Advisers have long wished for a Financial Services Authority (FSA) that regulated products. If the regulator vetted products before they came to market, it would have helped avoid the sorts of investment scandals that have plagued the IFA sector in recent years, such as Arch Cru and Keydata, the argument runs.
While the FSA has rejected adopting that sort of approach, it has signalled its intention to adopt a more interventionist stance on products it does not like.
Last week, we saw the consequences of its tough approach. On Monday, it announced it was consulting on a ban on the sale of life settlement funds to retail investors. By Wednesday afternoon, the most popular such fund among advisers, EEA Life Settlements, had been suspended. The fund’s board said it did not have enough liquidity to deal with the number of investors trying to redeem their holdings in the wake of the FSA announcement.
The regulator has been right to flag its concerns over the opaque world of life settlements; while its statement last week was its strongest, head of investments policy Peter Smith has been warning of the dangers for nearly two years.
But the impact of its announcement illustrates the dilemma it faces. It has to strike a balance between the need for a strong stance and the plight of investors. The risk of thousands becoming trapped in what are by their nature illiquid investments has become reality, and it could get a lot worse.