The FSA is pushing ahead with plans to consult on banning the marketing of traded life settlement products to retail clients, including marketing within the context of financial advice.
The regulator has published its final guidance on traded life policy investments this morning, following an earlier guidance consultation in November.
The guidance states: “We strongly recommend that TLPIs should not reach the vast majority of retail clients. This is not the first time we have warned the industry about these products.
“This year, as part of a review of the rules relating to unregulated collective investment schemes, we intend to consult on a ban of all marketing – including marketing delivered in the context of financial advice – of TLPIs to the vast majority of retail clients.”
The FSA says the final guidance is an interim measure ahead of a consultation on new rules which will look to impose “significant restrictions” on the promotion of non-mainstream investments, including traded life settlements, to retail investors.
TLPIs invest in life insurance policies, typically of US citizens. The client buys the right to the insurance payouts upon the death of the original policyholder. A TLPI investor is essentially betting on when a particular set of US citizens will die and, if these people live longer than anticipated, the investment may not function as expected.
Traded life settlements were the underlying products behind Keydata, and ARM bonds. The EEA Life Settlements fund was forced to suspend redemptions at the end of November, after the FSA’s guidance labelled life settlements as high risk, toxic products.
The FSA says it has found significant problems with the way traded life settlements are designed, marketed and sold to retail investors. It says it has seen cases where advisers have recommended these products without understanding how they work and the risks involved.
The regulator says where a firm has carried out extensive research and decided a traded life settlement would be a suitable investment for a client, the firm must be able to provide detailed and robust justification for its recommendation.
The FSA says the key risks associated with traded life settlements include longevity, liquidity and awareness of authorisation and compensation arrangements that apply for companies based offshore.
FSA head of investment policy Peter Smith says: “The TLPI retail market is worth £1bn in the UK and we were very concerned it was likely to grow even more.
“The threat to new customers was significant and growing: the potential for substantial future detriment was clear. There was a concern we were witnessing a repeating cycle of unsuitable sales followed by significant customer detriment in the TLPI market. Following publication of the guidance for consultation, this threat has receded.
“This is an interim measure – we believe TLPIs and all unregulated collective investment schemes should not generally be marketed to retail investors in the UK and will be publishing proposals soon to prevent them being promoted except in rare circumstances.”