With traded life policies, an investor bets on when a particular set of US citizens will die, purchasing a TLP from its owner prior to the policy’s expiry date at a discount. The investor will then hope to sell the policy for a profit if the beneficial owner of said policy dies at or before a certain date. However, if the original beneficial owners of the policy live longer than actuaries expect, the investment, so the FSA fears, may not function as hoped. This rather ghoulish-sounding market forms part of how investors are trying to profit from longevity risk, a subject that has been thrown into sharp relief by the strains imposed on pension schemes as people live longer than actuaries expect.

But as far as the FSA is concerned, this is all far too dangerous for Joe Public. TLPs, while they might be okay for sophisticated investors and professionals, should not be marketed to the retail consumer. In a statement a week ago, the watchdog’s managing director, Margaret Cole, said: “TLPs are toxic products which pose significant risks for retail investors.”

And some of the practitioners in this field, such as Managing Partners and Centurion Fund Managers, broadly agreed that these products are not really suitable for retail clients, at least not yet.

However, there is a problem here, since deciding who counts as being a “retail” client is not a simple issue. Simple size of investible assets does not make a person “sophisticated” (think of a National Lottery winner, for instance); and it is necessary, in my view, for the regulator to give a clearer notion of what its test for sophistication is. It should also be remembered that even ex-City financiers got hit by sagas such as the meltdown of the split-cap investment trust sector in the early noughties. Their sophistication did not help.

There is another problem, in that banning the marketing of any product, simple or complex, on the grounds that returns might not materialise if a market does not perform as expected, as in the case of TLPs, might justify banning retail investors from anything. Even cash is not king any more when real interest rates are negative. Is the FSA going to ban cash-based retail fund wrappers because the promise on a Bank of England paper note is a bad joke these days?

So it appears, at least at first glance, that this is not a simple issue of the FSA valiantly protecting the poor, huddled masses from crooks and shysters. It is necessary for regulators and policymakers to face up to the unpalatable truth that all financial innovations carry their risks and that the mass public cannot and should not be over-protected. Instead, it would be a better use of admittedly limited resources for regulators and in the industry alike to do more to educate the public about financial risks.

There could also be more of a mid-way solution, taken from the hedge fund world. While retail investors typically cannot get access to traditional hedge funds, they can, via wrappers such as UCITS funds, tap into long-short strategies in funds that have decent liquidity and high standards of reporting and disclosure.

There is another reason why it would be a mistake to over-protect retail investors and prevent access to interesting, maybe lowly correlated, sources of return. With the Retail Distribution Review and other cost-multiplying changes on the way, we are already seeing an increasing split in the financial services industry between a decent market for affluent clients, and a ragged one for the unwashed rest of us. Only the relatively rich will be able to afford financial advice at the rate we are headed, and yet it is the general public that needs advice the most, in many cases. As ever, regulators need to heed the unintended consequences of a financial Nanny State.