On 26 November 2019, the FCA announced that it would use its temporary intervention powers to restrict the mass marketing of speculative mini-bonds to retail customers. Although the intervention will allow the promotion of unlisted speculative mini-bonds to sophisticated and/or high net worth individuals, marketing materials which are produced by or approved by an authorised firm will also have to include a specific risk warning and disclose costs or payments made to third parties that are deducted from investors’ money. The FCA has published additional guidance on approving financial promotions for communication by unauthorised persons alongside the announcement.
The restrictions, which are to be set out in the Conduct of Business Sourcebook (COBS 4.14), will come into force on 1 January 2020 for a period of 12 months. During this time, the FCA intends to consult on permanent rules.
It would be difficult to say that the announcement comes ‘hot on the heels’ of London Capital and Finance (LC&F) which collapsed in early 2019, and into which an independent investigation was ordered by HM Treasury in May 2019 (the report is expected in Summer 2020). However, the FCA points to LC&F as one catalyst for action in its statement on the use of temporary intervention powers. It also highlights further work undertaken ‘both before and after LCF’ into the risks posed by the promotion of speculative illiquid securities; where timings are given for these activities, they coalesce around LC&F’s progression towards failing and the aftermath of the failure, for example:
- Examinations of 50 firms that are involved in approving financial promotions or distribution which commenced at the start of 2019;
- Investigations into 81 cases of possible unauthorised activity or breaches of the financial promotions rules during 2019; and
- Reviewing over 200 financial promotions made during the period November 2018 to May 2019.
The statement provides some insight into the action which the FCA was taking ‘behind the scenes’ at a time (i.e., in November 2018) when it was aware of the LC&F matter. That the mini-bonds issue had a high profile with the FCA Board through most of 2019 is apparent from a review of the available minutes (which are published up to and including September 2019). While the FCA Board discussed a range of actions in response to LC&F, including the consumer communications strategy, there is nothing in the minutes of these meetings to indicate consideration of using temporary intervention powers.
Authorised firms which are operating in this market should already be aware of the regulator’s views and wider public opinion. Given the number of firms and financial promotions which the FCA cites in the outline of its activities undertaken in response to LC&F, it seems likely that many will have had contact from the FCA already. Some firms may already be undertaking exercises to identify potential instances where customers may not have been treated fairly, to quantify this impact, and to determine a reasonable approach to mitigation. Firms may also be reconsidering policies, procedures, and even their continued engagement with this market given the potential reputation, regulatory, and litigation risks.
As mini-bonds themselves are unregulated, the use of temporary intervention powers – which are necessarily directed at authorised firms – has some limitations. It is a fair assumption that some bad actors will continue mass marketing to retail customers over social media and other channels. However, the FCA’s announcement is possibly well-timed as a reminder to consumers of the risks of investing in ‘too good to be true’ schemes in the run-up to ISA season.
The current UK situation has echoes of Hong Kong in 2008 when the failure of Lehman Brothers saw the eruption of a similar mini-bond scandal affecting more than 40,000 retail investors. Hong Kong regulators eventually reached agreements with banks that had sold the mini-bonds to buy back the investments, at rates of up to 97.55% [according to a 2011 announcement made by the distributing banks]. The FCA’s action should prevent similar levels of detriment and redress exercises from crystallising.