Also known as ‘death bonds’ TLPIs are high-risk and toxic products, the City watchdog said, adding that it had found significant problems with the way in which they are designed, marketed and sold to UK retail investors.
Investors in TLPIs put their money into a pooled investment or fund that invests in US life insurance policies. Essentially, the investor is betting on when a particular set of US citizens will die, and if the individuals concerned live longer than predicted the investment may not function as expected.
Many of these products have failed and caused losses for investors, the authority said.
Margaret Cole, managing director of the FSA, 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 and prevent their sale and distribution.”
Cole said that the regulator aims to ban TLPIs from being marketed to UK retail investors, but in the meantime it is issuing a strong warning.
The FSA will consult on the issue next year, but said it was not a simple problem to address, because many TLPIs are based outside of the UK and so outside its jurisdiction.
To try and combat this, the regulator said it was engaging in discussions in Europe around the Mifid review, AIFM Directive and with other European supervisors to find a solution to provide greater consumer protection against these products.
Until then, the FSA is asking firms to:
- Consider the significant risks of TLPIs and be aware that they should not be promoted to UK 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. For example, know whether a TLPI is an underlying asset within another investment, for example a fund of funds; and
- Not recommend products they do not fully understand.
Guidance on traded life policy investments can be found on the FSA website and consultation on the guidance is open for feedback until 23 Jan 2012.