Hard stop for mini-bond marketing as FCA launches retail clampdown

By Oliver Smith on Friday 19 June 2020

Alternative Lending

An indefinite ban on the promotion of risky retail mini-bonds.

Hard stop for mini-bond marketing as FCA launches retail clampdown
Image source: Sheldon Mills/Financial Conduct Authority.

It’s curtains for the beleaguered mini-bonds industry as the UK’s Financial Conduct Authority (FCA) permanently banned the mass-marketing of the investments.

The move comes after a tumultuous 2019 that saw the collapses of investment businesses including London Capital & Finance, that left around 11,500 small investors facing heavy losses, MJS, Blackmore and Basset & Gold.

By some accounts, consumer losses from the investments are expected to be in excess of £1bn.

Yesterday the FCA said that a temporary ban on the marketing of mini-bonds from January would continue indefinitely.

“We know that investing in these types of products can lead to unexpected and significant losses for investors,” said Sheldon Mills, the FCA’s interim executive director of strategy and competition.

“We have already taken a wide range of action in order to protect consumers and by making the ban permanent we aim to prevent people investing in complex, high risk products which are often designed to be hard to understand.”

Mini-bonds are a form of corporate debt that allows backers to invest in a company and receive a fixed return over a set period of time, with the initial investment returned at the end of that period.

They sprung up in the wake of the 2008 financial crisis as investors hunted for higher returns in a low-interest environment.

However the construction of many of these mini-bonds led to “complex and opaque arrangements where the funds raised are used to lend to a third party, or to buy or acquire investments, or to buy or fund the construction of property” the FCA said.

Mini-bonds are not regulated by the FCA and were never covered by the Financial Services Compensation Scheme if the companies offering them went bust.

The FCA’s crackdown is therefore focused on the marketing, but not the operation of such mini-bonds.

Sign up to the Daily Disruptor Newsletter