29th November 2019

FCA to ban promotion of speculative mini-bonds to retail consumers

The FCA is to ban the mass marketing of speculative mini-bonds to retail customers. Ahead of the upcoming Individual Savings Account (ISA) season, the Financial Conduct Authority (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 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 that 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.

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 that approve financial promotions are already required to ensure that those promotions comply with FCA rules. The FCA has 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.