MM Leader: FSA needs to take a careful line on life settlements

Evidence of the FSA’s new interventionist streak was on display this week as the regulator proposed banning the sale of life settlement funds to retail investors.

The life settlement industry has been in the FSA’s sights for some time following a speech early last year warning about “major flaws” in the marketing of the products.

The failings of Keydata Lifemark products, underpinned by life settlements, and ARM Asset Backed Securities, the life settlement vehicle that was used extensively by the recently fined Rockingham Independent, have exposed the huge range of risks associated with the asset class.

Banning a range of products from retail investors is not a step that regulators should take lightly but the risk and complexities associated with life settlements are such that they are unlikely to be suitable for the vast majority of retail investors. The fact that many life settlement funds are based offshore and so do not offer investors Financial Ombudsman Service or Financial Services Compensation Scheme protection, adds to the risks.

The FSA must tread carefully when ordering redress and past business reviews as these could hit the liquidity of a number of the investments. The regulator estimates that around £500m of the £1bn market is held by investments that are in difficulty and it must ensure its actions do not exacerbate client losses.

Investors nursing significant losses associated with life settlement vehicles may question why the FSA did not act sooner. However, this new tough line, which will protect consumers from these complex investments and IFAs from future FSCS bills, is to be welcomed.

Cost of delay

Leaving aside the horrific communication of this week’s auto-enrolment changes, the Government’s delays are bad news for the pension prospects of employers working for smaller firms.

When Adair Turner’s pensions commission published its final report, which became the foundation of the reforms, it warned of the damaging effect of delay on people’s future pots. This is now the second time that auto-enrolment has been delayed.

There is already concern that 8 per cent contribution levels will not provide a decent pension for most people. Every year of delay condemns more people to an inadequate retirement income.