Britain's financial regulator could next year ban the sale of so-called death bonds - effectively a bet on the lifespan of wealthy U.S. policyholders - to the general public as part of a crackdown on how investments are promoted in Britain.
The Financial Services Authority said on Wednesday it was launching a consultation in the second quarter on its plan to prevent traded life policy investments (TLPIs), or death bonds, reaching the vast majority of retail clients.
We believe that TLPIs and all unregulated collective investment schemes should not generally be marketed to retail investors in the UK and will be publishing proposals soon to prevent them being promoted except in rare circumstances, said Peter Smith, the FSA's head of investment policy.
The FSA said in November it was clamping down on the 1.0 billion pound British market for second-hand life insurance policies for being too risky, complex and toxic for general investors.
Death bonds were at the centre of the Keydata scandal - Britain's biggest personal investment scandal in decades - which left tens of thousands of pensioners without an income after the FSA fast-tracked the business into administration in 2009.
Keydata sold products backed by U.S. life insurance policies to around 30,000 mainly elderly investors, pitching them as low-risk with almost guaranteed returns. Investors ploughed more than 450 million pounds into the business.
But the FSA's attempt to sanction the company and its rags-to-riches founder, Stewart Ford, have been embroiled in court cases. Last week, a High Court judge ordered the FSA to destroy privileged material it had used as part of its investigation.
Undaunted, the FSA said it had seen numerous cases of financial advisers recommending death bonds without properly understanding how they worked and the risks involved, which include accurately forecasting original policyholders' deaths and the illiquid nature of the investment.
If rules are introduced following this consultation, we would expect them to come into force some time in 2013, the FSA said.
Britain's Financial Services Compensation Scheme (FSCS), a safety net for investors when regulated businesses fail, paid out more than 535 million pounds to investment victims last year - with the Keydata failure dominating the bulk of its work.
The FSA, which has also seen mis-selling scandals that have cost banks around 15 billion pounds in compensation over the past two decades, said in August it would issue product warnings if it felt investors were at risk.
($1 = 0.6192 pound)
(Reporting by Kirstin Ridley; Editing by Mark Potter)