By Daniel Hunter

The Financial Services Authority (FSA) has confirmed guidance that traded life policy investments (TLPIs) are high risk products that should not be promoted to the vast majority of retail investors in the UK.

The guidance is an interim measure — the FSA will shortly be consulting on new rules imposing significant restrictions on the promotion of non-mainstream investments, including TLPIs, to retail investors.

TLPIs invest in life insurance policies, typically of US citizens. Investors hope to benefit by buying the right to the insurance payouts upon the death of the original policyholder. Basically, a TLPI investor is betting on when a particular set of US citizens will die and, if these people live longer than anticipated, the investment may not function as expected.

The FSA has found evidence of significant problems with the way in which TLPIs are designed, marketed and sold to UK retail investors. Many of these products have failed, causing loss for UK retail investors. Many TLPIs take the form of unregulated collective investment schemes, which cannot lawfully be promoted to retail investors in most cases, but have often been marketed inappropriately to retail customers.

“The TLPI retail market is worth £1 billion in the UK and we were very concerned that it was likely to grow even more," Peter Smith, the FSA’s head of investment policy said.

"At the time that we published our guidance over half of existing retail investments were in financial difficulty — even so, we were hearing about the development of new products intended to be sold to UK retail customers.

“The threat to new customers was significant and growing: the potential for substantial future detriment was clear. There was a concern that we were witnessing a repeating cycle of unsuitable sales followed by significant customer detriment in the TLPI market. Following publication of the guidance for consultation, this threat has receded.

“This is an interim measure — we believe that TLPIs and all unregulated collective investment schemes should not generally be marketed to retail investors in the UK and will be publishing proposals soon to prevent them being promoted except in rare circumstances.”

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