FCA bans marketing of speculative mini-bonds to retail investors


In line with the FCA’s ongoing efforts to prevent consumer harm, in summary it has implemented the following temporary rules designed to strengthen its requirements on financial promotions:

  1. Restricting the marketing of speculative illiquid securities to sophisticated or high-net worth retail investors only and where the product has been pre-assessed as likely to be suitable for them; and
  2. Requiring any marketing material produced or approved by an authorised firm to include a specific risk warning, and disclosures of any costs or payments to third parties that are deducted from the money raised from investors.

What is the FCA’s rationale for intervention?

The FCA is using its temporary product intervention powers without consultation as it has significant concerns about the mass marketing of these products, particularly via the internet, due to the risk of investment by less sophisticated or less wealthy retail consumers. The FCA believes that the marketing of these products focuses on the high returns on offer (and often not the high risks) and tends to target retail investors for whom these products are unlikely to be suitable.

In light of the collapse of London Capital and Finance plc (LCF) in January 2019, the FCA has expressed concerns about regulated firms marketing and issuing unregulated mini-bonds. This is because retail investors who purchase mini-bonds are typically unable to claim from the Financial Services Compensation Scheme (FSCS) if things go wrong. As such, significant consumer harm could arise if retail consumers invest without properly understanding the high risk of these products and later experience unexpected losses.

What is the scope of the ban?

In summary, financial promotions relating to unlisted speculative securities will be restricted to sophisticated or high-net worth retail investors.

The FCA has defined a ‘speculative illiquid security’ as a debenture or preference share, which:

  1. Has a denomination or minimum investment of £100,000 or less; and
  2. Has been issued, or is to be issued, in circumstances where the issuer or a member of the issuer’s group uses, will use or purports to use some or all of the proceeds of the issue directly or indirectly for one or more of the following: a. The provision of loans or finance to any person other than a member of the issuer’s group; b. Buying or acquiring investments (whether they are to be held directly or indirectly); c. Buying property or an interest in property (whether it is to be held directly or indirectly); d. Paying for or funding the construction of property.

The temporary rules will apply in relation to unlisted debentures and preferences shares where the issuer uses the funds raised to lend to a third party, invest in other companies, or purchase or develop property.

There are various exemptions, including that the measures will not apply to companies using the funds raised from unlisted securities to buy or construct property used by them for their own commercial or industrial purpose, and investment vehicles that only invest in a single UK-based property.

Who will the ban affect?

The FCA considers that the following will be affected:

  • Issuers of speculative illiquid securities
  • Authorised firms that approve or communicate financial promotions relating to speculative illiquid securities
  • Firms offering services in relation to these products – for example, investment advice, arranging deals in investments, dealing in investments on behalf of clients, companies receiving funding from issuers of speculative illiquid securities, and law firms and other professional service providers to issuers or firms

Next steps

Firms will need to understand and apply these rules by 1 January 2020. The temporary measures will take effect from 1 January 2020 and expire on 31 December 2020. These will be included in the FCA Handbook as a new chapter 4.14 in the Conduct of Business Sourcebook.

The FCA will consult on permanent rules in the first half of 2020. The consultation is likely to seek views on whether to make permanent rules apply on or before the expiry of the temporary rules to ensure there is no gap in consumer protection.

Co-authored by Janice Pang.