Compliance
FCA Proposes Permanent Mini-Bonds Ban, Draws Industry Praise

The watchdog clamped down on the sales to retail investors in January when problems came to light; it now wants to make the move permanent and hit other sales of speculative investments. The policy marks out what regulators' view as "suitable" for the private investor.
The UK’s financial regulator is being praised for its proposal to
permanently ban sales of what are called speculative illiquid
securities such as “mini-bonds” to retail investors. The move
comes after thousands of investors lost money via these
entities.
The Financial
Conduct Authority temporarily banned such sales in January
and fears that firms are trying to bypass the it with sales of
other speculative investments. As a result, the FCA wants to make
the ban permanent, and widen its scope.
The prohibition will apply to the “most complex and opaque
arrangements”, the FCA said, where the funds raised are used to
lend to a third party, or to buy or acquire investments, or to
buy or fund the construction of property. There are various
exemptions 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, it said.
“It cannot be right that 14,000 people who invested in an
Individual Savings Account (ISA), with London
Capital & Finance for example, are now having to seek
compensation, which well-run firms will pay through the Financial
Services Compensation Scheme (FSCS) levy,” Tim Fassam, director
of policy and government relations at PIMFA, the wealth industry
trade group, said.
“PIMFA has been concerned about the marketing of mini-bonds for
some considerable time and there have been a number of notable
examples of consumers being ill-treated. The announcement today
from FCA that it intends to permanently ban the marketing of
mini-bonds, as well as extending this to listed illiquid assets,
is welcome,” he said.
In January it was reported (Guardian, 9 January, others)
that more than 11,400 investors were likely to lose more than
£230 million ($292.8 million) in savings due to the collapse of
London Capital & Finance after it was announced that only 159
affected mini-bond customers would receive compensation.
The mini-bonds promised strong returns to investors of up to 8
per cent a year. Only a small amount of the money went into safe
interest-bearing investments, and was instead put into
speculative property developments, oil exploration in the Faroe
Islands and even a helicopter bought for a company controlled by
LC&F. The investment company collapsed in early 2019, owing
money to thousands of customers.
The saga again highlights how regulators are meant to limit sales
of investment services/products deemed unsuitable to the retail
client. This issue reared its head over the structured products
sector in the aftermath of the 2008 financial crisis.
Make it permanent
“We know that investing in these types of products can lead to
unexpected and significant loses 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,” Sheldon Mills, interim executive director of
strategy and competition at the FCA, said.
“Since we introduced the marketing ban we have seen evidence that
firms are promoting other types of bonds which are not regularly
traded to retail investors. We are very concerned about this and
so we have proposed extending the scope of the ban,” he
said.
Adrian Lowcock, head of personal investing at Willis Owen, an
investment platform in the UK said: "This ban has been long
overdue and is welcome news. Retail investors have lost millions
in mini-bonds after being drawn in by eye-catching interest rates
from seemingly safe investments which go on to fail and leave
them with nothing.”
"The difficulty in getting your money back, or even having
visibility of how your money is being used by the issuer of the
bonds, was a very real problem, and this blanket ban on marketing
them to retail investors should ensure fewer individuals end up
investing in products that few truly understand," he said.