Met Life fined $25 million over variable annuity sales practices. Implications for structured settlement experts

Earlier this week we posted this video and story summary on The Settlement Channel, explaining the news regarding this exceptionally large FINRA fine levied against Met Life. Excerpts of the Settlement Channel story follow:

 "Met Life has agreed to pay a penalty of $25 million to the Financial Industry Regulatory Authority (FINRA) to settle FINRA’s investigation into MetLife’s sales of variable annuities to tens of thousands of investors. The sum includes a fine of $20 million plus $5 million to customers “for making negligent material misrepresentations and omissions” in the sale of replacement variable annuities to MetLife customers. This is the second largest fine ever assessed by FINRA."

" FINRA charged that MeLife’s salespeople failed to help its customers properly compare old and new versions of the annuities, leading some people to change to a newer version of the annuity that was more expensive and less customer generous than the older version. Each sale of a new product typically includes a commission of 5% to 7%, something that encourages sales of newer annuities. MetLife sold at least $3 billion worth of variable annuities through replacements between 2009 and 2014. Insurers began to change their variable annuity contracts after the stock market decline in 2008 revealed the financial risks they faced in offering extremely generous benefits to investors. "

The implications in all this for structured settlement experts is not so much the black eye given to yet another one of the premier life insurance brands that also happen to write structured settlements. Instead it is the continued focus by regulators, the press, industry groups and others on the sales practices, communication, commission structure and business model of annuity sales in general. Those of us in the structured settlement profession can expect to see continued scrutiny of the settlement process and sales practices of our profession, as regulators, industry groups and others examine the suitability of structured settlements as part of the over all settlement plan for injury victims through out the US. 



What does the CBS story on structured settlements mean for structured settlement experts?

Last week those of us in the structured settlement profession were treated to a CBS Evening News story covering the uproar over the purchasing of settlement payments by a number of factoring/settlement purchasing companies. This followed on a series of stories first reported in the Washington Post last year, along with subsequent legislative changes in both Maryland and Virginia tightening the process required for a party to sell their payments to a third party. Among the companies discussed in the report were Stone Street Capital, and interviews with Attorney Earl Nesbitt who is a long time industry spokesman in his role with NASP. 

Link to the CBS News original story here. 

So what you might ask? Isn't it a good thing that the factoring companies are being exposed for alleged abuses? In a way, yes. I don't think I've spoken to a single factoring or settlement purchasing company who doesn't agree that certain abuses needed to be addressed and procedures tightened in the court approvals that already governed these transfers. 

However, if you watch this CBS report and take in the sound bites regarding the pathetic lead paint damaged woman they profiled, you can't help but come away from it asking a very simple question. "If she was so clearly impaired and incapable of making even simple decisions, why weren't her funds placed or paid into a trust or guardianship?" This will of course elicit the usual protests from my friends at NSSTA and the structured settlement primary markets that I'm some how implying that the attorney's, brokers and settlement professionals were somehow incompetent. So let me address directly my thoughts on this and some suggestions for trial lawyers and others who wish to avoid seeing their clients sharing equally tragic stories in the future.

  • If you have a class of victims who are either incompetent, brain damaged or have a very high probability of being incapable of managing their affairs, you should set up asset protection trust, a guardianship, a settlement trust, etc. There are multiple ways to insure that the structured settlement payments go into a managed trust where these vulnerable injury victims can be protected long term. Specialize trust companies, such as First Capital Surety & Trust in Milwaukee, WI, offer a wide range of services tailored specifically for personal injury victims that could prevent most of these abuses. 
  • Be sure to engage a PLAINTIFF settlement planner to work with the trial lawyer, the client and the rest of the team. It has been noted in recent litigation by major defense brokers who in testimony explicitly state that they owe no duty to the plaintiffs for the long term financial protection of the plaintiff. Bring in a settlement professional who represents the long term interests of the plaintiff and can assist in the type of planning that protects the future payments. Dual broker arrangements where both parties are represented is the industry norm these days, single broker deals are the exception. 
  • Don't throw the concept of structured settlements under the bus! The long term, or life time, payment options offered by a structured settlement is ideally suited to injury victims who struggle with decision making, financial concepts and are vulnerable. However, you have to provide a post settlement management process that prevents them from making decisions with out the assistance or approval of a guardian, trustee or adviser. Defense brokers by their very business model do not provide long term, personal service to structured settlement beneficiaries. They have no idea in almost every case that payments are being factored or sold. The client must have a party to rely upon over time to hold off the solicitations to sell their payments if it's not suitable. 
  • Does a long term guardianship or trust cost some money or potentially reduce the amount allocated to a structured settlement annuity? Yes absolutely it adds cost and may result in less premium for the brokers. However, isn't the benefit of protecting people from unwise and reckless financial decisions well worth the price of having a professional trust company or guardian watch over the assets? 

In short, the structured settlement profession who puts the annuity payments in place at settlement needs to expand the degree of services offered to match the obvious needs of the plaintiff. The best advocate for that is a plaintiff oriented structured settlement expert, of which there are hundreds to choose from who take this long term planning responsibility seriously. The legislative changes are welcome and needed on the sale process, but the structured settlement profession needs to also up their game to not just sell and annuity and wish the claimant luck in the future. We can do better, get paid for it and provide real value if we communicate the message to trial lawyers effectively. 

Will structured settlements eventually fall under greater scrutiny as to suitability?

"Structured settlements" have recently gotten back in the news through a series of articles by Terrence McCoy in the Washington Post. The stories covered the lead paint cases arising in Baltimore, Maryland. The tragic death of Freddie Gray has also brought the lead paint litigation issue and the widespread use of structured settlements to resolve personal injury litigation to the forefront, as it turned out that Gray was a lead paint victim. The stories discussed problems which arose long after his settlement and structured settlement were put in place and involved the purchase of his future structured settlement payments at a discount of their present value for cash. 

The issue that brought structured settlements into the news was the purchase of structured settlements by companies that engage in the business of factoring, or purchasing future cash flows at a discount in return for a lump sum. Many of these purchases discussed in the Post story were made of victims of the Baltimore lead paint cases. Children who ingested the paint had filed claims against landlords and building owners who had failed to re-mediate the properties that had lead paint in them. Many of the lead paint victims had severe cognitive problems as a result, something that is common in almost all lead paint injuries, leading to the wide spread use of structured settlements at the time of settlement to pay out their damages over a period of years. This fact and the contention that “A lot of them can barely read.” is the topic of interest I cover in this video commentary for The Legal Broadcast Network. 

The articles in the Washington Post prompted the Maryland Court of Appeals to adopt some new rules regarding the purchase and sale of structured settlements. Which, like 47 other states, has in place astructured settlement protection law which requires the involvement of an independent professional advisor and court approval in the sale of the settlement benefits for cash. However, what came to light in the investigation appeared to be the rubber stamping of proposed structured settlement sales through essentially the same professional advisor on almost all of the cases, with what the courts in retrospect feel was less than rigorous analysis whether the sale would be in the best interests of the structured settlement payee. However, it is still to be determined if the parties involved in those sales were doing anything less than what the law required in order to obtain court approval. 

While this apparently lax approval of process in selling benefits in the courts, as well as aggressive sales tactics used by representatives of factoring companies, has been the primary focus of the articles and the primary structured settlement industry. Yet for me the troubling issue not being discussed in these cases is that many, if not all, of these child or young adult plaintiffs apparently had mental or cognitive disabilities at the time of settlement. These plaintiffs clearly had the same mental problems when the structured settlements were put in place at settlement. 

Look, the job of trial lawyers is to get the largest possible settlement for their clients based upon the facts of the case and the economic recovery possible given insurance overages and the assets of the defendants. From all reports that was clearly done by the attorneys in these cases. However, once the settlement distribution process was locked into the use of structured settlements due to the impaired mental and cognitive capacity of these clients a decision had to be made as to whether an irrevocable fixed payment program was going to adequately address the future needs of the victim. If, as is contended, these plaintiffs were not so impaired as to require a Guardianship or incompetency hearing, should not at least a suitability assessment as to the use of a structured settlement annuity program have been done to determine if they might not be better served by a managed settlement preservation trust account? If you sell an annuity to a senior citizen in most states in the US you are required to do a full suitability assessment, as the presumption of potential Elder Abuse by recommending long term, low liquidity investments is high on regulators radars. There are civil and criminal penalties if those annuities turn out to be unsuitable for seniors, but in the settlement profession we are under no similar guidelines when it comes to the use of structured settlement annuities.

Under the new standards adopted by the Maryland Courts just the other week, Independent advisors on the sale of the cash flows now must appear before the court, explain their business relationship with the purchaser and also be willing to address the cognitive, educational and comprehensive ability of the person selling their payments. This is clearly a higher standard, one that makes sense, however my concern is if this standard is now going to be used on the liquidation of cash flows, plus we have state laws on annuity sales suitability, how much longer is it going to be before structured settlements experts on the front end of the process are swept under these exact same standards. I believe that most independent advisors are incapable of making decisions and assessments on competency and cognitive ability of a client and would be foolish professionally to even attempt that analysis. So who is going to make that decision going forward and what is that process going to look like? Only time will tell. 

In conclusion,  if structured settlement payees were being taken advantage of in these court-approved sales of their future cash flows, the solution to the correct solution to that problem is better oversight by the courts involved, which appears to be how this is going to resolve. However, before the primary structured settlement tears a rotator cuff patting itself on the back we might want to prepare ourselves for what I feel is going to be  heightened oversight and analysis of the cognitive abilities of these and many other structured settlement clients on the front end. I have no doubt that once the dust settles that factoring companies will start pushing to apply the same oversight at the beginning of the process, when structured settlements are being considered and put into place. Structured settlement companies are not presently required to do a suitability assessment for the sale of the annuities that make up structured settlements, I fear that won't be the case for too much longer and experts are going to need to prepare and upgrade their standards.