Traded life policy ban – FSA jumps the gun
I commented earlier in the month on the FSA guidance on product design covering payment protection and structured products.
It appeared the FSA was not waiting for its new product intervention powers under the draft Financial Services Bill but said it was giving a strong steer as to what it requires from firms.
In Monday's guidance consultation on traded life policy investments, the FSA has gone one step further and (for all practical purposes) banned a product. The FSA's proposed formal guidance says simply: "We strongly recommend that traded life policy investments (TLPIs) should not reach retail investors in the UK". It would be a brave firm that sold such products in the light of that recommendation. (Aficionados of 'Yes, Prime Minister' will remember that "a brave decision" meant Sir Humphrey thought Jim Hacker had gone quite mad!)
The Financial Services Bill now before Parliament proposes to give the FCA a product intervention power (amongst other things) to make general rules prohibiting particular products. That legislation is at the moment being examined by a Joint Parliamentary Committee (to which RPC has recently given evidence). It remains to be seen in what form the legislation will finally emerge after Parliamentary scrutiny.
The concept of a product ban has been criticised. It could completely remove from the market a product that might be suitable for some people, even if only a minority. In its guidance consultation, the FSA suggests it will include a ban on marketing traded life policy investments as part of its ongoing review of UCIS. But, the FSA says, because introducing new rules via consultation takes time, it is issuing guidance as an interim measure. It is thus a self-confessed attempt to avoid the consultation and scrutiny required by the existing legislation, and jumping the gun on the new law.
Traded life policy investments have of course given rise to many notorious difficulties and not just because of the morbid concept. Keydata is probably the most high-profile problem but many would suggest the problem in that case was not the traded life policies but the way in which the investment was managed. Furthermore, Keydata was not an unregulated collective investment scheme but an authorised firm.
Bad generals are always criticised for fighting the last war. It looks as if the FSA is retrospectively banning the last product to have caused investor detriment. Many would suggest it more important that it concentrates on what is happening in the market today but perhaps this example demonstrates the difficulties of predicting the fortunes of financial services products.