28th November 2011
The consumer watchdog, the Financial Services Authority, says that the products known variously as traded life policy investments, viaticals funds or by some critics as death bonds are too risky and too toxic for the retail market. About £1bn of retail investors' money is currently invested in the plans and as trade website IFAonline reports around half of this £1bn appears to be in some degree of trouble.
Traded endowment plans buy second hand life insurance policies i.e. they pay a lump sum to the original policyholders and then continue to pay the premiums, until that policyholder dies at which point they take the insurance payout. The biggest pool of such second hand policies is in the US and most funds invest in this market.
The theory is that the funds should generate a large amount of return for investors. The original policyholders get a lump sum during their life rather than a payout on death, which is how the products have been justified on ethical grounds. One of the risks of such funds, is that the original policyholder lives longer than expected, or more accurately that a group of policyholders live longer than expected.
However, the financial regulator now believes that based on the investment risks there is very little if any justification for selling the plans in the retail market. It is currently consulting on a new rule which will allow it to enforce a ban which it hopes will come into force from the second quarter of next year. But in the meantime, the FSA has made it clear that it sees it as very unlikely that an IFA could continue to advice on the plans and stay within the rules as this warning from FSA managing director Margaret Cole shows.