FCA expands scope of ban on sale of illiquid securities to retail investors

Out-Law News | 30 Jun 2020 | 1:10 pm | 2 min. read

The UK’s Financial Conduct Authority is proposing to permanently ban the mass-marketing of speculative illiquid securities and some listed bonds to retail investors.

The proposed permanent ban follows the introduction of a 12-month ban on the sale to retail investors of ‘mini bonds’, which came into force in January 2020. These products include 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.

The FCA said it wanted to now bring listed bonds with similar features  and which are not regularly traded within the scope of the ban, as it was also seeing the type of harm and loss caused by mini bonds migrate to these products.

Exemptions to the proposed ban include regularly traded listed bonds, companies which raise funds for their own commercial or industrial activities, and products which fund a single UK income-generating property investment.

The FCA has opened a consultation (66 page / 1MB PDF) into the expanded, permanent ban. It said making the ban permanent was just the first part of its thinking into high-risk investments, and not the end of its work in this area.

It said it will evaluate the success of the proposals through looking for an absence of promotions for speculative illiquid securities on websites and other public places; seeing a reduction in the number of complaints it receives about such products; and the clear disclosure of key risks and costs to certified high net worth and sophisticated investors in financial promotions for speculative illiquid securities.

Financial services regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said: “The FCA’s concerns regarding so called mini-bonds and their general suitability for the retail client market has been known for some time and was marked not least by the temporary product intervention".

“This consultation broadens the scope to include listed bonds which have many of the speculative and illiquid features of mini bonds, despite their listing. The proposals would mean that speculative illiquid securities in future would be marketed only to sophisticated or high net worth investors for whom such investments had also been assessed as suitable – a regime not dissimilar to that which applies to unregulated collective investment schemes,” Budd said.

The FCA is also proposing that marketing material promoting the benefits of speculative illiquid securities will 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.

Budd said the proposed permanent ban was a further indication of the FCA’s ongoing cross-industry commitment that customers should not be exposed to investing in high risk and esoteric investments which they arguably may not understand or which may not be appropriate for them by their nature.

The regulator wrote to financial advisers in February to tell them they must ensure they are giving suitable advice to customers. It has also warned credit brokers to review their businesses to reduce potential harm to customers.