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الثلاثاء، 26 نوفمبر 2019

FCA bans the marketing of high risk mini-bonds to retail customers

FCA bans the marketing of high risk mini-bonds to retail customers

The watchdog says it is banning the investments ahead of the upcoming Isa season

Stephen Little Tue, 11/26/2019 - 11:02
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The financial regulator is banning the mass marketing of mini-bonds to retail customers following the collapse of a number of companies.

The Financial Conduct Authority (FCA) says it is intervening to protect inexperienced investors ahead of the Isa season.

The FCA says that it has significant concerns with the widespread marketing of mini-bonds and warns there is growing evidence of fraud.

The watchdog says the ban will restrict the promotion of mini-bonds to “sophisticated” or high-net-worth investors.

Andrew Bailey, chief executive of the FCA, says: “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.”

Firms will also have to include risk warnings and disclose any costs or payments to third parties on marketing materials.

The FCA says it is investigating more than 80 cases of regulated activities potentially without having the right FCA authorisation and over 200 cases of financial promotions that appeared not to have complied with the FCA's rules.

The ban will come into force on 1 January and last for 12 months while the FCA consults on making permanent rules.

What is a mini-bond?

A mini-bond is effectively an IOU issued by a company to an investor, in exchange for a fixed rate of interest over a set period of time. At the end of this period, the investors’ money is due to be repaid.

While there is no legal definition of a ‘mini-bond’, the term usually refers to illiquid debt securities marketed to retail investors.

The return on investors’ money entirely depends on the success and proper running of the issuer’s business. If the business fails, investors may get nothing back.

They typically offer high returns, but this means they come much higher risks compared to other types of investments.

As firms do not generally have to be regulated by the FCA to issue mini-bonds, this means you are not protected by the Financial Services Compensation Scheme (FSCS).

Collapse

The news comes after thousands of small-scale investors lost millions when mini-bond lender London Capital & Finance (LCF) collapsed earlier this year.

LCF advertised itself as a low-risk Isa provider, offering market-leading returns of 6.5% to 8% a year.

Nearly 12,000 customers, many of them pensioners, lost £236 million when the company fell into administration in March.

The FCA was then ordered by the government to launch an independent review into its handling of the collapse of LCF.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, welcomes the ban.

She says: “Not all retail bonds are equal, and this particular kind of mini bond has always posed huge risks for retail investors – as they embody a lethal combination of fiendish complexity and high risk.

“At this time of year there’s always the risk that inexperienced investors are tempted by a complex mini-bond claiming to be an Isa and seeming to offer attractive returns, without understanding what they’re getting into.

“It’s great to see the FCA take decisive action on these bonds, and get something in place quickly for this Isa season.”



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