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UK regulator bans marketing of speculative mini-bonds

As London Capital & Finance victims see move as the FCA ‘admitting we were mis-sold’

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Investors in defunct London Capital & Finance (LCF) say the decision by the Financial Conduct Authority to temporarily ban the promotion of speculative mini-bonds to retail consumers means that they are entitled to compensation.

A representative of a group of LCF victims told International Adviser that by taking this action, the UK watchdog is “admitting we were mis-sold”.

Get money back

Mini-bonds came under scrutiny at the beginning of 2019, after it came to light that investment firm LCF had mis-sold them to around 11,600 retail investors raising roughly £237m ($305m, €277m).

LCF is currently in administration and victims have taken legal action to try and get their money back.

Those who received financial advice to invest in the mini-bonds may be eligible to receive up to £85,000 from the Financial Services Compensation Scheme (FSCS).

But DIY investors are unlikely to be so fortunate, as the products were not regulated and are therefore not covered by the scheme.

Various exemptions

While the FCA ban includes many types of mini-bonds, it doesn’t apply to all.

The watchdog said: “The term mini-bond refers to a range of investments.

“The ban announced today will apply 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.

“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.”

Complementary action

The measure will come into force on 1 January 2020 and last for 12 months. A consultation will be rolled out on making the rules permanent.

The FCA said it has limited power over the issuers of this type of investment. But if an authorised firm approves, communicates a financial promotion, directly advises on or sells them, it can step in.

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.”

More regulatory work needed

Thomas Donegan, partner at Shearman & Sterling the law firm representing some of the LCF victims, told International Adviser: “We welcome the FCA’s announcement. The previous situation was counterintuitive and not in the best interest of end investors.

“Previously, the largest banks were prohibited from selling capital instruments or bonds to retail investors but less reputable organisations operating under FCA and [HM Revenue & Customs (HMRC)] regulation, like London Capital & Finance, were allowed to do so.

“Focusing on LCF specifically, the term ‘mini-bond’ is a misnomer and was not used by LCF in its marketing materials. It has retrospectively been misapplied by the FCA to LCF.

“It is therefore unclear whether measures like this would have been effective. ‘Mini bonds’ usually refer to corporate bonds issued by corporates to fund their legitimate businesses – and not to investment scams.

“Retail investors need to be allowed to invest in bonds and shares issued by genuine listed companies. In implementing this measure, the FCA will need to work out how to stop companies like LCF that don’t have investors best interest at heart from operating, whilst at the same time allowing the corporate bond market to continue to flourish.

“It is pleasing to see FCA and FSCS now taking these steps, but unfortunately this will not help those who have already lost out from investment scams such as LCF.

“We continue to await a response to our latest correspondence with the FCA and FSCS on whether the Financial Services Compensation Scheme will be made more widely available than has been indicated.”

Disappointed

The LCF victims, however, are not happy with the FCA’s latest measure.

The representative of the group added: “Surely if the LCF scandal has led the FCA to ban the marketing used by LCF, it is admitting we were mis-sold and are entitled to recompense.”

The LCF bondholders were also critical of the regulator’s ‘action points’ regarding the steps it has taken so far to tackle the promotion of mini bonds.

They hit back at Bailey’s claim that retail investors do not have the experience to assess and manage the risks involved in mini-bonds.

“Clearly neither does the FCA, otherwise LCF would not be on the register”, they said.

Victims have also hit back at HMRC for allowing mini-bonds to be marketed as having Isa status, when they did not.

Last flurry of ads

Laura Suter, personal finance analyst at investment platform AJ Bell, said: “You would have to have been living under a rock last Isa season to have missed the flood of advertising from mini-bond companies, touting these unregulated products to the mass market and promising unbelievably high returns while claiming to be ‘low risk’ products.

“Many likened their returns to cash or cash-plus, meaning that people who have grown weary of their cash savings earning next-to-nothing were lured into investing in the hope of getting a return on their money.

“But 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 often higher risk than advertised.

“It’s interesting that the initial ban is just for a year, and being brought in in time to cover next year’s Isa season, but it seems unlikely that the regulator will relax the ban after the first 12 months.

“However, we could see a last flurry of advertising before 2019 is out and the ban comes in.

“The move also means that the Innovative Finance Isa’s (Ifisa) days must surely be numbered, with the FCA 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 Ifisa for the safety of savers.”

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