The FSA has “significant concerns” over the way that life settlement policies are being brought to market and says it has uncovered “major flaws” in the marketing of the products.
In a speech last week at the European Life Settlement trade mission in London, FSA head of investment policy Peter Smith said the regulator had already taken action with a number of firms and it would be closely monitoring marketing literature from providers.
He said: “Firms are not achieving good customer outcomes on their own and we are concerned at the number of problems we are finding.
bviously, 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 unaccep-table to produce complicated products and downplay the risks to customers.”
Smith said the regulator viewed traded life policy investment products which include traded life policies, senior life settlements or viatical settlements as “complex” with a number of “inherent risks”.
He said longevity is a primary risk due to the difficulty in accurately assessing life expectancy and calculating the true price of underlying policies.
He cited lack of diversification of policies, illiquid underlying investments and counterparty risk as other “real and significant” risks.
Smith said the FSA has identified the potential for weakness in the compliance regime of firms governing the distribution of products. It is concerned that providers are not proactively highlighting risks to advisers.
He said the FSA has concerns about the quality of marketing literature after identifying promotions with risk warnings that lacked prominence or were insufficiently detailed.
“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,” he said.
Much like the FSA’s stance on structured product allocation, Smith said the regulator would be concerned to see significant proportions of any client’s portfolio in TLPIs or a rapid increase in the size of the market.
As such, he 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 these products are not aligned to the market norms.
He said: “I would ask the providers in the audience, if it is 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 that 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 for the general market but also the TLPI market.
’I would ask the providers in the audience, if it is such a good product, why do you need to pay people so much to sell it?’
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.”
The European Life Settlement Association, which organised the event, says the FSA’s views echo its own concerns about the market.
Joint chairman Patrick McAdams says: “He very much echoed in his speech why there is a need for Elsa to be in existence as we are promoting disclosure and transparency to support investors in Europe who are considering this type of investment.”
Life settlement provider SL Investment Management supports the FSA’s move to raise industry standards.
Chief executive Jeremy Brettell says: “We welcome the FSA’s renewed focus on the sector as it may ultimately help to separate the wheat from the chaff.
“Some of our competitors have been claiming returns based on over-inflated valuations that we simply cannot sanction. Our own valuation methodology is conservative, backed by an in-house team of 13 qualified and experienced professionals that includes nine members of the Institute of Actuaries, whereas some companies rely entirely on consultants which we believe is an inadequate approach.”
Advisers say the FSA’s focus on high commission levels from TLPI products could help stamp out the influence they could wield on product recommendations in the market.
Ingard Independent Financial Management partner Ian Osang says: “I am not a great advocate of the attitude that if a product pays more commission it must be bad but, if nothing else, it is politically insensitive at the moment with the way the industry is moving to come out with products which pay high levels of commission and may lead certain IFAs to recommend certain products that they perhaps should not.”