The traded life policy investments (TLPI) market has "significant problems" and is in no way a mainstream option for investors, the FSA's head of investments said today.
TLPIs are "complex products with a number of inherent risks", and should only be offered to "sophisticated investors", Peter Smith told the 2010 Life Settlement Trade Mission in London today.
The "mission" brings together the European Life Settlement Association (ELSA) and America's Life Insurance Settlement Association (LISA).
Doug Head, chief executive of LISA said the mission's aim is to"keep markets open, in a regulated way, for sellers who have no complaints about these products".
"We believe there are great benefits to these products," he says.
However Smith told delegates the FSA has "significant concerns" in the way these US-pioneered products are brought to market at present, and "would be very concerned to see a rapid increase in the size of this market".
TLPIs are life insurance policies sold to a third party by policyowners for less than the face value but more than the cash-surrender value, and then traded on.
Smith said the risks posed by such investments - including longevity risk, volatility of returns, liquidity risk, counterparty risk, potential for loss, and breaches to TCF rules - are "real and significant".
Misleading financial promotions and unsuitable sales by intermediaries were also serious areas for concern, said Smith, who warned advisers not to sell products without fully understanding the risks to investors.
"As TLPIs target relatively high returns which are uncorrelated with other asset classes there is significant potential for marketability by intermediaries.
"[But] if you do not understand the product, you should not sell it. We have seen far too many market problems arising from advisers selling products they have not properly understood."
He also fired a warning shot at providers: "I would ask the providers in the audience - if it's such a good product, why do you need to pay people so much to sell it?"
The mission's agenda focuses on "the renewed investor interest into Life Settlements covering the favourable tax-environments of Dublin and Luxembourg, risk mitigation and best practice amongst others."
But Smith said the FSA has had to take action with a number of firms already over TLPIs.
Collapsed structured product Keydata was a significant life settlement product issuer with money invested with Luxemburg life settlement vehicles SLS Capital and Lifemark. Its business interests in this asset class and its third-party administration duties outweighed its own-branded structured product interests.
Head said the issues his mission is addressing are the same as those highlighted by FSA: "But there is no magic bullet for issues like these."
Data quality is key
Granted leave to appeal the judgement