FCA ban on mini-bond welcomed but ‘more needs to be done’

21 June 2020

The Financial Conduct Authority has made its ban on mini-bond marketing permanent, amid fears that products were being promoted to consumers who neither understood the risks involved or could afford the potential financial losses.

In its proposals the watchdog said it had extended the scope of its ban to include listed bonds with similar features to speculative illiquid securities and which are not regularly traded.

It follows a temporary ban introduced by the FCA in January.

Sheldon Mills, interim executive director of strategy and competition, FCA (pictured), said: “We know that investing in these types of products can lead to unexpected and significant losses for investors. 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.”

The FCA ban means products caught by the rules can only be marketed to investors that firms know are sophisticated or high net worth. Marketing materials produced or approved by the firm will also have to include a specific risk warning as well as disclose any costs or payments to third parties that will be deducted from investors’ money.

Laura Suter, personal finance analyst, AJ Bell, welcomed the ban, saying the interest rate cuts and dearth of attractive investment options during the Covid-19 crisis would likely have led to many people being drawn to these investments if the FCA had not intervened.

Suter said: “It’s good news for savers that the FCA has made its temporary ban on the mini-bond market permanent. This year’s tax-year end was notable in that people weren’t being bombarded with adverts for mini-bonds guaranteeing attractive interest rates and likening the risk to saving in cash accounts.

“Before the FCA introduced its temporary ban there was a flood of advertising, touting these unregulated products to the mass market and aiming to entice people who have grown weary of their cash savings earning next to nothing. The fact is that most of these products aren’t suitable for the average person on the street: they aren’t regulated, they aren’t covered by the compensation scheme and they are higher risk than many other ways of investing.”

However, Suter warned that more still needs to be done to protect consumers from “unscrupulous” people attempting to sell these products and called for the Innovative Finance ISA to be scrapped.

Suter added: “It was inevitable that the unscrupulous people attempting to sell these products to the mass market would transfer into marketing other products, so it’s good news that the regulator has extended the ban to other similar products. However, you only have to Google a few key terms like ‘high interest savings accounts’ to stumble across mini-bond or similar high risk offerings, meaning more still needs to be done to protect consumers.

“The move also means that the Innovative Finance ISA’s days must surely be numbered, with the FCA previously acknowledging that the ISA status of some of these mini-bonds has enabled them to be touted to a wider market. The regulator and Government are already looking at the suitability of the IFISA as part of the review into London & Capital Finance, and we would urge them to scrap the Innovative Finance ISA for the safety of savers.”

Professional Paraplanner