Life Policy Investments Should Not Generally Be Promoted to UK Investors – FSA

Jack Humphrey, Regulatory journalist
April 25, 2012 /

Due to high risks posed by traded life policy investments (TLPIs), these should not be promoted to the vast majority of retail investors in the UK, the Financial Services Authority said.

The guidance is an interim measure – the FSA will shortly be consulting on new rules imposing significant restrictions on the promotion of non-mainstream investments, including TLPIs, to retail investors.

In 2008, the FSA already manifested its plan to consult on and ban such products. The UK financial regulator described these products, also known as death bonds, as “toxic”. In UK, these products failed and many investors had lost money.

TLPIs invest in life insurance policies, typically of US citizens. Investors hope to benefit by buying the right to the insurance payouts upon the death of the original policyholder. Basically, a TLPI investor is betting on when a particular set of US citizens will die and, if these people live longer than anticipated, the investment may not function as expected.

An estimated 25,000 people have invested around £1 billion in life policy investments and there are many other firms that continue to market them.

The FSA has found evidence of 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.

Many TLPIs take the form of unregulated collective investment schemes, which cannot lawfully be promoted to retail investors in most cases, but have often been marketed inappropriately to retail customers.

In June 2009, the FSA had closed down Keydata for being insolvent and breaking tax rules, leaving 30,000 investors with £450 million of losses.

Peter Smith, the FSA’s head of investment policy said: “The TLPI retail market is worth £1 billion in the UK and we were very concerned that it was likely to grow even more. At the time that we published our guidance over half of existing retail investments were in financial difficulty – even so, we were hearing about the development of new products intended to be sold to UK retail customers.

“The threat to new customers was significant and growing: the potential for substantial future detriment was clear. There was a concern that we were witnessing a repeating cycle of unsuitable sales followed by significant customer detriment in the TLPI market. Following publication of the guidance for consultation, this threat has receded.

“This is an interim measure – we believe that TLPIs and all unregulated collective investment schemes should not generally be marketed to retail investors in the UK and will be publishing proposals soon to prevent them being promoted except in rare circumstances.”

 

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