31st March 2010

Compliance Alert - March 2010 - Traded Life Policy Investments

The FSA uses the term Traded Life Policy Investments (TLPIs) as a collective term to describe any product that invests in Traded Life Policies, Life Settlements or Viatical Settlements. In simple terms products based around the secondary market for life insurance where a secondary group or intermediary buys, sells and packages these policies.

In a recent speech to the European Life Settlement Association, Peter Smith who is head of Investments Policy at the FSA, highlighted that it is the FSA's view that all TLPIs are complex investments with a number of key risks and that they do not see these products as mainstream products - i.e. products which may be freely marketed and sold to the wider general public (retail investors). He went on to confirm that there is an expectation that these investments are only appropriate for "sophisticated" investors.

The FSA also stated that as a result of the supervisory work undertaken in this area they have some significant concerns about the way these investments have been packaged and brought to the wider retail market. Furthermore they have taken action against firms in this sector and said that they would be "concerned to see a rapid increase in this market".

Essentially the FSA's concern about TLPIs arises out of the key risks impacting on these products, for example risks related to life expectancy and longevity, liquidity, counterparty risk, credit, premiums and the potential for loss. Their view is that these are not easy to predict or necessarily well understood.

The second of the FSA's Treating Customers Fairly (TCF) consumer outcomes is based around ensuring that products that are marketed and sold in the retail market are designed to meet the needs of the customer. From what the FSA are saying there is a high likelihood of a risk that products in this sector have the potential to fall foul of this requirement.

Clearly from what the FSA said at the speech they have concerns around product design, target market and how products are stress tested and at the same time they have wider concerns about adviser knowledge and the methods by which these investments are promoted. Issues with misleading financial promotions from providers have also been raised.

The FSA finished by stating that it expects providers to be clear about the target market for their products, to understand when the product will and will not perform, to disclose and explain all of this clearly to distributors, and to monitor what actually happens. It also expects advisers to understand the risks inherent in TLPIs, to explain these fully to their clients, and to recognise that these products are unlikely to be suitable for many clients, for example;

• those who have specific investment goals so should not be put at risk of substantial capital loss;
• those who may need to realise their investments quickly;
• those who do not already have a diversified portfolio: and
• those who do not have a sophisticated investment approach

Key Action Points

So what does all this mean for intermediary firms? Well if you have been involved in this market and recommended that clients invest into TLPIs in the past then you may need to review your approach and potential exposure to this area. Rather like the thematic work in the areas of Pensions Switching, Structured Products and Unregulated Collective Investment Schemes firms need to be sure that they can demonstrate that they have handled this area appropriately.

The risk of over reliance on product provider literature and the potential for shortcomings in provider and product due diligence, adviser product knowledge and advice explanation and documentation are all areas that may need reviewing. It may also be appropriate to consider reconfirming any advice given to clients where appropriate.

All firms impacted should take into consideration the above points and reassess whether their approach has been appropriately robust in the past and that they have communicated the risks of these investments to their clients.

If you require any assistance in this area please contact our Resources Compliance Birmingham office on 0121 616 3480 or email us at compliance@resources-uk.com

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