The Financial Conduct Authority will introduce a temporary ban on the marketing of mini-bonds to retail investors.
The regulator announced the ban today (November 26) after finding the risk to consumers was sufficiently "serious and immediate" to justify its intervention without consultation.
The ban will come into force on January 1, 2020 and stay in place for 12 months while the FCA consults on introducing permanent rules.
The move will ban the mass-marketing of mini-bonds to retail customers, including those "complex and opaque" arrangements where funds raised are used to lend to a third party, invest in other companies or purchase or develop properties.
Under the ban unlisted speculative mini-bonds can only be promoted to sophisticated or high net worth investors and any marketing material produced or approved by an authorised firm will need to include specific risk warnings and disclose any payments to third parties.
The FCA said it was particularly concerned about mass-marketing that focuses on high rates of return, places "insufficient emphasis" on risk, or pretends the regulator or HM Revenue and Customs offers protection on the products.
The FCA has come under increased scrutiny in this area of the market this year following the high-profile collapse of mini-bond provider London Capital & Finance, which fell into administration in January putting the funds of more than 14,000 bondholders at risk.
London Capital & Finance allegedly signed clients up to fixed-rate Isas promising 8 per cent interest, with investors' capital then invested into mini-bonds used to issue loans to small businesses.
Andrew Bailey, chief executive of the FCA, said the regulator remained concerned about the promotion of mini-bonds to retail investors, especially those who lack the "experience to assess and manage the risks involved".
Mr Bailey said: "This risk is heightened by the arrival of the Isa season at the end of the tax year, since it is quite common for mini-bonds to have Isa status, or to claim such even though they do not have the status.
"In view of this risk, we have decided to complement our substantial existing actions with a further measure which will involve a ban on the promotion and mass marketing of speculative mini-bonds to retail consumers.
"We believe this will enable us to further consumer protection consistent with our regulatory principles and the FCA mission."
Firms that approve financial promotions are already required to ensure they comply with FCA rules, but the regulator warned many adverts were still falling short of meeting requirements.
The FCA said it has been attempting to persuade internet service providers, particularly Google, to act on misleading marketing, including "promptly" taking down websites which are likely to involve a breach of law or regulations.
The watchdog said: "Widespread marketing of speculative illiquid securities continues, particularly via the internet, with promotions for these products commonly appearing in response to simple online searches for 'high investment returns' or similar phrases.
"We have significant concerns that increasing numbers of less sophisticated or less wealthy retail investors will be drawn to these products by promotions that focus on attractive "headline" interest rates, while down playing key risks and implying products are more secure than they are in practice."
The FCA estimates the average amount currently invested by consumers in illiquid speculative securities is more than £25,000 per investor, which the regulator warned would lead to "significant" losses should a provider fail.
rachel.mortimer@ft.com
What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know.
