FCA bans 'mini bond' marketing to retail customers ahead of rule consultation

Out-Law News | 06 Dec 2019 | 2:21 pm | 2 min. read

Financial firms will be banned from marketing unlisted speculative 'mini bonds' to retail consumers from 1 January, the Financial Conduct Authority (FCA) has announced.

The ban (46-page / 355KB PDF) will mean that these products can only be marketed to investors known to firms as sophisticated or having high net worth status, and only if the associated risks, costs and third party payments made from funds raised are clearly explained. The FCA believes it is justified in imposing a 12 month ban using its product intervention powers, during which time it will consult on permanent rules.

The marketing ban announced by the FCA covers unlisted debentures and preference share arrangements which are used to raise funds from investors to lend to a third party, invest in other companies or purchase or develop properties. Exemptions will be made for listed mini bonds, companies raising funds for their own activities (except as described above) or raising funding for a single UK property investment.

The FCA said that it had "significant concerns" about the widespread marketing, particularly online of these products, due to them being high risk and difficult for most retail investors to understand. It has estimated that at least 11,000 people have invested and that the average amount invested may be over £25,000. Over the past year, the FCA has investigated around 200 cases involving financial promotions which are not in line with its rules, and has been in contact with internet service providers in relation to online marketing of financial promotions in breach of its rules.

Once the ban is in force, firms will only be able to promote these products to investors known to be 'sophisticated', with sufficient knowledge, experience and understanding of the risks involved; or of high net worth, which means having an annual income of £100,000 or more or net assets of £250,000 or more not including their main residence. Marketing materials aimed at these individuals will have to include specific risk warnings, and to disclose any costs or payments to third parties that are deducted from the money raised from investors.

Financial regulation expert David Heffron of Pinsent Masons, the law firm behind Out-Law, said: "The FCA is not only banning the widespread marketing of these products using its product intervention powers, it is also tightening up its marketing requirements".

"The FCA's observations on the misleading nature of some of the promotional marketing it has seen for mini-bonds mean it is once again reminding firms of its rules on approving financial promotions," he said. "The FCA has also said that if a firm intends to begin approving financial promotions for unauthorised persons, they should consider if it is something they need to tell the regulator about. The FCA issued two 'Dear CEO' letters earlier this year that focus on its financial promotion rules and powers to ban promotions or adverts. So its scrutiny of firms' activities and compliance in this area is clear."

The FCA will consult on permanent rules in the first half of 2020. The consultation is likely to include proposals to make the temporary rules, or similar measures, permanent, as well as other changes to enhance consumer protection related to high-risk investments more broadly. The FCA has also published new guidance setting out its requirements of firms which approve the financial promotions of unauthorised persons.

Andrew Bailey, the FCA's chief executive, said that the risks to consumers were "heightened" ahead of the annual ISA investment deadline at the end of the tax year.

"It is quite common for mini bonds to have ISA status, or to claim such even through they do not have the status," he said.