FSA estimates £500m caught in troubled traded life policy funds

The Financial Services Authority (FSA) said it estimates half of all funds held in the UK traded life settlement policy market are in investments which are in "difficulty".

Today the FSA announced plans to ban the sale and promotion of "toxic" traded life policy investments because they are high risk and generally unsuitable for the majority of UK retail investors.

FSA figures suggest at least 1,000 distributor firms have been involved in the sale of TLPIs such as those promoted by failed firm Keydata.

Of a total TLPI market worth £1bn, the regulator said around half of this is held in investments that are already in difficulty.

Costs to distributors of today's guidance could be "significant" depending on the volume of unsuitable sales, it said.

According to the regulator the vast majority of cases it has reviewed so far show that advice has been unsuitable.

In one example the FSA found a firm selling TLPIs without appropriate controls which showed evidence of mis-selling in almost all cases.

The FSA is not requiring firms to review past sales of the TLPIs. But if firms decide to review past sales, it estimates a cost per case of £200 to £300 for firms using their own compliance staff.

Depending on the results of any reviews, firms may be liable to pay consumers redress, the FSA warned.

"It is important to note that, while this is a cost for firms, it is also a benefit for existing customers who have received unsuitable advice," the FSA stated.

The FSA said it is aware reviews of sales by firms and subsequent payment of redress may lead to problems with the ongoing viability of some firms.

But it adds these products carry inherent risks that may lead to customers' claims for redress anyway.

Providers of TLPIs are set to be hardest hit by FSA plans to ban the investments.

The FSA expects its consultation to reduce retail demand for TLPIs. It could also lead to increased redemptions from existing customers resulting in liquidity difficulties for firms running TLPIs and may cause the products to fail.

The regulator admitted there is a risk that its decision to publishpropose a ban on the products may lead to a run on the investments, which may jeopardises the viability of the product and lose consumers money as a result.

As an example of customer exposure, the FSA have found average holdings of £36,000 per investor in one unnamed TLPI.

The FSA said investors may only get back 15% of their investment if one particular product it looked at failed.

Firms should review promotions following publication of the guidance to ensure they meet the required standards, the FSA said.

Reviews may give rise to redress if firms find that their promotions have not been fair, clear and not misleading so that retail customers can understand the risk involved with TLPIs, the regulator said.