The European Life Settlement Association (“ELSA”) was established in May 2009 to set standards for the European life settlement industry and to promote transparency by providing accurate, authoritative information to its investors.
ELSA’s founding members recognised that the consistent application of best practice was fundamental to the continued prosperity of the industry and the protection of its investors, and quickly sought to collate, refine, document and highlight this best practice.
Work began on the first edition of its code of practice (the “Code”) in October of that year and it was completed nine months later in July 2010. As Patrick McAdams, then ELSA’s chair, said at the time, “Our Code is a living framework, intended both to encourage and reflect the development of the European life settlement industry in the years ahead. As the market continues to mature, the Code will be updated to ensure that it continues to best serve the needs of the life settlement investor.”
Twelve years and six editions later, that message still rings true. The current edition of the Code, which ELSA expects to update again this year, is available at https://www.elsa-sls.org/code-of-practice/.
The development of the Code is perhaps best summarised by the edition history presented in the Code itself:
|First draft. Organised into general provisions and sections on education, transparency, policy origination, competition, consumer choices, suitability, conflicts of interest and priority of clients’ interest.
|Second draft. Reorganised into asset management and disclosure, risk mitigation, suitability, and transparency.
|Third draft. Reorganised into asset origination, asset and risk management, and managing the investor relationship.
|First published edition. Page of contents added. Minor textual changes.
|Reorganised into product design, disclosure and reporting, and sales and marketing.
|Separated into requirements and guidance. Additional standards added reflecting “Big 4” auditing practice.
|Introductory sections revised. Additional standards added relating to COI increases, valuation, performance attribution, performance fees, data security, medical record updates, external data sources, and overhead and leverage disclosure.
|Performance attribution and loan/(re)insurance disclosure reworded. Key portfolio information and portfolio breakdown reporting revised.
|Extensive textual changes based on committee members’ comments. Member conduct section added. Guide and “Comply or Explain” procedure created.
Usage and Reception
ELSA members that are product designers, managers or distributors must comply with the required elements of the Code and are expected to comply with its guidance. ELSA members that are not product designers, managers or distributors are expected to encourage the Code’s use in the products with which they are associated.
ELSA members certify their compliance with the Code when they apply for membership and annually thereafter. Failure to comply with the Code may ultimately result in the member being asked to resign from the association.
Members typically reference their membership of ELSA and, by extension, their compliance with the Code in marketing materials, and may use the Code as a basis of discussions with prospective investors; the Code has also been presented and favourably received in ELSA’s meetings with European regulators, including the UK’s FCA, Luxembourg’s CSSF, and Ireland’s CBI.
Spreading awareness of the existence and content of the Code is a key challenge. Membership in ELSA, and therefore compliance with the Code, remains voluntary. Opportunities to promote the Code, such as this article, are always very welcome.
As the industry has grown so has the Code, and the current edition runs to fourteen pages of densely worded text. To make it more accessible, particularly to investors looking at the market for the first time, ELSA created a shorter, three-page summary of the principles guiding the formation of the Code, which is available alongside the Code itself at https://www.elsa-sls.org/code-of-practice/.
To avoid stifling innovation and to bring the Code in line with other international standards, ELSA also introduced a new “Comply or Explain” procedure with the current edition. This allows members, in exceptional circumstances, to request from ELSA’s membership committee an exemption from one or more practices required by the Code. If granted, the member must prepare a disclosure statement, which must be made available to all its existing and prospective investors on request and presented alongside the Code when shared. Viewed by some commentators as potentially weakening the Code, the opposite has been ELSA’s experience: The limited number of exceptions requested to date have highlighted unclear or unqualified wording in the Code that can be refined in the next edition.
As noted above, ELSA expects to update the Code again this year. One area it is currently looking into is that of performance fees, making sure that the existing wording is clear as it relates to open-ended as well as closed-ended structures.
A second relates to how regularly life expectancy estimates should be updated. A number of products in the market are less reliant or wholly non-reliant on life expectancy estimates, and the existing wording may benefit from qualification.
ELSA believes the Code is among the most comprehensive documents of its type in the life settlement industry. It is detailed throughout and complex in places, reflecting the relative complexity of the market. For over a decade, it has provided prospective investors with a framework for their due diligence, highlighting the questions they need to ask of product designers, managers, and distributors. It reflects the thinking and philosophy of ELSA’s members and is a key reason the association was established. ELSA looks forward to refining it further in the months and years ahead.
Simon Erritt is a Managing Director of Coventry Capital