Ontario regulator to investigate viatical company

(October 29, 2003) The Ontario Securities Commission (OSC) is set to resume its stalled investigation of Universal Settlements International (USI) — a viatical settlements company based in Waterloo, Ontario — following a favourable decision by the province’s divisional court.

USI argued that since it is not registered under the Securities Act, and does not sell a product that falls within the definition of a security, it should not be subject to an OSC investigation, which the company said would be an intrusive step in its business operations.

The court disagreed, stating that because the company is based in Ontario and sells investment products in Ontario, Nova Scotia, B.C. and Alberta, it is “still subject to the parameters of the [Securities] Act and must cooperate with the commission in its investigation.”

OSC spokesperson Eric Pelletier says the regulator wants to determine exactly what type of product USI is selling. “They’ve been arguing they shouldn’t be regulated as an insurance product or a security,” he says. “We don’t know if it’s a security and we’d like to investigate whether it is or not,” he says, adding that viaticals are registered in some U.S. jurisdictions as securities, but not in others.

Viatical or life settlements allow a life insurance policy owner to sell the policy to a third party at a discounted rate. Policy owners are typically senior citizens or terminally ill. The buyer becomes the beneficiary of the policy and receives a payout when the owner dies.

There’s a clear prohibition in Ontario’s Insurance Act against the buying and selling of insurance policies, says Guy Giorno, a lawyer with Fasken Martineau DuMoulin in Toronto, who’s familiar with the viatical industry. But USI acts as a third party in the business, buying policies from U.S. providers and re-selling them to individuals as investments.

“They were buying non-Ontario policies so that’s a loophole in the Insurance Act,” says Giorno. Ontario’s Financial Services Tribunal recognized that when it threw out a proposed cease and desist order against USI last year. The loophole is slated to be closed when Ontario proclaims a new version of its Insurance Act, Giorno says.

In the meantime, USI is free to operate using its current business model. “The question is whether any of the elements of the structure could lead to violations of the Securities Act or possibly some other legislation,” Pelletier says.

There are a number of other unanswered questions about USI and its products, Pelletier adds, including which agents are selling them, and whether the risks of investing in viaticals are being properly disclosed.

“It’s quite risky because you’re gambling on the remaining lifespan of someone who probably has a terminal illness,” he says. “So you can’t figure out what your rate of return would be because you don’t know what the investment period is.”

Pelletier says the commission also wants to make sure the original policy owner is being treated fairly and not paying an unreasonable amount to the middleman.

“It’s dressed up in altruism; you’re going to help someone live out their last days in dignity,” he says. “On that basis, maybe it’s preferable but we have to make sure it’s being put together properly and that people buying into those agreements are aware of the risks they’re taking.”

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca