Mini-bond marketing banned

Today the FCA have announced a welcome move to make their temporary ban implemented at the beginning of the year permanent. The FCA introduced a temporary ban on the mass marketing of ‘mini-bonds’ in January, following their review into the speculative debentures marketed to retail investors who didn’t fully understand the risks involved, nor could afford the potential financial loss. 

Speculative illiquid investments as defined in COBS 4.14.17R. are debenture preference shares which:

(1) has a denomination or minimum investment of £100,000 or less; and

(2) has been issued, or is to be issued, in circumstances where the issuer or a member of the issuer’s group uses, will use or purports to use some or all of the proceeds of the issue directly or indirectly for one or more of the following:

    (a) the provision of loans or finance to any person other than a member of the issuer’s group;

    (b) buying or acquiring investments (whether they are to be held directly or indirectly);

    (c) buying property or an interest in property (whether it is to be held directly or indirectly);

    (d) paying for or funding the construction of property.

The marketing of mini-bonds was receiving increased attention from the regulator since the collapse of London Capital & Finance (LCF) at the beginning of 2019. Throughout 2019 the FCA undertook a programme of work to identify the risks to investors and expose the real risk of consumer harm which included; 

• Investigating more than 80 cases of regulated activities potentially being carried out without having the right FCA authorisation.
• Assessing over 200 cases of financial promotions that appeared not to have complied with the FCA rules.
• Seeking to persuade the internet service providers, particularly Google, to take more action, for instance to take down websites promptly where they are likely to involve a breach of law or regulations.
• Contact with the Department of Culture, Media and Sport to urge inclusion of financial harm in the proposed legislation on online harms.
• Developing tools for data analysis, for instance introducing web scraping to assist in the identification of mini-bond promotions

In todays press release 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 losses 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.

The FCA ban will mean that unlisted speculative mini-bonds 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.

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.

As outlined in COBS 4.14.18R. A debenture or preference share is not a speculative illiquid security where one or more of the exemptions in (1), (3) or (4) below applies.

(1) This exemption applies where:

    (a) the issuer or a member of the issuer’s group uses or purports to use the proceeds of the issue for the     purpose of the activities in COBS 4.14.17R(2)(c) or (d) (buying or constructing property); and

    (b) the relevant property is or will be used by the issuer or a member of the issuer’s group for a general     commercial or industrial purpose which it carries on.

(2) The exemption in (1) will not apply if the ability of the issuer to pay in relation to the debenture or preference share:

    (a) any coupon or other income; and/or

    (b) capital at maturity

is wholly or predominantly linked to, contingent on, sensitive to or dependent on a return generated as a result of the matters referred to in COBS 4.14.17R(2)(c) or (d).

(3) This exemption applies where the debenture or preference share is:

    (a) issued, or to be issued, by a credit institution;

    (b) a non-mainstream pooled investment;

    (c) a readily realisable security; or

    (d) a P2P agreement.

(4) This exemption applies where the issuer is a property holding vehicle.