Ahead of the upcoming ISA season which runs up to the end of the tax year on 5 April 2020, the financial regulator has announced it will ban the mass marketing of speculative mini bonds to retail customers for 12 months from 1 January while it consults on making permanent rules.
Mini bonds are a form of debt that allows investors to invest in a company and receive a fixed return over a set period of time. The money raised from the bonds is often used to fund speculative and high-risk activities. These types of bonds cannot be traded on the market and so investors are often locked in for long periods of time.
Many mini bonds offer very high levels of interest but often fail to explain the associated risks or have misleading promotions, which has caused the Financial Conduct Authority (FCA) to be very concerned.
For example, London Capital & Finance’s ‘fixed-rate ISA’ turned out to be high-risk mini bonds, promising high rates of return of 7% to 8% per year, and thousands of investors have subsequently lost their money after the provider collapsed.
The FCA believes the average amount invested by consumers in speculative illiquid securities is over £25,000. ‘This would mean significant losses for individuals if an issuer failed and little or no money was repaid,’ it comments.
The regulator says it is also worried about some promotions claiming that the FCA or HMRC offer protection or endorsement of these products, which is not the case.
WHAT HAS THE FCA FOUND?
The FCA is assessing more than 200 cases where financial promotions didn’t comply with the rules and investigating over 80 cases of regulated activities which potentially do not have the correct FCA authorisation.
Laura Suter, personal finance analyst at investment firm AJ Bell, says: ‘Most of these products aren’t suitable for the average person on the street. They aren’t regulated, they aren’t covered by the compensation scheme and they are often higher risk than advertised.
‘Investors should also be aware that the regulator has said there is evidence of a growing incidence of promotions which are scams. ‘It is important to be wary of anything that looks too good to be true.’
Investors should watch for firms rushing through marketing of speculative mini bonds before the ban comes into effect.
WHAT DOES THE BAN COVER?
The ban will mean that unlisted speculative mini bonds can only be promoted to investors that firms know are sophisticated or high net worth individuals.
Sophisticated investors are individuals who can to demonstrate that they have sufficient knowledge and experience of relevant investments, while high net worth individuals have an annual income of at least £100,000 or net assets of at least £250,000 excluding their main residence.
