Financial watchdog, the Financial Conduct Authority has banned the mass marketing of mini-bonds to retail investors, saying peer-to-peer lending could be a better alternative.
FCA used its product intervention powers to impose a ban from 1 January to 31 December 2020 and will consult on the rules in the first half of the year.
It said speculative debt securities offered through mini-bonds were unlikely to be suitable for retail investors but that there are other products more widely available such as P2P investments.
This means mini-bond providers, including some Innovative Finance ISA (IFISA) platforms, can only be able to sell their products to sophisticated and high-net worth clients.
Announced in the aftermath of the London Capital and Finance scandal (more here) the ban applies to more convoluted and murky arrangements where funds raised are lent to a third party, invested in other companies or used to purchase or develop properties.
Listed mini-bonds, companies which raise funds for their own activities or to fund a single UK property investment, are exempt.
a ban on the promotion and mass marketing of speculative mini-bonds to retail consumers
FCA said that these rules will not apply to P2P lending although further marketing restrictions are being introduced next month.
It will also look out for regulatory arbitrage where firms try to highlight similar features; in the case of LCF, investors were misled into believing investments were ISA-eligible.
To highlight the scale of the issue, LCF attracted 11,600 investors; FCA estimates the average amount invested in mini-bonds may be around £25,000.
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.
‘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.’