Regulator confirms forthcoming "significant restrictions" on non-mainstream investment promotion

Out-Law News | 30 Apr 2012 | 3:32 pm | 2 min. read

The UK's financial services watchdog will shortly consult on new rules imposing "significant restrictions" on the ability of investment companies to promote complex non-mainstream investment products.

The Financial Services Authority (FSA) confirmed its position as it published finalised guidance stating that traded life policy investments (TLPIs) – so-called 'death bonds' – are "high risk products" that should not be promoted to the majority of retail investors. The guidance is an "interim measure" until more formal rules are in place, it said.

TLPI investors put their money into a pooled investment or fund which invests in life insurance policies, typically of US citizens. If the policyholders live longer than expected, the investment will not return as much money as the investor expected. Although many of the schemes take the form of unregulated collective investment schemes which cannot lawfully be promoted to retail investors in most cases, the FSA said that they had often been "marketed inappropriately" to retail customers.

In addition to the effect of increased longevity on the value of the underlying policies, the FSA said that there was a "liquidity risk" due to the specialised nature and limited secondary market for TLPIs.

"This may mean they are sold at a significantly reduced value if the TLPI needs to raise funds at short notice, which has an impact on the value of the portfolio," it said in its guidance. In addition, the FSA highlighted corporate governance issues particularly as a result of both firms and the underlying policies being located offshore, and warned that parties involved in the TLPI were at the same risk of insolvency as other financial service companies,

"The TLPI retail market is worth £1 billion in the UK and we were very concerned that it was likely to grow even more," said Peter Smith, the regulator's head of investment policy. "At the time that we published our guidance over half of existing retail investments were in financial difficulty – even so, we were hearing about the development of new products intended to be sold to UK retail customers."

The regulator had seen a "receding" of the threat since publishing its draft guidance for consultation at the end of last year, he said.

"This is an interim measure," Smith added. "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."

The proposals will be published as part of the FSA's review of the rules relating to the sale of unregulated collective investment schemes, which is due in the second quarter of this year.

In its guidance, the regulator warned that even where a firm considers the product suitable for a particular retail client "after conducting extensive research" it must be able to provide "detailed and robust" justification for its reasoning. "Where a firm promotes an investment without giving advice, they must comply with our financial promotion rules, but given the risks involved we consider it to be extremely difficult to promote TLPIs in a way that is fair, clear and not misleading," the guidance said.

It added that where a firm identified problems or compliance failures with a particular product, it should consider "whether it ought to act on its own initiative" regarding customers who may have suffered detriment from those failures.