EEA Fund Management, which runs one of the UK’s largest traded life policy funds, has called the Financial Services Authority ‘reckless’ and ‘without merit’ for issuing a warning last year on the asset class, in which it called the funds ‘toxic’.

In December the City watchdog put out a strongly-worded warning on TLP funds, saying they were ‘toxic’, ‘high risk’ and unsuitable for retail investors.

This triggered a rush of investors trying to get their money out, which caused the $955 million EEA Life Settlements fund to be suspended a few days later.

EEA, which is licensed by the Guernsey Financial Services Commission, has now issued a response to the FSA’s consultation on TLP funds.

It says it agrees that the funds are not suitable for the majority of retail investors. ‘However, we remain firmly of the opinion that TLP funds are suitable for some retail clients, such as sophisticated individual investors and certain high net worth individuals, where such clients only make an investment after receiving appropriate personal advice from an authorised firm,’ Simon Shaw, chairman of EEA, says in the response.

The firm also accepts that the funds are complex, but argues that hedge funds, private equity funds, venture capital trusts and property funds also share similar risks, such as an illiquid secondary market and the fact that assets may only realise value far later than originally envisaged.

The response explains: ‘Life policies are a valid and appropriate asset class for investment, providing fixed and known payouts from reputable, creditworthy life insurance companies established in a mature, regulated market where the rule of law is upheld. This is not necessarily the case with all other asset classes – for example, concerns have been raised publicly with respect to emerging markets’ equities (price volatility, poor corporate governance and accounting issues), commodities (price volatility, custodian and counterparty risk) and ETFs (counterparty risk, credit risk and opaque arrangements between sponsors and service providers).’

EEA says that there is not any ‘sound basis’ for the FSA to treat its TLP fund any differently from any other unregulated collective investment scheme, and there should not be a ban on the marketing and sale of it.

Finally, it calls for the watchdog to retract its references to TLP funds as being ‘toxic’, and clarifies that its reference to ‘ponzi’ schemes applies to specific funds and names those funds.

What are TLP funds?

Also known as death bonds and life settlement funds, TLP funds are fairly esoteric. They invest in US life insurance policies of people with impaired life expectancies. The fund managers pay the policy premiums, and when the original policyholders die, the funds receive the payouts, which are distributed to investors as income. It is a gamble on life expectancy, but to date some funds have paid out a high level of income. The EEA Life Settlements Fund has delivered an annual return of 8-9 per cent since launching in November 2005.