Marketing of mini-bonds to retail investors permanently banned

Mini-bonds are often promoted over the internet, with the risks not always clearly spelled out to retail consumers.

The marketing of mini-bonds to retail investors has been permanently banned by the Financial Conduct Authority (FCA).

The FCA introduced a temporary ban in January, slated for a year, amid concerns that mini-bonds were inappropriate for retail investors.

In making the rules permanent, the FCA has also extended the ban to include listed bonds with similar features to speculative illiquid securities and which are not regularly traded.

Sheldon Mills, interim executive director of strategy and competition at the FCA, says: “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 actions 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.

“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.”

The term mini-bond refers to a range of investments. 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. 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.

Mini-bonds have come under increased scrutiny over the past year, following several high-profile scandals. One of the most prominent cases has been London Capital & Finance, which left almost 12,000 pensioners and first-time investors out of pocket following its collapse.

Mini-bonds are often promoted over the internet, with the risks not always clearly spelled out to retail consumers. In addition, they are not covered by the Financial Services Compensation Scheme – something that London Capital & Finance incident showed many retail investors were not aware of.

Mini-bonds are not tradeable, unlike retail bonds, so need to be held to maturity. At the same time, they are subject to less financial regulation. For example, there is no obligation for issuers of mini-bonds to produce financial statements.

The FCA ban will mean that products caught by the rules can only be promoted to investors that firms know are sophisticated or high net worth. In addition, 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.