The Financial Services Authority (FSA) has confirmed that traded life policy investments are high risk products that should not be sold to the vast majority of retail investors in the UK.
The confirmation follows previous guidance on the subject and comes ahead of new rules which will impose significant restrictions on the promotion of non-mainstream investments to retail investors.
We agree with this guidance from the FSA.
Traded life policy investments, which invest in the life assurance policies of US citizens and receive insurance payouts on their deaths, are closer to gambling than investing.
The returns from these products rely on the death of a group of US citizens. Should they live for longer than expected, these returns fail to materialise and there may be insufficient liquidity to fund premiums.
It is worrying to see that the traded life policy investment market in the UK has already reached £1bn, as we can only think of very limited circumstances where one of these might be suitable for our clients.
Whilst we can understand the demand from some investors and advisers who are seeking the opportunity for higher returns that are non-correlated with traditional asset classes, this does not explain the rapid growth of this very niche investment market.
Hopefully the new rules from the FSA will clarify which investment types are suited to retail investors and which should be generally excluded from advice.
As well as helping investors avoid exposure to esoteric high-risk asset classes, this should also reduce the burden of research on advisers who remain independent after the end of this year.
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