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IFAs to dodge death bonds after FSA edict

The European Life Settlements Association believes IFAs will steer clear of recommending traded life settlements to retail investorsfollowing the FSA’s latest guidance on what it has dubbed high-risk, toxic products.

The regulator published its final guidance on traded life policy investments last week. It says advisers recommending traded life settlements need to be able to provide a detailed justification for why the product is suitable.

It says: “We strongly recommend that TLPIs should not reach the vast majority of retail clients. This is not the first time we have warned the industry about these products.

“This year, as part of a review of the rules relating to unregulated collective investment schemes, we intend to consult on a ban of all marketing – including marketing delivered in the context of financial advice – of TLPIs to the vast majority of retail clients.”

With traded life settlements, or TLPIs, investors buy the rights to the insurance payout upon the death of the original policyholder. Problems can arise when these people live longer than expected.

Traded life settlements were the underlying products behind Keydata and ARM bonds. Following the FSA’s guidance in November, the EEA Life Settlements fund was forced to suspend redemptions.

European Life Settlements Association chairman and SL Investment Management investment director Patrick McAdams says: “The capital coming into the UK life settlement market is going to be a fraction of what it was. IFAs are not going to be able to justify the risk.”

Attain Wealth Management managing director Gordon Crothers says: “Nobody is going to want to go to the degrees necessary to justify recommending life settlements.”

Industry feedback to the FSA’s guidance consultation on the traded life policy investments and the regulator’s response:

Industry feedback:

● The FSA should have taken into account the possible impact of its warning about traded life settlements on existing investors

● The FSA’s use of the terms ‘death bonds’ and ‘toxic’ were overly emotional and inflammatory

● The FSA should not have compared traded life settlements to Ponzi schemes

FSA’s response:

● The regulator says it worked with traded life settlement providers before publishing the guidance to ensure they could deal with an increase in redemption requests

● The scale of the risk to consumers justifies the use of the word ‘toxic’. ‘Death bonds’ is a recognised term to describe these products

● Problems with liquidity and actuarial assumptions mean some funds appear to rely to some extent on contributions from new investors to meet the funds’ obligations to existing investors. In this way, some traded life settlements share characteristics of Ponzi schemes, but the FSA says no allegation is made in its guidance that traded life settlements are Ponzi schemes


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