UK financial watchdog hits out at major flaws in marketing of life settlement policies

Written by Ray Clancy

Friday, 26 February 2010 09:42

The UK’s financial watchdog says it has ‘significant concerns’ about the way in which life settlement policies are being brought to market and it has uncovered major flaws in the marketing of the products.

In a speech at the European Life Settlement Association trade mission in London, Financial Services Authority head of investment policy Peter Smith said the regulator had concerns about the quality of marketing literature from providers in the traded life policy investment market and it would be monitoring this area closely.

‘Already these risks mean that we have had to enter the market to take action. Firms are not achieving good customer outcomes on their own and we are concerned at the number of problems we are finding. Obviously, I cannot go into detail about these problems here, but I can say that we have identified major flaws in the marketing of the products. It is simply unacceptable to produce complicated products and downplay the risks to customers,’ Smith explained.

Smith said the regulator viewed traded life policies, senior life settlements and viatical settlements (TLPIs) as complex products with a number of inherent risks. These, he said include longevity risk as it is difficult to accurately assess life expectancy and calculate the true price of underlying policies. Lack of diversification of policies, the illiquid nature of underlying investments and counterparty risk are other ‘real and significant’ risks, he said.

One of the problems the FSA has identified is that the compliance regime in firms governing the distribution of products has the potential to be weak and it was concerned that providers are not proactively highlighting the particular risks to advisers. Smith said the regulator has seen promotions that feature risk warnings that lack prominence or were of insufficient detail.

‘We have seen instances where the financial promotions, marketing materials and other information designed and approved for use by IFAs and their clients have fallen well below the standards we require. If individual complexities and risks are not being adequately explained to IFAs, there is a risk that important features of the products may not be relayed to customers,’ explained Smith.

‘It is never enough to assume that it is the adviser’s responsibility alone for advising their clients and delivering compliant and suitable recommendations to invest in the products. Both groups have responsibilities to the end customer,’ he added.

The FSA said it would be concerned to see significant proportions of any client’s portfolio in TLPIs and said advisers must recognise they are unlikely to be suitable for many clients. There is also concern that commission rates being offered to advisers for TLPI products were misaligned with the market norms.

The financial watchdog is monitoring the use of high commission rates in the market generally and the TLPI market. ‘Taking high levels of commission from these products in the interim does not send us the right signals at all,’ Smith said.