The FSA plans to ban all marketing of traded life policy investments to UK retail investors and says firms that have recommended these products should consider whether redress is due to investors.
It published a guidance consultation on TLPIs this week, which are also known as traded life settlements or death bonds. The products operate as pooled investments into US life insurance policies.
Life settlement policies were the underlying investment behind Keydata products. The collapse of Keydata triggered an industry interim levy of £326m, with advisers paying £93m and fund managers paying £233m.
Investors essentially bet on when a particular set of US citizens will die. If these people live longer than expected, premiums need to be funded for longer, which could have an impact on investment return and liquidity.
The FSA says in some models yields are promised to previous investors which can only be sustained by using new investors’ money. The regulator says these models “appear to share some of the characteristics of a Ponzi scheme”.
Many TLPIs sold in the UK are operated by firms based offshore, so investors may have limited or no protection from the Financial Services Compensation Scheme or the Financial Ombudsman Service.
The FSA says firms that recommended these products should consider carrying out a past business review and assess whether redress is payable. It estimates that at least 1,000 distributor firms were involved in the sale of TLPIs.
The total UK market in TLPIs is worth around £1bn. The FSA says around half of this money is held in TLPIs which are already in difficulty.
Thameside Wealth director Tom Kean says: “These are not products that we would have considered because we do not understand them. However, if the FSA had done its job properly in the first place, we would not be in this mess.”