The FCA has announced proposals to make permanent its ban on the mass-marketing of speculative illiquid securities, including speculative mini-bonds, to retail investors.
The FCA introduced the temporary ban without consultation in January following concerns that speculative mini-bonds were being promoted to retail investors who neither understood the risks involved nor could afford the potential financial losses.
In introducing the rules permanently, the FCA is proposing a small number of changes and clarifications to the temporary ban: “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. 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.”
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. 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.
The FCA has limited powers over the issuers of speculative mini-bonds who are usually unauthorised but can take action when an authorised firm approves or communicates a financial promotion, or directly advises on or sells, these products.
Mini-bonds had skyrocketed in popularity over the past few years due to their high-interest rates and added perks. For example, in October 2018 Mexican fast-food restaurant Chilango issued a mini-bond dubbed the ‘Burrito Bond’ yielding 8% annual interest. Due to this high-interest rate, it raised upwards of £1m in just a few days. To further entice investors the ‘Burrito Bond also offered free perks such as free burritos and guacamole. Similarly, in 2015 the Taylor Street Baristas ‘Coffee Bond’ has an annual return of 8% and offered free coffees and pastries for investors.
With any high-interest investment, there always runs a higher risk and with mini-bonds this is no different. In fact, according to the FCA, mini-bonds were an even higher risk due to several key points:
- They are subject to much less regulation than their institutional counterparts. As the FCA points out a mini-bond does not have to be regulated by the FCA or offer protection by the FCSS if the issuer is unable to repay investors’ capital.
- The majority of these companies use mini-bonds as a way of raising capital are much smaller and less established than companies that are more commonly invested in by institutional investors and as such are more at risk from bankruptcy or administration.
- Due to the relative lack of regulation and the smaller size of many of the companies issuing mini-bonds it can be much harder to assess their financial health due to the lack of financial information which is required with traditional corporate bonds.
These risks have been largely realised in recent times. Firstly, at the start of 2019 London Capital & Finance, one of the largest mini-bond issuers with £237 million under management went into administration leaving many investors high and dry. Similarly, in August 2019 Asset Life, an unregulated mini-bond firm, went under leading to uncertainty over whether many of their investors will get their money back. The Times also reports that Asset Life ‘has ties to London Capital & Finance (LCF)’ primarily though Martin Binks, director at Asset Life and previously of LCF.
How can we help?
At Laven, our consultants are on hand to help identify the actions your firm needs to take to ensure you are compliant and aware of all the risks outlined in this update. Whether this is through assisting with new policies and procedures that need to be put in place or providing online training for staff to make them fully aware of the regulatory burden.
Laven has also built Laven Tech software solution that leverages advanced technology combined with our vast subject matter expertise. Laven Tech is designed to assist fund managers, service providers and investors to meet today’s growing demands.
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