The Financial Conduct Authority (FCA) is looking to permanently ban the mass promotion of speculative illiquid securities, which include mini-bonds, to retail investors.
These products have received increasing attention by the regulator since the collapse of London Capital & Finance (LCF) at the beginning of 2019, which impacted over 11,600 individuals who had invested around £237m ($297m, €264m) through the firm.
The FCA took steps in November 2019 when it introduced a temporary ban on speculative mini-bonds, effective from January 2020.
The permanent rules would include some changes and clarifications to the previous measure, including bringing listed bonds with similar features to speculative illiquid securities, which are not regularly traded within the scope of the ban, the FCA said.
Sheldon Mills, interim executive director of strategy and competition at the FCA, said: “We know that investing in these types of products can lead to unexpected and significant loses for investors.
“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.
“Since we introduced the marketing ban, we have seen evidence that firms are promoting other types of bonds which are not regularly traded to retail investors. We are very concerned about this and so we have proposed extending the scope of the ban.”
Terms and conditions
But this doesn’t mean that the promotion of all mini-bonds or speculative illiquid securities will be banned.
According to the regulator, listed bonds which are regularly traded; companies which raise funds for their own commercial or industrial activities; and products which fund a single UK income-generating property investment, will not fall under the measure’s remit.
The set of rules specify that speculative illiquid securities can only be marketed to sophisticated or high net worth investors, since it will only be illegal to promote them to retail clients.
The FCA, however, admitted that it has limited powers in this field because speculative mini-bond issuers are usually unauthorised, and it can only take action if an authorised firm; like LCF; approves, promotes or directly advises and sells these types of products.
Greater safety net
The regulator’s intervention has been welcomed by many industry players.
Adrian Lowcock, head of personal investing at Willis Owen, said: “This ban has been long overdue and is welcome news. Retail investors have lost millions in mini-bonds after being drawn in by eye-catching interest rates from seemingly safe investments which go on to fail and leave them with nothing.
“The difficulty in getting your money back, or even having visibility of how your money is being used by the issuer of the bonds, was a very real problem, and this blanket ban on marketing them to retail investors should ensure fewer individuals end up investing in products that few truly understand.”
Unsuitable yet palatable
Laura Suter, personal finance analyst at investment platform AJ Bell, said that the effect of the temporary ban was already visible with the lack of advert avalanches, and that transporting it to a permanent one can only be positive for retail investors.
“It’s good news for savers that the FCA has made its temporary ban on the mini-bond market permanent,” she said.
“This year’s tax-year end was notable in that people weren’t being bombarded with adverts for mini-bonds guaranteeing attractive interest rates and likening the risk to saving in cash accounts.
“Before the FCA introduced its temporary ban there was a flood of advertising, touting these unregulated products to the mass market and aiming to entice people who have grown weary of their cash savings earning next to nothing.
“Considering interest rates have seen two further cuts this year and there is a dearth of options for savers to earn a decent interest rate it feels certain that many would have been drawn into these products at the moment if marketing was more prevalent.
“And the fact is that most of these products aren’t suitable for the average person on the street: they aren’t regulated, they aren’t covered by the compensation scheme and they are higher risk than many other ways of investing.
“It was inevitable that the unscrupulous people attempting to sell these products to the mass market would transfer into marketing other products, so it’s good news that the regulator has extended the ban to other similar products.”
But this is not the end, Suter added, because a quick and easy internet search still shows many similar products being promoted to unsophisticated investors every day.
“You only have to Google a few key terms like ‘high interest savings accounts’ to stumble across mini-bond or similar high–risk offerings, meaning more still needs to be done to protect consumers.
“The move also means that the Innovative Finance Isa’s days must surely be numbered, with the FCA previously acknowledging that the Isa status of some of these mini-bonds has enabled them to be touted to a wider market.
“The regulator and government are already looking at the suitability of the IFISA as part of the review into LCF, and we would urge them to scrap the Innovative Finance ISA for the safety of savers.”
FCA chairman Charles Randell has recently criticised internet giants such as Google for their role in the promotion of speculative mini-bonds, and for the fact that the regulator has been forced to pay for its own ads to fight fraudulent ones.
Don’t cure, prevent
Keith Richards, chief executive of the Personal Finance Society, agrees as he believes that “prevention is definitely better than cure”.
“This permanent ban makes sense as these products were being mass–marketed when mini-bonds aren’t suitable for most retail investors,” Richards said.
“These products use false pretences to make legitimate investment products look uncompetitive, advisers get tarred with the same brush when the provider’s mis-selling is exposed and these products result in increased Financial Services Compensation Scheme (FSCS) levy impact if the people selling the bonds are in the same FSCS category as advisers.
“Some of these mini-bonds were being marketed as offering returns of 6.5% to 8% a year. We would all urge anyone being offered returns that seem too good to be true to be aware that they probably are, and to seek financial advice as to whether an investment is suitable for them.”
Tim Fassam, director of policy and government relations at Pimfa, said that it shouldn’t be up to retail investors to seek compensation over highly-problematic products.
“Pimfa has been concerned about the marketing of mini-bonds for some considerable time and there have been a number of notable examples of consumers being ill-treated,” he said. “The announcement today from FCA that it intends to permanently ban the marketing of mini-bonds, as well as extending this to listed illiquid assets is welcome.
“It cannot be right that 14,000 people who invested in an Isa, with LCF for example, are now having to seek compensation, which well-run firms will pay through the FSCS levy.
“Pimfa has repeatedly called for the marketing of these types of investments to be banned outright. The fact that this hasn’t happened sooner has, by its own admission, meant the FSCS has had to budget £45m to compensate consumers.
“This could have been avoided and goes right to the heart of the debate over the current limits of FCA supervision,” Fassam added.