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FSA raises concerns over traded life settlements

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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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. 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!!!

  2. 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!

  3. Dear me, too late once again.

    I wonder what these FSA people do all day long.

  4. 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.

  5. Horse…stable door…after bolted…closing…etc.

  6. 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?

  7. “Horse…stable door…after bolted…closing…etc”

    THIS!!!.

  8. 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??!!

  9. 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.

  10. 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.

  11. We reported an IFA firm to the FSA several months ago for recommending up to 95% of people’s portfolios in to life settlements and promising returns in excess of 10% as low risk. The IFA company are still happily selling the products, so one has to question what the FSA are doing, other than speaking at seminars. I would prefer to see that they are actually taking steps to protect consumers and the good name of most IFAs who do an excellent job for their clients.

  12. Why do the FSA always react after the event? How long now have Traded Life Settlements been marketed and sold ? Surely it`s the FSA`s job to raise these concerns before the event? Smells very much of “protecting your back to me!

  13. The FSA should take a look at the way the viatical market has been going for years in the usa where firms are likened to the grim reaper

  14. Yes the stable door is being bolted, but who is on what side of the door? The FSA in thier cozy central London offices and providers on one side and not responsible and the rest of us on the other – the scapegoats!!!!
    These products should be regulated before they can be brought to market. Would the airline industry allow an untested plane to be flown and only check its airworthyness once it had crashed? Then apply ‘hindsight regulation’ and blame the travel agents for selling the tickets?
    I don’t think so. It’s timje the FSA or any regulator actually does what it is paid for. Regulate the products and make the providers responsible. Then we as advisers can do what we do best, ensure that our clients have the most appropriate products for their needs. If this was done than most of the regulation applying to advisers would not be needed. I don’t know about you, but I am fed up being the scapegoat for poor regulation and greedy providers!

  15. “Taking high levels of commission from these products in the interim does not send us the right signals at all.”

    But the FSA allows:

    1 travel agents ridiculously high levels of commission on travel insurance
    2 ditto consolidators on just about every class of general insurance
    3 banks and building societies more than 40% on home insurance (when the market rate is half that)

    Come on!!

  16. Since the Shepherds debacle it is somewhat of concern that a diector of a liquidated Isle of Man company has become the MD of an UK authorised company in the TLP sector.
    Not to mention the alleged back door payments from the US direct to a Gibraltar bank account!

  17. Should they not consider why these deals are better than those offered by the insurers. if they were not then this detailed intervention would not be necessary. Should they not focus on the inadequate terms offered by thye insurers

  18. What about the fact that the directors and management of structured product providers put out of business by the FSA are then sanctioned/approved by the FSA (presumably a different dept) to continue wortking in the industry in other firms : and they never learn, they just carry on with the same low vaue toxc rubbish that resulted in them being out out of business inthe first place !!

  19. I think the mention of Keydata in relation to this article is well worth mentioning.

    At present, the only levy arising from Keydata relates to ISA issues, ie a product development mistake, and the £103m of ‘missing’ SLS assets. Both of which are directly linked solely to Keydata’s Life Settlement product offerings.

    However, Keydata’s Life Settlement exposure to apparent fraud around SLS could yet look inconsequential compared to the problems if their major Life Settlement vehicle, Lifemark, is as screwed as it appears to be. For anyone not aware, word on the street is that Lifemark is up to all kinds of fun and games – and only some of this is properly in the public domain (but what is should be enough to ring monster alarm bells, ie Lifemark wants to restructure their bond to a zero coupon bond, ie stop paying income to investors – which is the sole purpose of Lifemark!). Lifemark has some £350m, compared to £100m at SLS. The proverbial hasn’t even hit the fan yet.

    As for comments about fees – and the FSA questioning the value of this asset class with reference to the grotesque fees earned by the managers BEFORE their funds have even delivered proven results, IE INCOME AND REPAYMENT OF CAPITAL UNTIL MATURITY, not just for the first few months or years – these comments are wholly pertinent. And as with most of the facts about Lifemark not being in the public domain, when it comes to fees most of that is also hidden. There are some managers creaming off 75% performance related fees on gross internal rates of return on their portfolios, over and above the 7, 8, 9% offered to investors. Even the worlds most revered and restricted hedge fund managers don’t get away with that! But the really rich part of this is that fees for performance are being taken annually based on ‘smoothed’ actuary projections of portfolios and their performance – and we all know how useful actuaries are. The fact is that the people definitely destined to get rich from this asset class are the so called managers – because they’re busy ripping out their extortionate fees along the way. It’s yet to be seen/known if investors get their expected returns.

    And I haven’t even touched on the ‘feeder funds’ into the Life Settlement ‘master funds’ (now there’s a euphemism, if ever there was one!). Feeder funds basically means white labelled funds distributed by firms and individuals who know even less than the firms actually managing the funds – but who share in the extortionate fees ripped out annually.

  20. In what way is this different from the Sub-prime Mortgage market ? To let this take charge of public finances even after what Sub-prime mortgage did to world economy is a judgment on the public that it can be fooled all the time

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