When they were launched, Innovative Finance ISAs (IFISAs) were heralded as the exciting new way to invest, with the money ultimately being invested in products like mini-bonds or growth industries such as peer-to-peer investments.
However, recent events have prompted the Financial Conduct Authority (FCA) to issue a warning about these products. The regulator says:
- Although IFISAs are generally high-risk, some firms are marketing them alongside cash ISAs, suggesting that some IFISAs are being taken out by mass market customers who are not sophisticated investors
- The investments may not be protected by the Financial Service Compensation Scheme (FSCS) so customers may lose the money invested if their provider fails
- Anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing
In December 2018, the FCA ordered a firm to withdraw all of its existing marketing materials in relation to its Fixed Rate ISA or Bond. This became necessary as the regulator observed that the firm’s Bonds did not qualify to be held in an ISA account, and that consequently investors were being misled by being told the interest they earned would be tax free.
Additionally, the FCA commented that:
- Whilst the firm’s promotions were highlighting that the underlying investments were not regulated by the FCA, and that the bonds were not protected by the FSCS, these warnings were given much less prominence than the statement about the firm being authorised and regulated by the FCA
- The warning about past performance not being a guide to future performance was only stated in a footnote
- The statement “LOOKING FOR HIGHER RETURNS THAN THE HIGH STREET” was given higher prominence than the balancing statement, which was “Investing is bonds means your capital is at risk and payments are not guaranteed if borrowers default”
Since this intervention by the FCA, the firm has entered administration, and it is now up to the administrators to decide if investors will get any of their money back, as for this type of investment there is no FSCS protection. While the firm in question may have been authorised by the FCA, the specific activity of issuing mini-bonds is not a regulated activity.
Administrator Finbarr O’Connell told the BBC Radio consumer finance programme Money Box that the bondholders might expect to get no more than 20% of their money back, and that they might have to wait up to two years to receive it.
FSCS chief executive Mark Neale also appeared on the same programme, and commented:
“I think there is a confusion there. The company was regulated for the purposes of giving advice but not for the purposes of selling the bonds and I am quite sure some consumers were misled by that.”
Certain individuals associated with the firm are now being investigated by the Serious Fraud Office, and the FCA has ordered an independent investigation into two specific issues:
- Whether the existing regulatory system adequately protects retail purchasers of mini-bonds
- Whether the FCA adequately supervised the firm
The episode has prompted FCA chief executive Andrew Bailey to write another letter to all authorised firms, highlighting that even if a financial promotion concerns unregulated products, the authorised firm must still ensure that it complies with all relevant FCA promotions rules.
The saga also serves as a warning to all authorised firms to ensure that their promotions meet the ‘clear, fair and not misleading’ test, and that key information is not being hidden in small print or obscured in some other way.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article