On 26 November 2019, the Financial Conduct Authority (FCA) announced its temporary intervention measures banning the marketing and sale of speculative mini-bonds to retail investors. These measures will apply from 1 January 2020 to 31 December 2020 and the FCA will consult on introducing relevant permanent intervention measures in the meantime.
The FCA introduced the temporary ban due to its concerns that certain high-risk speculative securities are regularly marketed to retail investors, particularly online, without adequately disclosing the potential risks and fees associated with these investments. According to the FCA’s findings at least 11,000 investors have invested in such products, investing in average approximately £25,000. Therefore, the FCA decided to act promptly by using its product intervention powers, without prior consultation.
The FCA measures
The FCA has limited powers in relation to issuers of securities themselves, where these are unregulated. Therefore, the measures focus on the communication of financial promotions, the provision of advice and the sale of securities.
The temporary intervention measures can be found in section 4.14 of the Conduct of Business Sourcebook (COBS) of the FCA Handbook. In brief, the new rules will:
- restrict the marketing and sale of certain ‘speculative illiquid securities’ to sophisticated and high-net worth retail investors only; and
- require that financial promotions addressed to sophisticated and high-net worth retail investors are accompanied by specific risk warnings and disclosures.
Scope of measures
The term ‘mini-bond’ is used to describe a variety of products. The FCA measures will only cover certain complex and opaque arrangements, which are deemed unsuitable for the vast majority of retail investors.
The temporary intervention measures will apply in relation to ‘speculative illiquid securities’, which are defined as unlisted bonds and preference shares where the funds raised are used by the issuer to lend to a third party, invest in other companies, or purchase or develop property.
The new measures will not cover:
- listed mini-bonds;
- companies using unlisted securities for the purpose of buying or constructing property for their own commercial or industrial purpose; and
- investment vehicles only investing in property based in the UK.
In addition, in-scope investments will still be permitted to be marketed to certain types of retail investors, namely:
- sophisticated investors (certified as such by an investment firm or self-certified), i.e. investors who have sufficient knowledge and experience of similar investments; and
- high-net worth individuals, who are persons with an annual income of £100,000 or more, or has net assets of £250,000 or more.
Guidance on approving financial promotions
Financial promotions which have been approved by authorised firms before 1 January 2020, will not be subject to the FCA intervention measures. However, the FCA expressed concerns regarding the quality of certain approved financial promotions, which, in the FCA’s view, ‘fall short’ of the relevant requirements. Therefore, on the same day the FCA also published guidance on the requirements on firms when approving the financial promotions of unauthorised persons, urging authorised firms to take it into account.
The FCA will consult on similar permanent rules and on rules aiming to enhance consumer protection regarding high-risk investments more generally.