The FCA said today it would ban the mass marketing of speculative mini-bonds to retail customers, effectively ending their sale at least temporarily with a permanent ban in the offiing.
The watchdog says it is making the move ahead of the forthcoming ISA season, introducing the restriction using its product intervention powers.
The temporary ban will come into force on 1 January and last for 12 months while the FCA consults on permanent rules.
An independent investigation is currently looking into the FCA’s handling of the affair which caused a national outcry after thousands of investors were ripped off. Because the bond were treated, in regulatory terms, as loans rather than investments they escaped full regulator scrutiny.
Victims have asked for compensation but there remains a question mark over whether they are eligible for a full return of their money.
In tandem with the ban, the FCA plans to launch a communications campaign to improve consumer awareness of the risks involved in mini-bonds and high risk investments and it has also been trying to persuade Google and other internet sercice providers to take action to take down websites involved in breaches of FCA rules.
The FCA says the term ‘mini-bond’ refers to a range of investments and the ban will apply to more complex and opaque arrangements where funds are used to lend to a third party, invest in other companies or purchase or develop properties. The new restrictions will be set out in the Handbook (COBS 4.14).
There are various exemptions, including for listed mini-bonds, companies which raise funds for their own activities or to fund a single UK property investment.
The FCA has pointed out it has limited powers over the usually unauthorised issuers of speculative mini-bonds but can take action when an authorised firm approves or communicates a financial promotion, or directly advises on or sells, these products.
Over the last year, the FCA says it has undertaken an extensive programme of work to tackle the risks for investors from mini-bonds.
1.Investigating more than 80 cases of regulated activities potentially being carried out without having the right FCA authorisation;
2.Assessing over 200 cases of financial promotions that appeared not to have complied with the FCA rules;
3.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;
4.Contact with the Department of Culture, Media and Sport to urge inclusion of financial harm in the proposed legislation on online harms;
5.Developing tools for data analysis, for instance introducing web scraping to assist in the identification of mini-bond promotions.
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 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.