are used interchangeably in this article. While the majority of the industry is focused on ‘life settlements’ (insureds who are not terminally or catastrophically ill) the majority of existing regulation uses the older term ‘viatical settlement’ to encompass both types of settlement transactions.)