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FSA to ban marketing of traded life investments to retail investors

The FSA has warned traded life policy investments are high risk, toxic products which should not be promoted to UK retail investors.

The regulator says it aims to ban TLPIs from being marketed to UK retail investors in a guidance consultation paper published this morning.

TLPIs are known as ‘death bonds’ because investors are putting their money into a pooled investment or fund which invests in US life insurance policies. Investors are essentially betting on when a particular set of US citizens will die and if these people live longer than expected then the investment may not function as expected.

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.

The FSA says evidence from its work to date has found significant problems with the way in which TLPIs are designed, marketed and sold to UK retail investors.  Many of these products have failed, causing loss for UK retail investors.  

FSA managing director Margaret Cole says: “The failure of these products in the past has led to significant consumer detriment and we fear new investors will suffer unless we take the necessary steps now to prevent their sale and distribution.

“We are issuing a strong warning to the industry not to market these products to UK retail investors. Ultimately we aim to ban TLPIs from being marketed to UK retail investors, and we intend to consult on this next year to help erase the risks they pose.”

The FSA says firms should consider the significant risks of TLPIs and be aware that they should not be promoted to UK retail investors.

Firms should carry out extensive research into the products and be able to justify recommending them in the “unlikely event” they think the products are suitable.

Firms should also be aware of the underlying assets involved, and should not recommend products they do not understand.

The FSA has found that some TLPIs lack sufficient liquidity to meet ongoing costs if the people whose life policies they have bought live longer than expected.

It says if the TLPI provider needs to sell assets to raise funds, they may find it difficult to sell the underlying policies at a reasonable price, due to the small market and its specialised nature, and this may lead to losses for investors.

If the firm needs to sell the assets and cannot find a buyer quickly, this could also mean that investors find their money locked into a TLPI for longer than expected.

Finally, if the underlying assets of the TLPI are based offshore there is also an exchange rate risk, both in terms of the costs of meeting ongoing premiums and the final payout for the underlying insurance contracts.

Investors may have limited or no recourse to the Financial Services Compensation Scheme and Financial Ombudsman Service as many TLPIs are located offshore.

The guidance consultation closes on 23 January, 2012.

EEA Fund Management marketing director Peter Winders says: “We agree with the FSA’s desire to ensure that investors understand product risks and are placed into suitable investments. That’s why our investment minimum on the EEA life settlements fund is £25,000 and why we make clear this is for sophisticated investors under advice.”

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Comments

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

  1. It was known for a long while that TLPI,s in America were a dodgy investment. What was not known that these were behind Key Data strategy.

  2. Money Marketing 24 Feb 2010 – ‘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…’

    21 months later…

  3. Typical FSA, Horses & stable doors come to mind

  4. It seems a bit late for the FSA to issue this warning! I think that we are all fully aware of the risk now. Perhaps the FSA should have looked into Keydata at the time they were marketting this product and assessed the risk then rather than now that Keydata has gone belly up! Keydata were after all authorised and regulated by the FSA and somehow managed to market these policies into stocks and shares ISA’s which has baffled me.It seems that the FSA will not accept their part in the Keydata affair and are blaming IFA’s and Building Society’s for recommending them and issue this warning after the boat has sunk!

  5. Oddly enough I agree with Margaret Coles.

    Bit on the tardy side of regulatory action. But hey who is surprised – thematic review anyone?

    Our own compliance services provider researched a particular Life Settlements fund and stated, lo & behold each indivdual investor should have a holding in this fund. Diversification you see.

    I am of the opinion that they are not all rogue but I don’t like the lack of FSCS coverage and concerns over liquidity.

    Funnily enough had an email showing a particular funds escalating performance this morning.

  6. But wasn’t the system back-tested by WXYZ accountants, one of the biggest in the world? How can the scheme possibly fail?

    Ha Ha.

  7. Point, fine, ban.

    Is this what regulation is all about? Allow everything to go sour and then trip over it?

    What has regulation done for society?

    SFA

    And that doesn’t stand for Securities and Futures Authority.

  8. This is absurd.

    One event that may lead to failures in these funds is for a scare story to circulate that could lead to a liquidity issue.
    .
    Would the FSA really try and justify its actions by telling us they told us so because fo failures arising solely from their hysterical overreaction.

    If this happens with Life Settlements due to this sort of ignorance at the FSA do we as advisers sue them for any losses sustained by clients?

    Also, what constitutes “marketing”? We have advised clients to invest in these funds, but we have not marketed them to anyone.

    Ian Coley
    Partner
    Medical Investment Services

  9. I cannot see anything wrong with the principle that if a company owns a large number of life policies then an actuarial calculation should be able to establish how much revenue the fund could expect given the statistical probabilty that so many people will die in a certain number of years. We will never know what went wrong at Keydata until there is an enquiry, finding out who knew what, when, and what did they do about it. What were advisers supposed to tell their clients when they advised on these products offered by a regulated firm covered with the FSCS? Oh, by the way, here’s a brochure. Don’t take any notice of it because its a pack of lies?

  10. Ridiculous approach by FSA

  11. horse gate and bolted spring to mind.

    Apparantely next week they are to issue a warning that the twin towers may come under attack.

    Can someone tell the FSA that their input would be welcomed far more before the …. hits the fan than afterwards, If they could do that Im sure the advice industry would enjoy working with them far more than they do at present.

  12. @ Ian Coley …So, if everyone believes that everything will be ok then the status quo will continue…..

  13. Re the Twin Towers, the point is that there WERE warnings. Please obtain a read a copu of “War & Anti War” by the Toflers. I read it in August 2001. It was ratehr presient.

    The trouble with the FSA, is they write the book and then choose not to publish until AFTER the proverbial has hit the fan

  14. This is unbelievable. What better way to start a run on not just a Fund but the whole asset class. If run correctly in the right structure it’s a solid proposition as part of a balanced portfolio. How many advisers are recommending ETF’s and hand on heart fully understand every aspect of the underlying strategy, holdings and liquidity policy? Oh and by the way along with all other equity back funds they losing money, highly volatile and a standard deviation upwards of 30%. Perfect for the retail mass market.

  15. It’s easy to be wise with hindsight. As usual our regulator has entered the debate after the damage has been done, having allowed various product manufacturing companies to the flood the market with these things using clever marketing that claims they are safe, with lots of facts and statistics to support their claims (i.e. Key Data, Arch Cru, TLP’s, UCIS’s etc.). When will the FSA (or future FCA) stop these products from being distributed to IFAs in the first place? It’s then the IFAs who then get a good kicking, the FSA having allowed these products to be marketed in the first place. The FSA needs to start accepting more responsibility and stop companies promoting these products in the UK in first place rather than going after IFAs who have promoted “safe” branded products in good faith – it’s too easy to be wise in hindsight!

  16. anyone who justifies a fund use solely on the grounds of diversification is flawed.

  17. We are all in Europe (at the moment).
    The SLS funds (I had no clients invested with SLS) were regulated in Luxembourg I believe.
    I quote from the FSA press release “TLPIs are not a simple problem for the FSA to address as many of them are based outside of the UK”
    The FSA are being paid handsomely, well above the national average for an IFA and their support staff to do their job CORRECTLY.
    The FSA is effectively saying if an IFA firm does business with a NON UK FSA regulated firm, then if anything goes wrong ALL the risk is with you Mr IFA as we will give you no quarter and the FOS will decide against you with no right to go to a higher court either in the UK or EU.
    As such it is a restriction of trade within the UK and EU.
    Either we are part of the EU or we are not.
    If the FSA want us out of Europe, please go and join UKIP Hector

  18. should have seen this coming 1st December 2011 at 11:57 am

    given their history in US, the fact that some started shioving longevity swaps in, the liquidity crisis, general liquidity challenge with these and the FSA’s view anyone who didn’t see the risks needs to look at themself

  19. The real risk for investors in the UK is poor regulation. There should be a risk warning on every product – “The FSA can seriously damage your wealth”.

  20. I agree with Ian Coley. These are sophisticated products, however it was not the underlying asset that failed in Keydata, it was a crook running off with the money. That’s why due diligence is so important. If the management controls, internal due diligence and corporate oversight are in order the fund will be fine.

    I can’t imagine what Margaret Coles was thinking when she made such a public comment. I suppose it’s one way to create a self-fulfilling prophesy.

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