The FSA has published a speech by Peter Smith (Head of Investments Policy, Conduct Policy Division, FSA) entitled FSA sets out concerns about Traded Life Policy Investments.

The FSA uses Traded Life Policy Investments or TLPIs as a collective term for any products that invest in Traded Life Policies, Senior Life Settlements or Viatical Settlements.

At the start of his speech Smith briefly covers the FSA’s general approach to regulation. He refers to Hector Sants' speech at Bloomberg in November 2009 at which he confirmed that the FSA will increasingly need to focus on problems that have their origins higher up in the value chain, and on identifying these problems before consumer detriment occurs. In the past the FSA might have concentrated on sales practices to try to ensure good outcomes for consumers. Now the FSA will intervene earlier, in product design and the marketing by providers of those products to distributor firms.

Smith then discusses the FSA’s position on the inherent risks and issues of TLPIs covering:

  • Longevity risk.
  • Volatility of returns.
  • Liquidity risk.
  • Counterparty risk.
  • Potential for loss.

Smith then discusses the second Treating Customers Fairly consumer outcome - that products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

Smith states that the risks mentioned above need to be taken into account in product design. TLPI providers are responsible for ensuring appropriate risk mitigation strategies are in place at the early stages of design.

Smith also states that provider firms must have systems and controls to ensure that their products are well designed. This leads to the following questions which must be answered before the product is launched:

  • 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?

Smith warns that the FSA has identified that the compliance regime in firms governing the distribution of TPLIs has the potential to be weak. He states that it is not enough to assume that it is the adviser’s responsibility alone for advising their clients and delivering compliant and suitable recommendations to invest in the products. Both providers and distributors have responsibilities to the end customer.

Smith also warns that the FSA has seen instances where the financial promotions, marketing materials and other information designed and approved for use by IFAs and their clients have fallen below the required standards. The FSA also has concerns about the general quality of marketing literature from providers. He also notes that there have been unrealistic performance illustrations due to fund managers manipulating valuations by using shorter life expectancy figures to calculate future payouts. The FSA is monitoring this area closely.

In the final part of his speech Smith looks at unsuitable sales by intermediaries. One of the features the FSA has observed in structured product sales is a tendency for too great a proportion of a client’s assets to be invested in such assets. The FSA is concerned by this and it would not expect to see significant proportions of any client’s portfolio invested in TLPIs.

View FSA sets out concerns about Traded Life Policy Investments, 24 February 2010