Peter Smith (Head of Investments Policy, Conduct Policy Division at the FSA) has given a speech to the European Life Settlement Association in which he presented concerns about aspects of the market in Traded Life Policy Investments (TLPIs). His comments are particularly interesting in relation to the need for product providers to make sure they explain their products clearly to IFAs.
TLPIs include any products that invest in Traded Life Policies, Senior Life Settlements or Viatical Settlements. According to Smith, such products are not mainstream investments and the FSA is very concerned about the rapid growth in the size of this market.
The FSA is aware of certain inherent risks in TLPIs which mean that they require careful product design and sales advice. Amongst these, longevity risk is of particular concern. These policies are subject to the risk that the underlying policyholders live longer than was originally estimated in actuarial assumptions. Where calculations of life expectancy are wrong TLPIs have the potential for considerable financial loss. A failure to adequately diversify a fund can lead to volatility of returns with the additional factor of the general lack of liquidity that TLPIs possess as they only yield over long periods of time.
Because of the inherent risks involved in such products, the FSA has had to take action as some firms have failed to achieve good customer outcomes.
In his speech, Peter Smith consider how firms must ensure they meet treating customers fairly outcomes. Products and services marketed and sold in the retail market must meet the needs of identified consumer groups and be targeted accordingly.
The FSA is concerned that provider firms do not have adequate systems and controls in place to ensure that their products are well designed and meet customers’ requirements. Further, there is a tendency for providers to assume that it is the responsibility of IFAs to provide suitable advice and information about products. Smith emphasises that this is a shared responsibility between product providers and distributors.
In the speech, Smith asks providers to consider the following questions when designing products:
- Who is the target market?
- How is the product stress tested?
- How do firms ensure their product is suitable for the end user?
- Are there any systems in place to check up on sales and to make sure that the target customers are the ones receiving the product?
- Are any high levels of execution-only sales being identified and investigated?
Providers should ensure that they gather and analyse management information to check where and to whom products are sold, together with indicators of the suitability of the product for customers. Providers have a duty to help distributors sell their products and achieve good consumer outcomes and prevent mis-selling. Firms should be aware that they may be exposed to reputational and commercial risk if products are not meeting customer expectation. Providers should therefore explain their products to IFAs in a manner which is clear, fair and not misleading.
In addition, the FSA is concerned that product literature is below the required standard. The regulator has seen some information which fails to set out the risks of the product in sufficient detail. Furthermore, there have been examples of some unrealistic performance indicators due to fund managers manipulating valuations by using shorter life expectancy figures to calculate future pay-outs.
Finally, the FSA is concerned about the level of commission being paid to distributors of these products. TLPIs can bring high returns and are attractive products to market. However, they are also complex products which may not be suited to many customers. Peter Smith states that it is a matter of great concern that commission rates being offered are out of line with market norms. The Retail Distribution Review (RDR) will ban the payment of commission to advisers by product providers. The FSA expects advisers to have started planning their new business models to take account of this change.