The UK's Financial Conduct Authority is clearly upset about the bad publicity that it has received because it authorised London Capital Finance, which recently went into administration.

An unauthorised firm commits a criminal offence if it communicates a promotion for an investment without that promotion being approved by an authorised firm. This is a requirement of section 21 Financial Services and Markets Act 2000.

Confusingly, there are investments for which this type of approval is required, which are not themselves regulated by the Financial Conduct Authority and thus protected by the Financial Services Compensation Scheme.

In a recent 'Dear CEO' letter, the FCA has said that it is crucial for firms that approve financial promotions for unauthorised firms to ensure that the information concerned always “gives a fair and prominent indication of any relevant risks when referencing any potential benefits.”

The letter also reminds firms that their obligations include the requirement to withdraw the approval of anything that has ceased to be compliant.

On top of this, firms that approve direct offers of unlisted securities and mini-bonds (essentially non-transferable debt securities) must ensure that the rules in COBS 4.7 are complied with. That is to say that the sales of the product are limited to high-net-worth, sophisticated and restricted investors (who have certified that they are not investing more than 10% of their net assets in readily realisable securities). Direct offers allow the customer to subscribe without receiving further material on the subject.

The approving authorised firm must also ensure that the customers not receiving advice have undergone the "appropriateness test" which tests the knowledge and experience of the customer. A failure on this examination does not prevent the sale; the firm just has to give the appropriate risk warning.

In January, the regulator issued a similar warning about regulated firms marketing unregulated products with a clear eye on London Capital Finance, which recently went into administration. The FCA is concerned that there are still authorised businesses that are sellling unregulated products and not making it clear that the “investments” in question are not regulated. Now, it is stressing the need for firms approving promotions for unregulated offerings to ensure that promotions make clear the unregulated status of the asset.

The FCA is clearly upset about the bad publicity that it has received because it authorised LCF and then pointed out that the products that it was marketing were unregulated and so fall outside the protection of the FSCS.

The two Dear CEO letters have all the hallmarks of horses that have bolted. There are a whole range of small companies trying to raise money by issuing debt instruments without making them transferable. It would be much healthier if these “investments” were regulated and thus protected by the FSCS. Obtaining the necessary change to the Regulated Activities Order, though, requires a political will that may not be currently forthcoming.

Anyone thinking of investing should know not just the regulatory status of the firm but also that of the instrument in question. Some clarification in this area would be welcome. Anyone approving such a promotion needs to read COBS 4.7.7R urgently.

* Adam Samuel can be reached on +44 207 6254743 or at adamsamuel@aol.com