Viatical Settlement

Several years ago SFC began to raise the public awareness of an exotic product "viatical settlement" (保單貼現) when it was not yet commonly sold in HK.

A viatical settlement is a contractual arrangement under which the holder of a life insurance policy sells the rights to the death benefit under the policy to a viatical provider. The viatical provider in turn sells the death benefit from the discounted life insurance policy to investors as an investment opportunity. Generally, the viatical provider will provide a fixed return depending on the term of contract. However, the investor will not receive the death benefit until the death of the insured. Viatical settlement arrangements may be complex and investing in it could be risky.

This week SFC reprimanded and fine two financial consultants of Convoy Financial Services Ltd (which is not licensed by SFC). They are also Type 4 representatives of Convoy Asset Management Ltd. The disciplinary action followed SFC investigation into the complaints lodged by their respective clients who invested in viatical settlements as a result of their recommendation.

SFC found that these two financial consultants failed to:

• be conversant with the risks associated with the investment product as required by Convoy;
• adequately explain to the complaining clients all the material downside risks associated with the investment product; and
• sufficiently ensure the suitability of the investment product before giving his investment advice to clients.

SFC decided to impose a fine because the financial consultants did not use their SFC licence to conduct the business, and so suspension or revocation of the licence was insufficient to discourage them from repeating the misconduct.

Regulating the selling of viatical settlement is difficult because the product itself is not securities. It may be regarded as a regulated investment agreement and subject to SFC's authorization requirement. In this case, SFC did not indicate whether the viatical settlement had been authorized, and the financial consultants sold the product under a non-licensed firm. If they were not accredited to another licensed firm, I wonder how SFC could handle this case.