Ahead of the upcoming Individual Savings Account (ISA) season, the FCA is introducing the restriction without consultation, using its product intervention powers. The restriction will come into force on the 1 January 2020 and last for 12 months while the FCA consults on making permanent rules.
The term mini-bond refers to a range of investments. The ban announced today will apply to more complex and opaque arrangements where the funds raised are used to lend to a third party, invest in other companies or purchase or develop properties. There are various exemptions including for listed mini-bonds, companies which raise funds for their own activities (other than the ones above) or to fund a single UK property investment.
The FCA 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. Alongside this activity, there is evidence of a growing incidence of promotions which are frauds or scams and involve no attempt to meet financial promotion rules. The marketing ban does not apply to such frauds and scams because they are illegal in any event.
Over the last year, the FCA has undertaken an extensive programme of work to tackle the risks for investors from mini-bonds, reflecting the real risk of consumer harm. This includes:
- 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.
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.
Firms which approve financial promotions are already required to ensure that those promotions comply with FCA rules. The FCA has today also published guidance on the requirements on firms when approving the financial promotions of unauthorised persons. The FCA believes that many promotions still fall short of existing requirements and firms which approve the financial promotions of unauthorised persons may not be taking adequate steps to ensure that they comply with our rules before approving them.
The FCA also intends to launch a communications campaign to improve consumer awareness of risks and to inform consumers about what they should consider before investing in high-risk investments. The FCA continues to work with HM Treasury on its review into the regulatory framework for the issuance of non-transferable debt securities (NTDS).
Notes to editors
- The new restrictions will be set out in the Handbook (COBS 4.14).
- A sophisticated investor is someone who has sufficient knowledge and experience of relevant investments, and has attested that they understand the risks involved and significant risk of losing all their investment. This can either be assessed by a firm, or can be self-certified (subject to slight variations in the attestations required).
- A high net worth investor is one who has an annual income of £100,000 or more, or has net assets of £250,000 or more, excluding the value of their main residence, insurance rights or benefits, or withdrawals from pension savings (unless this is used to provide an income in retirement), and who also signs a declaration acknowledging the high-risk nature of the investments, the possibility of losing all their funds, and that they could seek professional advice.
- The temporary rules apply to unlisted debentures and preference shares where the issuer uses the funds raised to lend to a third party, invest in other companies, or purchase or develop property. We refer to them as ‘speculative illiquid securities’ for the purposes of our rules. There are exemptions to the definition, which are described in the statement and set out in the rules.
- Consumer information on mini-bonds.