RegulationMar 16 2020

What the FCA rules on the promotion of mini-bonds mean

  • Describe what the FCA's concerns are over mini-bonds
  • Explain how the FCA's product intervention rules will work
  • Describe some of the restrictions over marketing of mini-bonds
  • Describe what the FCA's concerns are over mini-bonds
  • Explain how the FCA's product intervention rules will work
  • Describe some of the restrictions over marketing of mini-bonds
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 What the FCA rules on the promotion of mini-bonds mean

 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.

The UK remains a leading jurisdiction for crowdfunding in a range of forms, including investment-based crowdfunding where mini-bonds play an important role and the regulator has only very recently concluded a review into the regulatory regime for investment-based crowdfunding platforms, which prompted few changes to the rulebook for firms engaged in this sector.

The FCA has used its temporary product intervention powers to enhance consumer protection for potential investors

However, the Treasury’s policy review may be the harbinger of wider change.

The FCA’s temporary intervention has targeted unlisted debentures and preference shares where the issuer uses the funds raised to:

  • lend to a third party, 
  • invest in other companies, or 
  • to purchase or develop property other than for the issuer’s own use. 

Importantly, the issuance of mini-bonds by unregulated companies in order to generate working capital for deployment in its business remains a viable funding structure provided that it is conducted in accordance with existing legal and regulatory requirements, such as those for the promotion of ‘non-readily realisable securities’. 

Given the significant customer detriment arising as a result of LCF’s failure, it is unsurprising that the regulator has now taken action in this area.

However, tightening rules in this sub-sector of the mini-bond market could inhibit investor appetite for mini-bonds in the wider market, and so the ripple effect of this intervention remains to be seen.

 The FCA has used its temporary product intervention powers to enhance consumer protection for potential investors.

Sale or promotion of mini-bonds

Although the FCA has limited powers over unregulated issuers of mini-bonds, firms involved in the sale or promotion of such products to retail investors are likely to fall within the regulatory perimeter and it is these firms to whom the temporary intervention will apply.

Any firms who communicate financial promotions relating to mini-bonds in scope of the intervention, and in reliance on ‘exemptions’ from the financial promotion restriction should expect heightened scrutiny from the FCA.

Any firms found to operate unlawfully outside such exemptions could face enforcement action.

 The FCA’s new rules target so-called ‘speculative illiquid securities’.

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