Lifemark talks could leave FSCS liable for £350m

 22 March 2010Rescue talks for the troubled Keydata life settlement vehicle Lifemark could result in its £350 million liabilities dumped on the Financial Services Compensation Scheme (FSCS).

Three bidders are in talks with Lifemark and Keydata administrator PricewaterhouseCooper over a plan to bridge the Luxembourg-based company’s liquidity problems. A well-informed source said a deal between Lifemark and one of the bidders, which are understood to be major investment banks, could be struck in the next week.

However, the deal could hinge on Lifemark being pushed into default because any bidder would not want to take on the liabilities of Lifemark’s 25,000 clients, who would then fall into the hands of the FSCS. ‘I don’t believe an offer will be accepted unless the FSCS comes in,’ said the source.

The FSCS would become the largest shareholder in the life settlement-backed bonds issued by Lifemark, which were used to underpin Keydata products. It could recover cash from maturing assets or selling policies over time but compensation could be funded in the short-term through the FSCS levy.

The FSCS has already announced the intermediary sector will shoulder a £43 million extra levy to cover Keydata liabilities, but Lifemark claims would dwarf this figure, leading to a punishing rise on the levy.

Lifemark investors would still have to prove to the FSCS that Keydata broke one of its obligations before any claims could be paid.

The FSCS said it was liaising with the Financial Services Authority. ‘We are monitoring developments and are waiting to see what, if any, implications there are,’ said an FSCS spokeswoman.

Lifemark could be one last tricky case for FSCS chief executive Loretta Minghella (pictured), who is stepping down in May and will be replaced by Mark Neale from the Treasury.

The provisional administrator of Lifemark, Eric Collard, said a restructuring plan would be presented to Lifemark trustees next week. ‘I hope by the end of April the plan is in the hands of bondholders,’ said Collard, who was appointed to a supervisory role at Lifemark by the Luxembourg regulator.

Investors have been puzzled over why income payments were disrupted before Christmas, then paid in full in late January just a week before the bonds were suspended.

Lifemark has since warned investors its actuarial assumptions, used to estimate how quickly its life insurance policyholders would die thereby generating cash for the fund, were inaccurate.