FSA raises concerns over traded life settlements
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The FSA says it has “significant concerns” about the way in which life settlement policies are being brought to market and it has uncovered “major flaws” in the marketing of the products.
In a speech today at the European Life Settlement Association trade mission in London, FSA head of investment policy Peter Smith said the regulator had concerns about the quality of marketing literature from providers in the traded life policy investment market and it would be monitoring this area closely.
Smith said the regulator has already taken action with a number of firms and as such it would be very concerned to see a rapid increase in the size of the market.
He said: “Already these risks mean that we have had to enter the market to take action. Firms are not achieving good customer outcomes on their own and we are concerned at the number of problems we are finding. Obviously, I cannot go into detail about these problems here, but I can say that we have identified major flaws in the marketing of the products. It is simply unacceptable to produce complicated products and downplay the risks to customers.”
Smith said the regulator viewed TLPI products (traded life policies, senior life settlements or viatical settlements) as complex products with a number of inherent risks. These, he said include longevity risk as it is difficult to accurately assess life expectancy and calculate the true price of underlying policies. Lack of diversification of policies, the illiquid nature of underlying investments and counterparty risk are other “real and significant” risks, he said.
He said the FSA had identified that the compliance regime in firms governing the distribution of products has the potential to be weak and it was concerned that providers are not proactively highlighting the particular risks to advisers. He said the regulator has seen promotions that feature risk warnings that lack prominence or were of insufficient detail.
He said: “We have seen instances where the financial promotions, marketing materials and other information designed and approved for use by IFAs and their clients have fallen well below the standards we require. If individual complexities and risks are not being adequately explained to IFAs, there is a risk that important features of the products may not be relayed to customers.
“It is never enough to assume that it is the adviser’s responsibility alone for advising their clients and delivering compliant and suitable recommendations to invest in the products. Both groups have responsibilities to the end customer.”
In a nod to the FSA’s structured product review, Smith said the regulator would be concerned to see significant proportions of any client’s portfolio in TLPIs and said advisers must recognise they are unlikely to be suitable for many clients.
He also expressed great concern that commission rates being offered to advisers for TLPI products were misaligned with the market norms.
He said: “I would ask the providers in the audience - if it’s such a good product, why do you need to pay people so much to sell it? I would ask the advisers in the audience - can you be certain that what you are recommending is in your client’s best interests, given the amount you stand to gain from the transaction?”
Smith said in the run-up to the introduction of the retail distribution review the FSA was monitoring the use of high commission rates in the market generally and the TLPI market.
He warned: “Taking high levels of commission from these products in the interim does not send us the right signals at all.
“We are monitoring the provision, marketing and uptake of these products. Where we have discovered issues with the firms involved in the production or distribution of these products in the past they have been subject to supervisory actions and, where necessary, enforcement proceedings. This is an approach that we will continue to pursue in future.”
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Readers' comments (19)
Anonymous | 24 Feb 2010 12:35 pm
It's a pity they didn't do the same about the TEP market, especially Geared plans sold by certain people as "low risk" investments. We have lost several large clients as a result of this and the misleading marketing material issued and claims of "this can't go wrong" boy did it go wrong!!!
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Bob Donaldson | 24 Feb 2010 12:39 pm
Of course they are not 'proactively highlighting the particular risk to advisers' it is about shifting product and when it all goes belly up the advisor carries the can!
Another inherent problem with our industry I think!
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Evan Owen | 24 Feb 2010 12:41 pm
Dear me, too late once again.
I wonder what these FSA people do all day long.
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Michael Fallas | 24 Feb 2010 12:42 pm
Have they just smelt the coffee then or have they just reacted to the issue with Keydat that they should have know about for years.
"Hindsight regulation" yet again.
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Chris F | 24 Feb 2010 12:54 pm
Horse...stable door...after bolted...closing...etc.
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Gerry Cooper | 24 Feb 2010 1:13 pm
More stable doors and bolting (bolted?) horses if you ask me. None of this should be news to the FSA.
Also, has anyone sold this stuff? and if so, why?
Or do I know the answer already?
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Julie | 24 Feb 2010 1:22 pm
"Horse...stable door...after bolted...closing...etc"
THIS!!!.
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JB | 24 Feb 2010 1:27 pm
What staggers me is that these are classed as unregulated products...therefore you don't have to be regulated to sell TLS....
And if you're unregulated there is diddly squat that the FSA can do about because they are not interested in unregulated firms.
However woe betide anyone regulated who dips their toes into the market....
Wait a minute aren't IFA's post RDR supposed to offer unregulated collectives et al so that they can truly call themselves independent and whole of market??!!
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elaine birch | 24 Feb 2010 1:55 pm
Dont throw the baby out with the bath water. Life settlements are not bad investments. Advisers should take the time to get informed and advise in selected and suitable situations. It should not be a "must sell".
You dont have to retain the high commissions on offer as you can make a rebate to the client.
In a time when clients are seeking alternative investments that are uncorrelated to the stock market surely life settlements should be a consideration along with other "alternative" assets.
You will need to be engaged on an ongoing basis as advice is vital to make the right decisions about maturities and making certain there is enough time for any reinvested tranches to mature to cash before the client wants out. (secondary markets are infantile and need time to progress).
Think of life settlements for illiquid long term situations such as some trust funds and USP/ASP for a small part of the portfolio for clients that are used to sophisticated investments like BES, VCT, EIS, EBT's etc.
It is a pity that the asset class is getting tainted, regulation is probably required to clean things up .
It is a long term illiquid investment and the industry needs to get it right otherwise our PI insurance will not cover advice in this area even for the advisers who are trying to use it wisely.
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Anthony Badaloo | 24 Feb 2010 2:03 pm
Agreed, it does carry a longetivity risk as it is difficult to accurately assess life expectancy and calculate the true price of underlying policies. Lack of diversification of policies, the illiquid nature of underlying investments and counterparty risk are other “real and significant” risks, he said.
Don't know if these are higher than the typical 'managed' Fund. Risk of hidden charges, low performance, managers bonuses, inaccurate marketing, misleading ratings from rating agencies, poor value trading.
High comissions are probably necessary when a products is new to market, but reduces on establishment and increases competition. (Plasma TVs). FSA charges to IFAs are not exactly cheap!
Perhaps the FSA should approve all products, prior to launch, and not after the horse has bolted.
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