Beset by accusations that it was 'asleep at the wheel' in the run-up to the LCF débâcle, the UK's Financial Conduct Authority is proposing to make permanent its ban on the mass-marketing of speculative illiquid securities, including speculative mini-bonds, to most retail investors but not HNWs.
The regulator has written: "The [new] FCA ban will mean that products caught by the rules can only be promoted to investors that firms know are sophisticated or high-net-worth."
The FCA introduced the present ban without consulting the market in January, the same month in which it told the mini-bond firm of London Capital & Finance plc to cease to handle money in its bank accounts, having already forced it to withdraw all of its marketing materials in relation to the LCF fixed-rate ISA or bond. The Parliamentary Treasury Committee decided on an investigation, which ought to have culminated in a report on 10 July but which has been postponed to 30 September because of the Coronavirus. The FCA's new proposal might be an attempt to head off some of its critics by appearing dynamic.
London Capital and Finance raised £237 million from 11,605 bondholders before collapsing in January last year. Only 159 have qualified for compensation from the Financial Services Compensation Scheme. The Financial Conduct Authority - which activist Gina Miller has accused of being "asleep at the wheel" - and the Serious Fraud Office are investigating.
The FCA is proposing to make some trifling changes to the existing ban and also wants to extend it to some listed bonds that resemble speculative illiquid securities. It has embarked on a crusade against "complex, high risk products which are often designed to be hard to understand" and has come to frown on the promotion to retail investors of any bonds that are not traded regularly.
The ban will apply to the most complex and opaque arrangements which use the funds that they raise to lend money to "third parties," or to buy or acquire investments, or to buy or fund the construction of property. There are various exemptions, notably for any product which funds a single income-generating investment in property in the UK.
The FCA has few powers over the issuers of speculative mini-bonds (who usually need no official permission to operate) but can take action when an authorised firm approves a financial promotion of, or gives direct advice about, or sells these products.
Tim Fassam, the director of policy at the Personal Investment Management and Financial Advice Association, the UK's largest wealth management trade body, told Compliance Matters: “PIMFA has been concerned about the marketing of mini-bonds for some considerable time and there have been a number of notable examples of consumers being ill-treated. It cannot be right that 14,000 people who invested in an Individual Savings Account (ISA) with London Capital Finance (LCF) are now having to seek compensation, which well-run firms will pay through the Financial Services Compensation Scheme (FSCS) levy.
“PIMFA has repeatedly called for the marketing of these types of investments to be banned outright. The fact that this hasn’t happened sooner has, by its own admission, meant that the FSCS has had to budget £45 million to compensate consumers. This could have been avoided and goes right to the heart of the debate over the current limitations of FCA supervision.”