The City regulator has banned the sale of mini-bonds in the wake of a number of a scandals that have cost investors millions in the past few years.
The Financial Conduct Authority (FCA) has intervened to temporarily stop the promotion of mini-bonds to most retail investors for the whole of 2020. Usually, the FCA would need to have a consultation period, seeking views from the industry and consumers, but the regulator is using its “temporary product intervention” powers because of “our significant concerns with the widespread marketing of these products”.
Mini-bonds have caught the eye of investors by offering higher yields than those offered by high street and online savings accounts. Savers have been lured into these products thinking that their capital is protected and they can get interest above 8%.
“We have seen many cases of poor quality promotions for speculative illiquid securities targeting retail investors. These promotions often contain limited explanations of risks and fees or costs involved, and may include misleading information suggesting these products are more secure or less risky than is the case. We think this gives rise to a significant risk of consumer harm and requires immediate action,” the regulator says.
The regulator estimates that at least 11,000 people are invested in these products, which the FCA says are high risk and difficult to understand. It also thinks the average amount invested is around £25,000.
Matt Hopkins, director at BDO, says the FCA has taken the "nuclear option". “It is very rare for the FCA to put a retail investor ban on a whole product class particularly without going through a lengthy consultation period ... An outright ban makes it clear to retail investors that they should steer clear of these products completely.”
Sushil Kuner, principal associate, Gowling WLG, says the products are inherently risky and illiquid because they are tied to the fortunes of smaller companies who issue them.
"The return of investors' money really depends on the success and proper running of the issuer's business - if the business fails, then the investor may get nothing back."
The marketing of mini-bonds will now be restricted to sophisticated or high-net worth (HNW) individuals; one of the regulator’s key tenets in authorising investment products is that of “suitability”. Companies and advisers selling products to the public must ensure they have sufficient knowledge and experience to understand the risks of what they are buying. Any future promotions of mini-bonds to HNW investors will have to stress the risk to capital and make full disclosure of all costs.
London Capital & Finance’s collapse this year cost investors around £236 million and has sparked a Treasury review into the regulator’s own role. The firm marketed and sold high-interest bonds that were not covered by the Financial Services Compensation Scheme (FSCS), which protects savers’ capital up to £85,000 per person. But the FSCS is currently looking at whether investors are able to claim some of their money back. The Serious Fraud Office is also investigating the case of LCF.
Asset Life, which offered debenture payments with an 8.75% yield, went into administration in August. The firm is believed to have had 500 investors with £8 million in savings. The FCA warned against investors putting money into the firm earlier this year.
Experts have warned that next year’s ban will not stop prevent investors falling prey to mini-bond scams, which are already illegal. Scams tend to proliferate around the ISA season in March and April with the start of the new tax year.
