Following the temporary ban that was introduced in January 2020, the FCA released proposals to put a permanent ban on the mass-marketing of speculative mini-bonds and other products with similar features to retail investors.
The new consultation paper introduces a set of small changes and clarifications to the temporary ban, which came into force following the collapse of mini-bond issuer London Capital & Finance Plc. The FCA has confirmed that some firms have tried to get around the temporary ban, using listed bonds with similar features to speculative mini-bonds which are not regularly traded. As a result, the ban will be extended to include listed bonds with similar features to Speculative Illiquid Securities (“SIS”).
The FCA’s Interim Executive Director, Sheldon Mills, said that the permanent ban would serve as a protection to retail investors who neither understood the risks involved in investing in complex high-risk products nor could afford the possible financial losses. The FCA added that the ban will apply to the most ‘complex and opaque arrangements’ 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.
Additionally, the FCA has proposed certain exemptions to the ban which include regularly traded listed bonds, companies that raise funds for their activities, and products that fund a single UK income-generating property investment. Consequently, such high-risk products can only be marketed to sophisticated or high net worth investors.
These enhanced rules suggest that the marketing materials and promotions of mini-bond firms will also have to include a specific risk warning and disclose any costs or payments to third parties which are deducted from the money raised from investors.
Moreover, the FCA expressed its concerns over misleading claims implying that the FCA or the HMRC may offer protection or endorsement over the mass marketing of SIS. Whilst the regulator has limited powers over unauthorised issuers of SIS, it can act when authorised firms approve or communicate a financial promotion, or directly advise or sell such products.
The FCA has now opened a consultation that will run until the 1st of October, with the final rules expected to be published before the end of the year.
Consultation Paper: High-risk investments: Marketing speculative illiquid securities (including speculative mini-bonds) to retail investors, https://www.fca.org.uk/publication/consultation/cp20-8.pdf
