UK regulator to ban traded life policy settlements

The UK regulator has called on British financial advisors to stop selling traded life policy investment products as it consults on the so-called “death bonds” with a view to banning them next year.

The Financial Services Authority, which believes UK investors may have put around £1 billion in traded life policy investments, has warned of “significant problems” with the way the high risk products were designed, marketed and sold to UK investors.

The announcement comes in the wake of investment scandals involving firms like Arch Cru, Keydata, and ARM Asset Backed Securities, some of which had failed and lost investors significant sums.

Keydata was closed down by the FSA in June 2009 after it became insolvent and infringed tax regulations. Around 30,000 investors were reported to have lost £450 million.

Maltese savers had also invested funds in ARM Asset Backed Securities which was refused a licence by the Luxembourg regulator in late August.

Luxembourg-based ARM Asset Backed Securities SA was a special purposes vehicle and had issued bonds listed on Ireland’s stock exchange but which were suspended by the Irish Central Bank in November 2010 in view of the pending regulatory process in Luxembourg.

The Luxembourg regulator’s decision meant all payments by ARM were suspended, including redemption of its bonds and coupon payments. In late September, ARM decided to challenge the Luxembourg regulator’s decision.

The MFSA had advised Maltese investors to keep in contact with their advisors.

Traded life policy investments invest in US life insurance policies which are sold on the secondary market as holders seek to raise money. The second set of investors undertakes to pay the premiums and receive a payout when individuals died. But fraudulent behaviour and increased life expectancy meant investment returns often did not meet expectations. The FSA warned some funds lacked sufficient liquidity to meet ongoing premiums.

“We are issuing a strong warning to the industry not to market these products to UK retail investors,” FSA managing director Margaret Cole said this week. “Ultimately we aim to ban TLPIs from being marketed to UK retail investors and we intend to consult on this year to help erase the risks they pose. For now, we want to make our message about these products clear – they are completely unsuitable for most UK retail investors.”