More than £1bn is currently invested in these high-risk investments ?? also known as ??death bonds? ?? and half of this is thought to be at risk, because of failing funds.
As a result the Financial Services Authority today issued robust new guidance, warning advisers not to promote these products to investors.
Margaret Cole, the FSA??s managing director added: ??These are toxic products which pose significant risks for retail investors. The failure of these products in the past has led to significant consumer detriment and we fear new investors will suffer unless we take the necessary steps now to prevent their sale and distributions.?
With these products investors put their money into a pooled fund, which is invested in US life insurance policies. The fund buys insurance policies from those who are often seriously ill at a reduce value, and will then collect the full payout when they subsequently die.
But betting on the life expectancy of certain US citizen can be extremely high risk ?? as well as morally dubious in many people??s eyes. Many of those who sell their life insurance policies to these funds go on to live far longer than expected, which means many of these investments do not deliver the expected returns.
The FSA signalled it will ban traded life insurance investments in the UK, and has warned advisers to stop selling these ??toxic? products to ordinary investors.
Ms Cole said: ??Traded life policy investments are not a simple problem for the FSA to address, as many of them are based outside of the UK and are outside the FSA??s jurisdiction. There are also considerations under EU law that will affect what we can do. However, the FSA is engaging in discussions with other European supervisors to find a solution to give greater consumer protection against these products.?
She added: ??For now we want to make our message about these products clear ?? they are completely unsuitable for most UK investors.?
