FSA Aims to Ban Sale of Life Settlement Investments to UK Consumers

Financial regulators in the United Kingdom are warning that traded life policy investments, also called life settlements, should not be marketed to U.K. retail investors.

The Financial Services Authority warns that traded life policy investments are "high risk, toxic products that are generally unsuitable for the majority of U.K. retail investors and should therefore not be promoted to them."

The FSA said it aims to ban life settlements from being marketed to U.K. consumers.

The FSA said it's found significant problems with the way in which life settlements are designed, marketed and sold to U.K. retail investors. Many of these products have failed, causing losses for U.K. retail investors, the FSA said in a statement.

Retail investors are people investing for personal reasons rather than business reasons, and those who aren't classified as professional investors, said Rachel Cohen, a spokeswoman for the FSA. "We are sending a strong warning to the U.K. firms we regulate not to market them to U.K. retail investors," Cohen said in an email.

Life settlements allow people to invest in pools that have purchased U.S. life insurance policies. The pools buy individual life insurance policies from policyholders, who get an immediate cash settlement. The pool then continues to pay the premiums on the policies, and receives the payout when the policyholder dies.

An investor "is betting on when a particular set of U.S. citizens will die and if these people live longer than expected, then the investment may not function as expected," FSA said.

Life settlements are "toxic products which pose significant risks for retail investors," Margaret Cole, FSA managing director, said in a statement.

Products such as life settlements are not a simple problem for the FSA to address, the regulatory agency said. Many life settlements are based outside of the U.K., and so are outside the FSA’s jurisdiction. The FSA said it would work with other regulators on the matter.

The U.S. life settlement industry saw sales drop about 50% in 2010 to roughly $3.8 billion face value, which represented the third consecutive year of declines, a study by Conning Research & Consulting shows (Best's News Service, Oct. 6, 2011).

In 2009, the industry was hit hard on a big pullback by investors, making it more difficult for life-settlement funds to buy new life insurance policies, Conning's study showed. Its estimate of $8 billion face value of new policy purchases in 2009 represented a 36% drop from the prior-year estimate (Best's News Service, Oct. 29, 2010).

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)