City watchdog bans marketing of speculative mini-bonds to retail investors

By John Reynolds on 26th November 2019

Alternative Credit

FCA said the ban will initially last one year, citing concern that ordinary investors do not have experience to manage the risk of speculative mini-bonds.

City watchdog bans marketing of speculative mini-bonds to retail investors
Image source: Image of Andrew Bailey provided by FCA

The City watchdog is banning the mass marketing of speculative mini-bonds to ordinary investors, citing concern that everyday investors "do not have the experience to assess and manage the risk involved".

The Financial Conduct Authority (FCA) said the ban will begin in January and follows a number of mini-bond scandals, like the collapse of mini-bond lender London Capital & Finance (LCF), which led to thousands of ordinary investors losing money.

Andrew Bailey, Chief Executive of the FCA (pictured), said: “We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risks involved.”

“This risk is heightened by the arrival of the ISA season at the end of the tax year, since it is quite common for mini-bonds to have ISA status, or to claim such even though they do not have the status."

“In view of this risk, we have decided to complement our substantial existing actions with a further measure which will involve a ban on the promotion and mass marketing of speculative mini-bonds to retail consumers."

“We believe this will enable us to further consumer protection consistent with our regulatory principles and the FCA Mission.”

Ordinary investors have been lured by the returns promised by these speculative bonds.

The FCA said the ban will intially last 12 months while the watchdog consults on making the rule permanent.

The FCA said the ban will "apply to more complex and opaque arrangements where the funds raised are used to lend to a third party, invest in other companies or purchase or develop properties".

Exemptions to the ban include listed mini-bonds and companies which raise funds for their own activities or to fund a single UK property investment.

The watchdog only has the power to intervene in marketing, but not in the sale of the products.

It said the mini-bonds could be still marketed to "sophisticated or high net worth" individuals.

The watchdog announced a review into the regulation of how firms market mini-bonds in June, after the collapse of London Capital & Finance.

It said over the past 12 months, it has investigated more than 80 cases of regulated activities potentially being carried out without having the right FCA Authorisation; and assessed over 200 cases of financial promotions that appeared not to have complied with the FCA rules.

A communications campaign will also be launched by the watchdog to heighten consumer awareness of the potential risks of high-risk investments.

Bruce Davis, Joint MD of Abundance Investment and Director of the UK Crowdfunding Association Directors, said: “The UKCFA called directly for the FCA to take decisive action to address LCF crisis last June, as LCF’s structure and approach was certainly not consistent with legitimate and compliant investment crowdfunding businesses."

“We were disappointed that the FCA had not taken swifter and more decisive action to intervene in the case of LCF, so we are pleased that action is now being taken. "

“However, we still strongly hold the view that LCF was not a problem of a lack of rules but a need to more effectively enforce existing rules."

"Therefore we will examine the details of these temporary rules for unintended consequences – particularly if the definition of ‘speculative investments’ could stop legitimate, authorised investment crowdfunding platforms from offering investments that are structured to be entirely appropriate for retail investors.”