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Home > Investments > Alternative Investments

By Geordie Clarke | Published Apr 27, 2012

Analysis: FSA guidance on life settlement investments

Five months after the FSA warned the industry not to promote traded life policy investments to the public, it has now confirmed its position and said it would soon place significant restrictions on the products.

Sometimes described as ‘death bonds’, TLPIs are pooled investments that invest in US life insurance policies. The investment involves betting on when a particular group of people will die. If they die when expected, the fund makes profits; if they live too long, the fund might not make any returns.

The FSA found problems with the way these funds were designed, marketed and sold to retail investors in the UK. It also took note of the fact some of these funds have failed.

Keydata, the now-defunct structured products provider, distributed bonds issued by Lifemark, a Luxembourg based investment vehicle that invested in life settlements. Investors who lost money due to Keydata still have compensation claims moving through the Financial Ombudsman Service.

A number of other firms have been known for TLPIs. They have been marketed to UK investors through the Assured Fund, managed by a firm called Policy Selection Limited, as well as EEA Fund Management. Following the regulator’s warning against recommending life settlements in November, investors in the £600m EEA Life Settlements fund redeemed their cash at such a high rate the firm was forced to suspend it.

This week the FSA released an interim measure that suggested TLPIs should not be promoted to UK investors and added that it will be consulting on new rules that will impose “significant restrictions on the promotion of non-mainstream investments” that will include life settlement funds.

Peter Smith, FSA head of investment policy, said the TLPI market is worth £1bn in the UK and the regulator was “very concerned that it was likely to grow even more.” He added that more than half of existing retail investments in TLPIs were in financial difficulty when the guidance was issued in November.

Smith added, “This is a 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.”

EEA welcomed the FSA’s decision to restrict the marketing and sale of TLPIs to retail investors, saying it will restructure itself in light of the changes. The firm agreed that life settlements were not suitable for retail clients.

However, the European Life Settlement Association (ELSA), laid blame on the FSA for damaging the TLPI sector, saying its use of the word “toxic” led to EEA’s being suspended due to a high rate of redemptions.

Patrick McAdams, chairman of ELSA, said his organisation was happy the FSA was going to expand its knowledge of the sector before imposing further rules on TLPIs.

He added, “We are also gratified to note that the FSA has heeded feedback from the industry that TLPIs need to be considered in the wider context of alternative investments.”

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