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Regulator bans advertising of risky mini-bonds to the public

Paloma Kubiak
Written By:
Paloma Kubiak

The financial regulator is to ban the promotion and mass marketing of high interest mini-bonds to the general public.

These products often tout headline-grabbing rates of as high as 8% but are riskier than many investors think.

The Financial Conduct Authority (FCA) will impose a 12-month promotional ban on mini-bonds from 1 January 2020 while it consults on making permanent rules.

Andrew Bailey, chief executive of the FCA, said: “We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risks involved.”

The ban applies to more complex bonds where the money is lent to a third party to invest in other companies or buy properties. Firms will still be able to market mini bonds where they raise funds for their own activities or to fund single UK property investment.

The FCA warned that it has limited power over unauthorised issuers of mini bonds but can act when these products are promoted by an authorised firm. This will not prevent scam promotions, which are already illegal.

Mini-bonds can still be promoted to ‘sophisticated’ investors – those who have sufficient knowledge and understand the risks involved – as well as to ‘high net worth’ individuals earning more than £100,000 or with net assets of £250,000+.

What are mini-bonds?

While mini-bonds tend to offer attractive interest rates of between 6-8%, they are high risk propositions.

They’re unsecured and non-transferable so you’re locked in until the maturation point, which is often 3-5 years.

They aren’t subject to the same rigorous regulation as other bond products and aren’t covered by the Financial Services Compensation Scheme (FSCS), so if the issuer goes bust you could lose all your money. Read more: Q&A: What are retail and mini bonds?

The FCA said it is concerned about these products as they often have high upfront or embedded costs and charges, imply capital protection and can be held within a tax wrapper, such as an Innovative Finance ISA (IFISA) or Self-Invested Personal Pension (SIPP). However, many don’t meet the criteria and mislead investors by suggesting the products or issuer has protection or is endorsed by the FCA.

The regulator estimates the average investment in these securities is over £25,000 so a total loss of funds “could have a significant negative impact on individual consumers”.

Its action comes in the wake of London Capital and Finance (LCF) insolvency earlier this year. LCF issued mini-bonds to over 11,000 investors totalling £237m.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Not all retail bonds are equal, and this particular kind of mini bond has always posed huge risks for retail investors – as they embody a lethal combination of fiendish complexity and high risk.

“At this time of year there’s always the risk that inexperienced investors are tempted by a complex mini-bond claiming to be an ISA and seeming to offer attractive returns, without understanding what they’re getting into.

“It’s great to see the FCA take decisive action on these bonds, and get something in place quickly for this ISA season.”

Gareth Shaw, head of money at Which?, said: “Until [the ban] comes into effect, savers should approach these adverts with caution, as if the returns look too good to be true, they probably are. Any adverts promoting high-risk investments with guaranteed returns after the ban is in place should be avoided, as these will almost certainly be scams.”

Scrap the Innovative Finance ISA

Laura Suter, personal finance analyst at investment platform AJ Bell said: “The move means that the Innovative Finance ISA’s days must surely be numbered, with the FCA acknowledging that the ISA status of some of these mini-bonds has enabled them to be touted to a wider market.

“The regulator and government are already looking at the suitability of the IFISA as part of the review into London & Capital Finance, and we would urge them to scrap the IFISA for the safety of savers.”