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FSA confirms plans to ban promotion of traded life settlements

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.”

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. This sounds a lot like the anti-cigarretes campaign. Another restriction on freedom of enterprise.

  2. This actually sounds like product vetting by the back stable door.

    If the FSA is going to ban the promotion of any type of investments, regardless of other considerations, then it is effectively performing product selection without being honest about it.

    Most IFAs have long called for a system whereby products can be risk assessed by an independent body, the FSA has consistently refused to put in place any form of market approval method but now seems to be performing retrospective analysis of such products.

    Shame they did not do something positive in 2007, when the regulator was fully aware of the KIS Ltd problems.

    Typical !

  3. David Parkinson 25th April 2012 at 11:28 am

    That’s the well run transparent EEA fund done for then. Well done the FSA on getting rid of a truely uncorrelated asset class. Obviously no one at EEA went to the right boarding school! Supposed we better get rid of VCT’s & EIS as well. Also crossing the road & riding a bike can be risky!!!

  4. So they have effectively put EEA out of business – lots of IFAS and DFMs left with egg on face having to explain to clients. Not a great situation.

  5. it wasn’t difficult to see this coming

  6. This guidance is meaningless without a robust definition of “Retail Client”. Presumable they mean the Vicar’s widow on a small stipend. What about the right of self determination for an experienced investor. It all look to me as an attack on an investment vehicle that enables an income to be offset against capital gains allowance.
    I see little difference between a single life settlement fund and a litigation fund cf for longevity in an SLS read court delays in a litigation fund etc. Both types of fund have stringent qualification criteria to reduce risk. Where there have been problems with SLS funds it have been due to criminality and since when has the FSA been adept at identifying fraud.

  7. Why dont they just ban all investments being promoted to retail clients – lets face it some ETFs and ETCs use complex swaps etc. that open investors to significant counter party risk.

    This is like saying that there should be a ban on the promotion of high performance cars to the public as they cant handle the power and crash them.

    That way all the money will be put in deposit accounts just as the FSA wanted in the first place.

  8. Paul Derbyshire 26th April 2012 at 8:08 am

    I am clearly missing something here – apart from the fact the odd fund has been badly structured, the FSA seem to be saying that it is too risky to invest in something that relies on someone dying in order to generate a return. I thought death was one of two of life certainties; FSA blundering being the other!
    So the FSA consider that only regulated funds can possibly be used for retail investors? Lets not give them the chance to invest in any truly non-correlated investment, surely it would be far safer for them to invest all their money in a UK Gilt Fund as they are really safe and have no chance of losing clients money over the next few years (and they are regulated so an adviser will have no problems with the FSA when defending this shocking advice)!

  9. Over the last five years the biggest risks that have materialized for me have come from regulatory sources:
    1) moving drawdown from 120% to 100% of annuity rate
    2) gender equalisation of annuity rates
    3) QE depressing 15 year gilt rate upon which GAD rates rest
    4) regulatory vandalism of SLS funds
    5) reducing the FIT on solar panels
    6) pension annual indexation moving from RPI to CPI.

    The vandalism of SLS is the most annoying as it is a stems from sheer incompetence. The FSA seem to think that because the fund is able to make a payment back to the investor from month one they must be using subscription money from newer investors to do this; thus making the funds look ponzi (in their eyes).

    When the time comes to write history of this period; historians will conclude that a benign regulator is more effective (does less harm to those they seek to serve) than an over active blind regulator.

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