The City regulator is proposing to make its temporary mini-bond marketing ban permanent and extend its scope to include listed bonds.
The Financial Conduct Authority (FCA) introduced a ban for the whole of 2020, following concerns that mini-bonds were being promoted to retail investors who neither understood the risks involved, nor could afford the potential financial losses.
It came after the collapse of mini-bond provider London Capital & Finance, in which the regulator found investors were misled into believing investments were ISA-eligible.
The FCA has also proposed the expansion of the scope of the ban to include listed bonds with similar features to speculative illiquid securities and which are not regularly traded.
Products caught by the rules can only be promoted to investors that firms know are sophisticated or high net worth.
Marketing material produced or approved by an authorised firm will also 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, the FCA said.
“We know that investing in these types of products can lead to unexpected and significant loses for investors,” said Sheldon Mills, interim executive director of strategy and competition at the FCA.
“We have already taken a wide range of action in order to protect consumers and by making the ban permanent we aim to prevent people investing in complex, high risk products which are often designed to be hard to understand.
“Since we introduced the marketing ban, we have seen evidence that firms are promoting other types of bonds which are not regularly traded to retail investors. We are very concerned about this and so we have proposed extending the scope of the ban.”
Sarah Coles, personal finance analyst at Hargreaves Lansdown, supported the FCA’s proposals for a permanent and wider ban.
“People are desperately hunting for something with a better return than cash, but they were so keen to steer clear of risk that over 60,000 ran straight into a mini-bond mantrap,” she said.
“It was vital for the FCA to step in to protect us from ourselves.
“These specific kinds of mini-bonds are constructed in a way that makes them particularly toxic: they’re fiendishly complicated, so investors struggle to understand the risks involved.
“At the same time they have the potential to lose investors all of their money, and they’re called ‘bonds’, which lulls investors into a dangerous sense of security.
“Absolutely everything involves risk – even cash ISAs that risk falling short of inflation.
“Each investment is a balance of the potential risk and the possible rewards. It’s important that people understand the risks involved, take the ones they’re comfortable with, and steer well clear of anything complex and opaque enough to obscure the risk entirely.”
The term mini-bond refers to a range of investments.
The FCA said the ban will apply to the most complex and opaque arrangements where the funds raised are used to lend to a third party, or to buy or acquire investments, or to buy or fund the construction of property.