The finance watchdog is to ban retail sales of Traded Life Policy Investments (TLPIs), a form of bet on the lifespan of U.S. policyholders known as death bonds, because they are too complex and risky for private investors.
TLPIs are toxic products which pose significant risks for retail investors, Margaret Cole, managing director of the Financial Services Authority, said in a statement on Monday.
The failure of these products in the past has led to significant consumer detriment. Ultimately we aim to ban TLPIs from being marketed to UK retail investors.
Death bonds are offered by specialist investment funds that build up portfolios of second-hand U.S. life insurance policies and claim payouts when the original owners die, taking advantage of U.S. laws that allow policyholders to sell life contracts early.
Returns fall short of projections if the original policyholders live longer than expected.
Death bonds were at the centre of an investment scandal in Britain three years ago when finance firm Keydata Investment Services, which sold the instruments to about 30,000 retail investors, was fast-tracked into administration by the FSA amid concerns over how it marketed its products.
The FSA's warning on Monday is the first of its kind as it implements a new, more pro-active policy of intervening in financial products.
The aim, the FSA's Cole has said, is to head off another of the mis-selling scandals that have cost banks some 15 billion pounds in compensation over the past two decades.
Cole told Reuters in August she would issue product warnings if she feels investors are at risk.
An FSA spokeswoman said the authority will consult on new rules to ban the marketing of death bonds to retail investors.
The authority is also holding talks with the European Securities and Markets Authority (ESMA) about a ban on the sale of the products to retail customers, the spokeswoman said.
Bruno Geiringer, insurance partner at law firm Pinsent Masons, said the FSA's move shows it is ready to intervene and regulate at product level.
The FSA move chimes with a far tougher approach to consumer protection anticipated in the European Union, with the bloc's financial services chief Michel Barnier due to propose a slew of measures to protect consumers better in structured products, complex mutual funds and insurance products, partly to apply lessons from the financial crisis.
(Editing by David Holmes)