Syedur Rahman of Rahman Ravelli outlines the mini bonds fiasco and the relevant regulation issues under the Financial Services and Markets Act.

The collapse of London Capital and Finance (LCF) after more than 11,000 investors put £236M into Financial Conduct Authority-authorised bonds has led to the FCA being accused of its worst regulatory failure in over a decade.

Very little of the money went into safe interest-bearing investments and allegations have been made that the FCA knew of the risks as early as November 2015 but failed to act. The FCA has acknowledged that LCF became regulated by it in June 2016; although the regulation covered the promotion side of the business and not the products themselves.

While the collapse of LCF has had a catastrophic effect on the market, much fault lies with the FCA in its handling of it. An independent investigation is taking place into the FCA’s actions, policies and approach to LCF’s failure – and rightly so.

LCF products were structured as “mini-bonds”. They are not a regulated activity and have no protection from the Financial Services Compensation Scheme. The FCA did not order LCF to stop promoting the bonds until December 2018, when it deemed the investments ineligible for ISAs and froze its assets because of serious concerns about the way the firm was conducting its business. LCF then went into administration. Read more about investigations by the Financial Conduct Authority (FCA) in the guide: The Financial Conduct Authority: How It Functions And How Best To Respond To It.

Under Section 21 of the Financial Services and Markets Act 2000 (FSMA), any marketing material used to either invite or induce an individual to engage in investment activity constitutes a financial promotion. While issuing mini bonds is not a regulated activity, financial promotion of them needs to be approved by an FCA-authorised person.

Section 19(1) of FSMA provides that no person may carry out a regulated activity in the UK or purport to do so unless he is authorised. This is known as a general prohibition. Section 22 of FSMA explains that an activity is regulated if it is a specified activity, carried on by way of business and related to an investment of a specific kind.