IL investors were warned in the strongest terms not to invest in highly risky “death bonds” by the finance watchdog yesterday, in a bid to stop a repeat of the Keydata collapse in 2009 in which 30,000 investors lost £450m.
The Financial Services Authority branded the so-called death bonds, otherwise known as traded life policy investments, “toxic” and “completely unsuitable for most UK retail investors” because of their complex structure and high risk of losses.
Death bonds are created by packaging up and selling on bundles of life insurance policies sold in countries such as the US and bought off their original policyholders.
They pay out a return based on how soon the policyholders die, but generate very poor returns when the holders live longer than expected.
“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 FSA managing director Margaret Cole.
The FSA likened some of the bonds on offer to fraudulent investments.
“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,” it said.
The market for death bonds is estimated at £1bn in the UK but the FSA has warned repeatedly since February 2010 that the instruments and the companies that sell them can both put investors at risk.
The bonds fall into the area of structured products, the same area that brought down Keydata Investment Services, which invested in a Luxembourg-based company, SLS that in turn invested in US life products.
City investment managers expressed outrage after being hit with a £326m levy from the Financial Services Compensation Scheme this year after compensating its victims.
“There is unlikely to be much disagreement with the proposed ban from those firms still reeling from the extra FSCS costs arising from the key data failure where these investments were used,” said Bruno Geiringer, insurance partner at Pinsent Masons.