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July 24, 2014

Will push on purchasing regulations backfire on structured settlements?

Filed under: Structured settlements — Peter Arnold

Yesterday morning, the American Association of People with Disabilities and the National Consumer League held a panel discussion on Capitol Hill about problems that structured settlement beneficiaries can encounter when selling future payment rights.  It was an interesting discussion and may presage heightened federal attention to the structured settlement industry in general and settlement purchasing specifically.

As usual when discussing structures, context is important: In recent years, the structured settlement marketplace has seen a drop in production.  This has created an economic dynamic that’s pushing broker companies and purchasing companies toward a single merged industry.

Industry watchdog John Darer recently reported that a structured settlement provider company has purportedly entered into a formal arrangement with a settlement purchasing company to sell “contacts and/or other nonpublic information.”

NSSTA Board member Randy Dyer of Ringler Associates told me last November that he’d picked up a heightened amount of industry chatter about settlement purchasing companies angling to purchase broker operations.

Yesterday’s panelists were AAPD President Mark Perriello, Shelly Buxenbaum, legislative assistant to Rep. Matt Cartwright and NSSTA member Marty Jacobson.  Perriello began by noting that on average, about 5,000-6,000 people each year sell their rights to future payments and therefore settlement purchasing “is critical for us to look at.”

Both he and Ms. Buxenbaum indicated upfront that settlement purchasing had value for accident victims in certain circumstances.  “It probably needs to remain a perfectly legal practice,” said Perriello.

Ms. Buxenbaum went further, saying, “We want factoring to remain legal.”  She later added that an example of a legitimate reason for a beneficiary to sell future payment rights might be to pay down a student loan.

Still, both Perriello and Ms. Buxenbaum spent most of their time urging Congress to strengthen federal oversight of settlement transfers. Perriello added that AAPD had expressed concerns about settlement purchasing to the Consumer Financial Protection Bureau.

Marty Jacobson, for whom I have tremendous respect, echoed the other speakers’ comments by cautioning against “too much regulation” on settlement purchasing, even as he encouraged passage of Rep. Cartwright’s bill.

Much more went on, including Marty describing why a New York judge describes the current regulatory framework for payment rights transfers provided by Section 5891 of the federal tax code as a “rubber stamp.”

I plan to write more about the event but for now, a few thoughts:

  • If NSSTA and the primary market push for new federal regulations on settlement purchasing, they could be in for a rude awakening.   Capitol Hill history is littered with examples of companies that start a lobbying effort to put competitors under a regulatory yoke only to see themselves put in regulators’ crosshairs.

Look at Google, which tried to saddle Internet service providers with online “neutrality” regulations and quickly found itself in trouble at the FTC for its privacy policies.

  • Regulators looking at structured settlements are unlikely to respect arbitrary lines between “primary” and “secondary” market activities – especially as the two markets merge.  Some in the primary market may believe that a “bright line” exists between the primary and secondary markets but don’t expect Federal regulators to believe it. Also, it’s just not true. Pat Hindert has been exceptionally keen on documenting this point.  If Congress starts probing transfer fees, it’s likely also to focus on the primary market’s standard 4% annuity commission.
  • Boon for plaintiff brokers?  If Congress believes that annuitants don’t have structures designed to meet their needs, it’s likely to focus on efforts to facilitate plaintiffs’ access to structure consultants. There was a brief discussion yesterday morning of Rep. Brian Higgins’ bill to encourage exactly that.
  • Trouble for Liberty, AIG & life insurance companies? In 2010, Hartford paid $74 million to settle claims that it defrauded thousands of structured settlement annuitants who did not have the benefit of a plaintiff broker.  Other life insurance companies (Liberty, AIG and others) may have had internal policies similar to those of Hartford. It’s a near-certainty that if Congress probes settlement transfers, it will also look at how life insurance companies have conducted themselves in disclosing fees.

There’s a lot more to write but this is a blog, not War & and Peace.  More to come in due course.  If anyone wants the recording of yesterday’s session, let me know.

UPDATE: The esteemed structured settlement consultant Dan Finn of Finn Financial Group informs me that there is no ampersand in the title of Tolstoy’s epic. Apologies to Dan and to Leo.