Watchdog warns over 'toxic' death bonds

FSA's criticism of life policy investments prompts investor panic.
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The City watchdog this week announced plans to ban so-called death bonds from being sold to British investors. The Financial Services Authority said on Monday that traded life policy investments – which encourage investors to gamble on when certain US citizens will die – were "high risk, toxic products".

The bonds take over life policies and continue to pay the policy premiums. When the original policyholders die, the bonds receive the payouts. But if the people on whose lives the policies are held live longer than expected, investors lose out.

"The failure of these in the pasthas led to significant consumer detriment, and new investors will suffer unless we take the necessary steps now," warned Margaret Cole,the FSA's managing director.

The warning prompted worried investors to clamour to get their money out of the EEA Life Settlements Fund, one of the biggest traded life policy funds in the UK. In fact the fund was forced to suspend dealings on Wednesday, saying: 'The current liquidity levels of the fund are insufficient to satisfy the redemption requests."

But Peter Winders, marketing director at EEA Fund Management, said: "Shareholders should be assured that the suspension of dealings will in no way affect the ability of the fund to pay premiums on insurance policies in the usual manner."

Ray Black, of the financial adviser, said: 'The FSA's damning statement on TLPI's seems to have already had the effect they were after – to make it very difficult for UK investors to put their money in. And unfortunately, the manner of their demise will almost certainly prove to be costly to existing investors.

"Whether or not you agree that life settlements can be a suitable diversification for well-informed investors happy to accept the risk, it seems that the option is effectively being removed without the need for the actual ban to be implemented."

The FSA will consult next year about banning the sale of the bonds. "We are issuing a strong warning to the industry not to market these products to UK retail investors," said Ms Cole. "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."

She said firms should not be selling the high-risk bonds to retail investors. Part of the problem is that many of the bonds are located offshore, giving UK investors no regulatory protection.

But Mr Black said a blanket ban is not the answer. "It is important that UK investors are protected from fraudulent or unsuitable products," he said. "However, it's a shame that this type of investment has been dismissed before it has really even had an opportunity to demonstrate how good it might have been."