Following through on its pledge earlier this year to take a more interventionist approach to regulation, the UK Financial Services Authority has announced its intention to outlaw a product that it has decided is unsuitable for retail investors.
The FSA said that traded life policy investments (TLPIs) are high risk, toxic products that are generally unsuitable for the majority of retail investors and should not be promoted to them. It notes that it has found significant problems with the way in which TLPIs are designed, marketed and sold to retail investors, and that many of these products have failed, causing losses to investors.
TLPIs, also known as ‘death bonds’, are pooled investments or funds that invest in US life insurance policies. “Basically, a TLPI investor is 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,” the FSA says.
It also warns that the product structure is complex and opaque; the underlying assets expose investors to high levels of risk, including a possible lack of liquidity; and many of them are located offshore.
Margaret Cole, FSA managing director, said, “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,” she added, noting that they are not a simple problem for the FSA as many of the products are based outside of the UK, and are outside the FSA’s jurisdiction.
In the meantime, the FSA is asking firms to: consider the significant risks of TLPIs and be aware that they should not be promoted to retail investors; conduct extensive research, and be able to provide robust justification, in the unlikely event they think TLPIs might be suitable for a particular retail investor; be aware of underlying assets within the investments they recommend; and, not recommend products they do not fully understand.