Axa Thema has suspended the issuance of structured notes wrapped as life insurance products in France following a ruling by the Paris Court of Appeal on June 21, 2016 which ordered insurer Generali to compensate an investor on the grounds of the non-eligibility of 'complex' structured notes (EMTN) within the meaning of the French regulation (Insurance Code).
According to a letter to clients signed by Olivier Samain, managing director at Axa Thema and head of third party distribution at Axa France, the 'suspension shall take time to precisely understand the foundations of the judgment and assess the potential impacts on our portfolios'.
Axa Thema will not undertake any special measures at this stage in relation to the assets already invested in structured notes wrapped as life insurance contracts. Samain stated in his letter that the structured notes selection follows a 'strict process' defined by the firm's governance framework which is in line with the recommendations of the Autorité de Contrôle Prudentiel Et De Résolution (ACPR) of October 2010 on complex products.
"[All] investments have been granted within the 30% limit for each contract and after signing a specific document explaining (...) the associated risks,' stated Samain.
AXA's decision comes a few days after the Paris Court of Appeal ruled that banks have no right to market so-called complex financial products wrapped as life insurance contracts, and ordered Generali to compensate a retail investor with €416,000 for unsuitable sales.
According to the court ruling, François Groell, a French investor, filed a claim in 2012 against insurance broker Horizon Patrimoine and the Generali group. In 2006 he had invested €941,000 in a product called Optimiz Presto 2, which was valued at €374,000 at maturity. The product, a growth and income structure linked to a basket of 40 stocks, had a term of eight years and a payoff profile based on a combination of knockout, napoleon and worst-of options.
To justify its decision, the Paris Court pointed at the prospectus of the product which 'clearly stated that it is not a classic bond but a complex obligation, whose valuation is not an indexed fixed rate or variable interest but a basket of shares' and highlighted within the 'disadvantages of the product' that there was 'no capital guarantee and that the redemption value could be less than 60%' of the capital invested. Therefore, stated the court ruling, the product 'cannot be described as a fixed income bond and therefore is not eligible for the contract' and so the insurer 'must repair the damage resulting from investments that the insured could not legally do'.
Helen Feron-Poloni (pictured), a partner at the Lecoq-Vallon & Feron-Poloni law firm, representing the investor, said the product sold by Generali 'was issued by SG Option Europe, a subsidiary of Societe Generale specialized in derivatives', and used 'advanced structured management techniques' according to the bank's marketing brochure which made it "particularly complex".
"[However] we argued that the French insurance regulation does not include structured products in the list of permitted assets to be included in the contracts of life insurance such as bonds, stocks, mutual funds or SCI shares, despite banks using these products as if they were fixed income bonds, and the ACPR, the regulator responsible for supervising the banking and insurance sectors in France, allowing this practice," said Feron-Poloni.
This is a decision that may unfold a small earthquake in the French banking and insurance sector as it sets a precedent and will touch many life insurance contracts, according to Feron-Poloni.
"The court's decision is expected to have a significant impact in the market because thousands of structured products are sold via life insurance policies," said Feron-Poloni. "[These products] are extremely lucrative for the financial firms selling [them] but [the firms] don't take into account the best interest of investors or their risk profiles."
According to Feron-Poloni, it is important that financial firms protect the interests of their clients and that they bear the responsibility for unsuitable sales. "We believe this could be a wake-up call for firms selling these products to retail investors," she said.
Generali is understood to have put on hold new issuance of structured notes wrapped as life insurance products but the firm declined to confirm. "We are currently analysing the judgment and the basis upon which it is made to determine the most appropriate action," said a Generali spokesperson.
Around 50% of life insurance policies sold in France are based on structured notes with more than 3,400 such products sold in the retail market in recent years. Societe Generale with more than 600 products marketed leads the issuance, followed by BNP Paribas (424), Credit Agricole (297), Barclays (95) and Keppler Cheuvreux (88).
SRP data also shows that Axa has sold 69 structured notes wrapped as life insurance products of which 39 are still live contracts.
Calls and emails to AXA requesting comment were not returned by press time.
Additional reporting by Nikolay Nikolov
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