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.”