UK Financial Conduct Authority Hits the Breaks on Certain Mini-Bonds

The UK Financial Conduct Authority (FCA)  will ban the mass marketing of “speculative mini-bonds” to retail investors beginning January 1, 2020. The FCA is banning these mini-bond promotions without a consultation by using its “product intervention powers.” The ban will be in place for 12 months but there is a good chance it will become permanent. The FCA ban will mean that unlisted speculative mini-bonds can only be promoted to investors that firms know are sophisticated or high net worth. Marketing material produced or approved by an authorized firm must include a specific risk warning and disclose any costs or payments to third parties that are deducted from the money raised from investors.

Andrew Bailey, Chief Executive of the FCA, explained that they remain concerned regarding the scope of Mini-bond promotion for retail investors. Additionally, the risk is heightened at the end of the year due to the “ISA season” when it is 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,” said Bailey. “We believe this will enable us to further consumer protection consistent with our regulatory principles and the FCA Mission.”

Mini-bonds have been criticized by some industry observers due to spectacular failures such as London Capital & Finance  (LC&F) which entered administration at the beginning of the year. LC&F sold approximately £236 million worth of bonds to 11,000 investors. The security was expected to pay investors annual returns of 3% to 8.5% but collapsed leaving little money to cover the financial scandal. Following the debacle, an investigation into LCF was commenced.

The FCA notes that the term mini-bond refers to a range of investments. While a typical mini-bond may be somewhat similar to more standard bonds, the FCA ban only applies 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.”

The FCA adds that there are various exemptions including for listed mini-bonds, companies which raise funds for their own activities (other than the ones above) or to fund a single UK property investment.

Some investment crowdfunding platforms utilize the debt vehicle to raise capital for younger firms from retail investors. Perhaps the best-known issuer of Mini-bonds (currently) is the BrewDog Brewery which is in the midst of raising capital via a Mini-bond issuance on Crowdcube. An issuer like this (BrewDog) would not be impacted by the ban.

The FCA explains that it has undertaken extensive research into Mini-bonds, including:

  • Investigating more than 80 cases of regulated activities potentially being carried out without having the right FCA authorization;
  • Assessing over 200 cases of financial promotions that appeared not to have complied with the FCA rules;
  • Seeking to persuade the internet service providers, particularly Google, to take more action, for instance, to take down websites promptly where they are likely to involve a breach of law or regulations;
  • Contact with the Department of Culture, Media and Sport to urge the inclusion of financial harm in the proposed legislation on online harms;
  • Developing tools for data analysis, for instance introducing web scraping to assist in the identification of mini-bond promotions.

The FCA will also launch a communications campaign to improve consumer awareness of risks and to inform consumers about what they should consider before investing in high-risk investments.

The FCA continues to work with HM Treasury on its review into the regulatory framework for the issuance of non-transferable debt securities (NTDS).

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