The City watchdog is to ban the promotion of speculative mini-bonds to small investors after facing severe criticism over its handling of the collapse of London Capital & Finance.
The Financial Conduct Authority is using its intervention powers to introduce the ban on 1 January, when financial firms start encouraging people to put money into their individual savings accounts (Isas) before the end of the tax year. Many mini-bonds have Isa status.
The regulator said it was concerned that retail customers did not have the experience to evaluate the risks involved in complex mini-bond arrangements, where funds are used to invest in other companies or to buy and develop a string of properties.
Promotion of bonds issued by the TV property guru Kevin McCloud’s eco-housing ventures would likely be banned under the new rules. Small investors who put millions of pounds into schemes established by the Grand Designs presenter were told they could lose up to 97% of their money, it emerged in August.
The regulator said each mini-bond would be assessed on a case-by-case basis.
The ban applies to mini-bonds sold to raise funds to buy properties, lend to a third party, or invest in other companies. It will not apply to mini-bonds that are listed, used to raise money for their own activities or to fund a single property investment.
High-profile mini-bonds offered by companies such as Brewdog, Hotel Chocolat, and Chilango – which raised millions of pounds through its “burrito bond” – are unlikely to be covered by the ban, since they are not funding speculative investments.
The ban will initially last for 12 months, while the FCA consults its membership on permanent rules.
The intervention comes just months after the high-profile collapse of London Capital & Finance (LC&F), which had been peddling bonds with table-topping returns of 6.5% to 8% a year. The company went into administration earlier in the year, owing £236m to more than 11,000 customers.
The FCA came under severe criticism by former LC&F customers and MPs for its handling of the collapse, after it emerged that the City regulator’s enforcement team had been warned three years earlier about the company but had failed to act.
It is now facing an independent inquiry into the scandal led by a leading high court judge, Dame Elizabeth Gloster. LC&F is also under investigation by the Serious Fraud Office, which arrested and released five individuals as part of its probe.
LC&F was authorised by the FCA, but while the marketing of mini-bonds is covered by the watchdog, the sale of the products is unregulated.
The FCA’s chief executive, Andrew Bailey, 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.”
However, Bailey acknowledged that the ban would offer little solace to victims of LC&F. “They will rightly say: ‘Well, it’s too late.’ But it’s aimed at future cases that would now have otherwise been at risk of arising.”
The regulator said the ban was part of wider efforts over the past 12 months to tackle risks around mini-bonds, which have involved persuading internet service companies to take down websites that fall foul of UK regulation.
Bailey called for more action from internet firms such as Google, which he said were not doing enough. “Their reach into our lives is huge, and I think with that goes responsibilities … I do think they should take more responsibility in this area.”
Gareth Shaw, the head of money at Which?, said: “Savers have been put at risk of losing their life savings by misleading adverts for high-risk investments for too long, so this strong action from the regulator banning the mass marketing of these products is positive.
“Until it comes into effect, savers should approach these adverts with caution, as if the returns look too good to be true, they probably are.”
