A fresh crackdown on dodgy investments will see the City watchdog ban financial advisers from peddling traded life insurance investments – so-called death bonds’ – to ordinary investors

Death bonds are ‘high risk, toxic products’ and unsuitable for the vast majority of individual investors, the FSA said today.

The regulator has uncovered ‘significant problems’ with way they’re designed, marketed and sold.

At a basic level, investors are putting their money into a pooled investment or fund which invests in U.S. life insurance policies, the FSA explains.

The products have attracted controversy because they involve individuals selling their life insurance policies in return for a lump sum lower than the sum assured.

The policy is then pooled with others and sold as a collective investment. Investors benefit if they original policyholder dies earlier than expected.

If these people live longer than expected, it poses significant problems for the issuing firm, which could collapse if it is not well-funded. Investors stand to lose everything.

The FSA is concerned that advisers are failing to tell clients about the extremely poor health of the traded life insurance market.
One danger is that providers would be unable to meet the costs of  ‘run’ on the policies if investors lose confidence and cash in bonds en masse.

>Margaret Cole, managing director of the FSA, said: ‘Traded life policy investments (TLPIs) are toxic products which pose significant risks for retail investors.

‘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.’

Nicknamed ‘death bonds’, these traded life insurance policies played a role in the collapse of Keydata in June 2009, which left 30,000 investors with £450million worth of losses.

Despite the risks, some advisory firms continue to market death bond deals. Rockingham Retirement had its knuckles rapped in August for selling life settlement investments to pension savers using with misleading literature, which only acknowledged a ‘small element of risk’.

Widely-respected IFA Stuart Fowler says the trend of honest advisers searching for weird and wonderful ways to plug gaps in clients’ portfolios – something he calls a ‘fashion for stamp collecting’ – is on the wane, though.

‘What’s dawned on people is that the law of diminishing returns applies to new asset classes, too,’ he says.

Full FSA Statement :

‘Traded life policy investments (TLPIs) are toxic products which pose significant risks for retail investors.

‘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.

 

‘Firms should not be selling these high risk products to retail investors, and so our guidance reminds firms of the importance of assessing whether a product is suitable for a customer and whether promotional material makes risk warnings clear enough.

‘Products such as TLPIs are not a simple problem for the FSA to address as many of them are based outside of the UK, and so are outside the FSA’s jurisdiction. There are also considerations under EU law that will affect what we can do. However, the FSA is engaging in discussions in Europe around the MiFID review, AIFM Directive and with other European supervisors to find a solution to give greater consumer protection against these products.

‘For now, we want to make our message about these products clear – they are completely unsuitable for most UK retail investors.’

Margaret Cole, managing director of the FSA

Article sourse: The Daily mail

Article on : http://www.thisismoney.co.uk

 

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.