The Financial Conduct Authority (FCA) today announced proposals to make permanent its ban on the mass-marketing of speculative illiquid securities, including speculative mini-bonds, to retail investors.
The FCA introduced the ban without consultation in January following concerns that speculative mini-bonds were being promoted to retail investors who neither understood the risks involved, nor could afford the potential financial losses.
In introducing the rules permanently, the FCA is proposing a small number of changes and clarifications to the ban introduced in January. This includes bringing listed bonds with similar features to speculative illiquid securities and which are not regularly traded within the scope of the ban.
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.”
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."
Industry welcomes move
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."
Keith Richards, chief executive of the Personal Finance Society, said: "This permanent ban makes sense as these products were being mass marketed when mini-bonds aren't suitable for most retail investors."
"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," Richards added.
Laura Suter, personal finance analyst at investment platform AJ Bell, said this represents: "Good news for savers." She added: "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 London Capital & Finance, and we would urge them to scrap the Innovative Finance ISA for the safety of savers."
The term mini-bond refers to a range of investments. The ban will apply to the most 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. There are various exemptions including for 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.
The FCA ban will mean that products caught by the rules can only be promoted to investors that firms know are sophisticated or high net worth. Marketing material produced or approved by an authorised firm will also have to include a specific risk warning and disclose any costs or payments to third parties that are deducted from the money raised from investors.
The FCA has limited powers over the issuers of speculative mini-bonds who are usually unauthorised but can take action when an authorised firm approves or communicates a financial promotion, or directly advises on or sells, these products.