The FCA recently announced the introduction of temporary product intervention measures in connection with the promotion of speculative mini-bonds to retail investors.
The new rules took effect for a temporary 12 month period, effective on 1 January 2020.
These rules significantly restrict the sale of certain mini-bonds described by the regulator as ‘speculative illiquid securities’, to retail investors.
The FCA has highlighted the dangers of less sophisticated investors, and investors less capable of bearing the risk of total loss of their investment, being drawn to these products by promotions.
The FCA noted that these types of products appeared within the top results of online searches for ‘high investment returns’ or similar phrases.
The regulator is concerned that investors may be attracted to the lucrative returns offered, but that such promotions down-play the key risks and imply that these products are ‘safer’ than they are in practice.
Risks of speculative illiquid assets
Although legally structured as a bond with fixed returns, or occasionally as preference shares, the risks associated with speculative illiquid securities are seen by the FCA to be similar to unauthorised collective investment schemes.
The FCA has taken the view that most retail clients would not be able to easily understand or assess these risks.
The FCA has used its temporary product intervention powers to make these rules.
These powers enable the regulator to introduce rules without prior consultation where it considers that it is necessary or expedient to advance its consumer protection, competition or market-integrity objectives.
The FCA concluded that action needed to be taken immediately through these powers as there was ‘significant risk of immediate consumer harm from unsuitable retail investment in speculative illiquid securities’.
The FCA is expected to consult on permanent rules during the first half of 2020.
HM Treasury’s direction to the FCA to conduct an independent investigation into the circumstances surrounding LCF’s collapse, as well as the regulator’s supervision of LCF and compliance with its statutory objectives, is likely to have been one of the catalysts for the temporary intervention.
A review of 'mini-bonds'
The Treasury’s direction was accompanied by an announcement that it would conduct a wider policy review in response to LCF’s failure, including a review of the regulatory regime for ‘mini-bonds’.
By their nature, mini-bonds are illiquid and contain other features which may be unfamiliar to many retail investors.
There is an apparent perception in Government that the regulatory regime for these investments may not be fit for purpose.
Although the temporary intervention only applies to promotions in respect of ‘speculative illiquid securities’, it is worth noting that most mini-bonds which are promoted to the general public are likely to be within scope of existing financial promotion rules.
The existing restrictions which apply to ‘non-readily realisable securities’ are a key component of the FCA’s approach to the regulation of investment-based crowdfunding.