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FSA to ban the sale of 'Ponzi'-like 'death bonds'
'Death bonds’ or funds investing in traded life policies are 'toxic' and completely unsuitable for the public, the Financial Services Authority warns.
(Update) Private investors have been warned to stay away from traded life policy funds, known as ‘death bonds’, which are so ‘toxic’ that the Financial Services Authority (FSA) intends to ban them from sale to private investors next year.
In a particularly strong warning from the financial regulator, it warned of ‘significant problems’ with the way the ‘high risk’ products are ‘designed, marketed and sold to UK retail investors’.
The regulator's announcement follows a string of investment scandals such as Arch Cru, Keydata and ARM Asset Backed Securities involving the sale of or investment in traded life policies. The FSA estimates £1 billion is currently held by UK investors in funds such as the Guernsey-based EEA Life Settlements Fund.
Death bonds got their name because they invest in US life insurance policies sold by terminally ill individuals looking to raise money. The funds were widely marketed to as 'alternative' investments that would provide stable, low risk returns not linked to the stock market.
By buying the policies second hand and agreeing to take on the payment of premiums, the funds were meant to receive a payout when the individuals died. However, a combination of fraudulent behavour and the general increase in life expectancy meant investment returns were not always what was expected. Some funds lacked sufficient liquidity to meet ongoing premiums when this happened, the FSA said.
The regulator warned of the complexity and opacity of the products, 'involving several firms working together, often in different jurisdictions'.
It even said that in some cases the products function like a Ponzi scheme. 'In some models, yields are promised to previous investors, which can only be sustained by using new investors’ money, so the model in effect "borrows" from itself and therefore appears to share some of the characteristics of a Ponzi scheme,' the FSA stated.
The regulator first warned about the risks posed by death bonds in March 2010 but said today that further intervention was needed as the market for the products was still showing growth.
'We are issuing a strong warning to the industry not to market these products to UK retail investors. Ultimately we aim to ban TLPIs from being marketed to UK retail investors, and we intend to consult on this next year to help erase the risks they pose,' said Margaret Cole, managing director at the FSA.
'For now, we want to make our message about these products clear – they are completely unsuitable for most UK retail investors,' Cole said.
This is the first time the FSA has announced its intention to use new 'product intervention' powers.
Other life settlement funds sold in the UK include:
- HC I Life Settlement Fund managed by Huet Capital Ltd
- Life Settlement Strategy Fund managed by Centurion Asset Management
- Life Plus Sub-Fund 1 managed by SL Investment Management in Chester
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