The Financial Conduct Authority (FCA) introduces ban on marketing of mini-bonds to retail investors

December 3, 2019

The Financial Conduct Authority (FCA) has introduced temporary rules banning the marketing of ‘speculative illiquid securities’, which are more commonly known as ‘mini-bonds’, to retail investors

The Financial Conduct Authority (FCA) has introduced temporary rules banning the marketing of ‘speculative illiquid securities’, which are more commonly known as ‘mini-bonds’, to retail investors (i.e. individuals who are non-professional investors). These rules will apply from 1 January 2020 to 31 December 2020.

Reason for the Ban

The FCA is concerned that, in marketing mini-bonds to retail investors, particularly online, FCA-regulated firms are highlighting potential high rates of return, while failing to adequately disclose the high risks and fees associated with these investments. This concern is heightened due to the fact that individuals who purchase these mini-bonds are typically unable to claim from the Financial Services Compensation Scheme if things go wrong.

Scope of Ban

From 1 January 2020, FCA-regulated firms may only market and promote mini-bonds to sophisticated or high net-worth investors (who must self-certify that they are such). Mini-bonds include debentures, bonds or preference shares issued for the purpose of enabling the issuer to:

  • Lend to a third party.
  • Acquire investments.
  • Acquire real estate.
  • Fund the development of real estate.

 

Exemptions

There are a number of exemptions to this temporary ban, including mini-bonds issued by companies raising funds to purchase or construct real estate to be used for their own commercial purpose, and investment vehicles that raise funds to invest in a single UK based investment property.

Risk Warnings

This ban will also mean that marketing materials produced or approved by FCA-regulated firms in relation to mini-bonds will need to include a specific risk warning and must disclose any costs or payments to third parties which are deducted from the money raised from investors.

FCA Consultation

In light of the collapse of London Capital and Finance plc in January 2019, it appears that the FCA has decided to introduce this ban, without consultation, in order to be seen by the public to be taking proactive steps to protect individuals who are less experienced in dealing with complex investments.

During 2020, the FCA plans to undertake a review and hold consultations on whether these measures should be permanently implemented.

Need Help?

If you want to know more about how these new rules may affect you, please contact Martin O’Donoghue to see if we can assist you.

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