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.”