THE FINANCIAL Conduct Authority has announced a ban on the mass marketing of mini-bonds to retail investors from the new year and suggests peer-to-peer lending could be a better alternative.
It said it was unlikely speculative debt securities offered through mini-bonds would be suitable for retail investors but added that there are other products more widely available such as P2P investments.
The move means mini-bond providers, including some Innovative Finance ISA (IFISA) platforms, will only be able to sell their products to sophisticated and high-net worth clients.
The City watchdog has used its product intervention powers to implement a ban from 1 January to 31 December 2020 and will consult on the rules in the first half of the year.
The ban will apply to more complex and opaque arrangements where the funds raised are used to lend to a third party, invest in other companies or purchase or develop properties.
There are various exemptions including for listed mini-bonds, companies which raise funds for their own activities or to fund a single UK property investment.
The FCA said it was making clear that these rules will not apply to P2P lending although there are other marketing restrictions being introduced next month.
It said it will also look out for regulatory arbitrage where firms try to highlight similar features.
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This follows the collapse of mini-bond provider London Capital & Finance after the FCA found investors were misled into believing investments were ISA-eligible.
The regulator estimates that at least 11,000 investors are invested in mini-bonds.
Based on a sample of bonds, it estimates the average amount invested may be around £25,000.
“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,” Andrew Bailey, chief executive of the FCA, said.
“This risk is heightened by the arrival of the ISA season at the end of the tax year, since it is quite common for mini-bonds to have ISA status, or to claim such even though they do not have the status.
“In view of this risk, we have decided to complement our substantial existing actions with a further measure which will involve a ban on the promotion and mass marketing of speculative mini-bonds to retail consumers.
“We believe this will enable us to further consumer protection consistent with our regulatory principles and the FCA Mission.”