The Financial Conduct Authority (FCA) has taken steps to prevent firms promoting speculative mini-bonds to ordinary retail consumers. It wants to take this step now to avoid more consumers being encouraged to invest in mini-bonds via an Individual Savings Account when the peak ISA season arrives in the spring.

The main elements of the ban are:

  • Mini-bonds can only be promoted to investors that firms know are definitely categorised as sophisticated or high net worth
  • Marketing material produced or approved by an authorised firm will have to include specific risk warnings. These include “You could lose all of your money invested in this product”, “This is a high-risk investment and is much riskier than a savings account” and (where applicable) “ISA eligibility does not guarantee you returns or protect you from losses”.

The regulator’s product intervention powers allow it to impose a restriction such as this for a 12-month period, without the need for a formal consultation first. It is expected that the FCA will then consult on new rules which would make the ban permanent. In the meantime, the ban will come into force on January 1 2020.

The FCA clarifies that the ban applies to arrangements where the funds raised are used to lend to a third party, invest in other companies or purchase or develop properties. Listed mini-bonds and companies which raise funds for their own activities (other than those listed above) or to fund a single UK property investment fall outside the scope of the ban.

A mini-bond is not a regulated product, but activities such as issuing financial promotions for these products or advising customers on these products are certainly regulated activities, so the FCA is entitled to impose this ban.

The regulator adds that it is investigating more than 80 cases where it suspects that regulated activities connected to mini-bonds may have been carried out without having the right FCA authorisation; as well as more than 200 cases of financial promotions that appear to breach the FCA’s rules in this area.

The FCA says it is concerned that large numbers of consumers do not fully understand the risks of mini-bonds before choosing to invest in this area.

According to the FCA, the main risks associated with these products are:

  • Exposure to high-risk, speculative assets
  • High and/or concealed charges
  • The complex nature of the product
  • The fact there is no Financial Services Compensation Scheme (FSCS) protection

The FCA’s issues with firms’ promotions include:

  • Implying or stating that high annual returns are guaranteed
  • Implying or stating that the products are authorised by the FCA and/or protected by the FSCS
  • Incorrectly stating that the product can be included in an ISA (where this is the case – some mini-bonds qualify for ISA status and some do not)
  • Failing to clearly disclose costs and charges

Andrew Bailey, Chief Executive of the FCA said:

“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.

“In view of this risk, we have decided to complement our substantial existing actions with a further measure which will involve a ban on the promotion and mass marketing of speculative mini-bonds to retail consumers. We believe this will enable us to further consumer protection consistent with our regulatory principles and the FCA Mission.”

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