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Regulator warns against 'toxic' traded life insurance policies

A controversial investment product which allows purchasers to effectively bet on when groups of American citizens are likely to die has been branded "toxic" and "unsuitable for the majority of UK retail investors" in new guidance from the Financial Services Authority (FSA).01 Dec 2011

The regulator intends to consult on and potentially ban traded life insurance policies (TLIPs) or 'death bonds' in 2012. In the meantime, it has urged financial advisers to stop promoting the products to retail investors.

TLIP investors put their money into a pooled investment or fund which invests in US life insurance policies. If the policyholders live longer than expected, the investment will not return as much money as the investor expected. The FSA said that some products were not well enough funded to meet ongoing costs if this was the case.

The FSA said that it had found significant problems in the way the products were being marketed and sold to investors. TLIPs are usually marketed as offering strong returns which are unrelated to stock market performance when in fact they are high-risk, complicated products it said.

"TLIPs 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," said Margaret Cole, FSA managing director.

"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."

The guidance reminded firms of the importance of assessing whether a product was suitable for a customer, and whether any promotional material makes risk warnings clear enough, she said.

Bruno Geiringer, an insurance law specialist with Pinsent Masons, the law firm behind Out-Law.com, said that the new guidance showed that the regulator was happy to intervene and regulate at product level.

"The FSA views these investments as too high a risk for the retail customer and that they are too complex for customers to make an informed decision on and understand all the risks involved. In this case, there is unlikely to be much disagreement with the proposed ban," he said.

Investors could have limited or no recourse to the Financial Services Compensation Scheme (FSCS) and Financial Ombudsman Service if they were mis-sold these products, because the customer's money is often held offshore, the FSA said.

However, investors may still be able to complain about advice given or marketing material produced in the UK by an authorised firm.