FSA attacked for product ban plans

12th December 2011

The Association of Independent Financial Advisers fears that the FSA announcement may have caused one fund to shut and wants an investigation to be held, as trade newpaper Money Marketing reports here.

The trade paper also reported on the closure of the fund concerned, the Guernsey-based EEA life settlements fund, which at the time had around £600m invested in it. EEA said it had been forced to close after an unprecedented numbers of requests for redemptions from both retail and institutional investors after the FSA described life settlements funds as toxic.

Stephen Gay, Director General of AIFA, said: "The FSA's recent warning on the life settlement class has already forced one fund to close. This has caused real consumer detriment and may, in fact, have harmed the very people they are seeking to protect. There must now be a review to establish if this closure was likely to happen regardless or if it was the direct consequence of the regulator's intervention."

Gay now believes the regulator needs to consider whether a product banning approach is the correct one. The Financial Conduct Authority, which will replace the FSA, is expected to make much more use of such powers.

"This demonstration of the regulator's increasingly interventionist approach does raise more general concerns about the impact it will have on the market in future. If the regulator is to have significant product intervention powers, it is vital we know how they will work in practice and how they will assess the impact."

"The system of accountability for the regulator has relied on internal self-assessment with the result that there have been few external effective checks and balances in place. The FSA must be much more accountable for its actions."

Retail financial services is still being rocked by the fallout from two company failures, Key Data and Arch Cru. The former was forced to close because of problems with a life settlements fund.

Life settlements are investments linked to US second hand life insurance contracts. The plan manager buys these contracts from the original policyholder, then pays the premiums, and receives a payout, when that policyholder dies.

Opponents argue that the funds have always been unethical but others believe that they provide access to a good level of returns, which are not correlated with other assets.

On Money Marketing's message boards, Clive Moore has some sympathy with the regulator.

He writes: "To be fair to the FSA, they've been rumbling on about Life Settlement Funds for well over a year, which should have been long enough for advisers to take the hint. If the valuations of this fund have been accurate (even though the performance suggests mark to model rather than mark to market) there shouldn't be a problem dealing with redemptions. If, however, the assets are largely illiquid with a limited secondary market, this should have been run as a closed-ended fund. Regardless, advisers and clients who think they can get a steady 9% a year return (on top of fat commissions) in the current environment probably need to pay a bit more attention."

However other advisers have already attacked the regulator over the fund's closure as this report from another adviser trade website IFAonline shows.

It quotes adviser Geoff Hartnell of Vintage Financial, hitting out at the FSA's choice of language. He said the FSA had been "reckless" in its use of evocative language like "toxic" and "death bonds" in its consultation on the ban. I thought I was reading a copy of the Sunday Sport rather than the regulator's home page."

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