The FCA has introduced a temporary product intervention to the promotion of speculative mini-bonds. These new regulations specifically apply to unlisted debentures and preference shares where the issuer uses the funds raised to lend to a third party, invest in other companies, or purchase or develop a property. These are now referred to as 'speculative illiquid securities'. The intervention is due to come into force on 1 January 2020 and will last for a year, whilst the FCA will consult to introduce permanent rules.
This intervention intends to safeguard ordinary retail investors from financial promotions regarding speculative illiquid securities. London Capital & Finance issued mini-bonds to 11,625 investors, with an approximate value of £237.2m. The company became insolvent, and the investors now face losing their money. The FCA is attempting to protect consumers from speculative illiquid securities as they are high-risk and are considered to be difficult for most retail investors to understand. The average amount invested by a consumer in speculative illiquid securities is believed to be over £25,000 per investor. This highlights the significant potential losses for individuals if issuers fail. Currently, the risk is increased with the ISA season approaching at the end of the tax year (April 2020). It is common for mini-bonds to have ISA status, or claim they do. These new regulations will be in place before the end of the tax year when retailers usually seek further marketing of speculative illiquid securities and consumers typically look for new ISAs.
So what does this intervention entail? The FCA has restricted the marketing of speculative illiquid securities. This is to ensure that they can only be promoted to individual retail investors who have been pre-categorised as a sophisticated or a high-net worth investor. Sophisticated investors are those who can declare themselves able to understand the risks. High net worth individuals are those with an annual income of more than £100,000 or net assets of £250,000 or more. As well, the FCA are mandating a risk warning and disclosures of any costs or payments to third parties that are deducted from the money raised by an issuer in any financial promotion for these products. However, the FCA only has the power to intervene in marketing and cannot affect the sale of the products themselves.
There are further exemptions and limitations to this intervention. The ban will not cover mini-bonds where companies raise money 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. Additionally, unauthorised issuers may rely on exemptions under the Financial Promotions Order (FPO), however, the FCA consider these restrictions to allow relatively restricted marketing activity. The FCA has provided guidance on the requirements which apply to firms seeking approval on financial promotion. This can be seen following this link - https://www.handbook.fca.org.uk/instrument/2019/FCA_2019_99.pdf
If these regulations are broken, the guilty party will risk breaching s.21 Financial Services and Markets Act 2000. This is a criminal offence, and there is a potential liability of 2 years imprisonment, a fine, or both.
With the ban due to come into force on 1 January 2020 there are projections of a late rush of advertising over the next month.
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