The Financial Conduct Authority is set to make permanent its ban on the marketing of mini-bonds to retail investors amid concerns over "unexpected and significant consumer loses".
In a consultation paper published this morning (June 18) the regulator proposed extending the scope of the ban to include some listed bonds which are not regularly traded and have similar features to speculative illiquid securities.
The move follows a temporary ban introduced by the FCA in January after it found the risks linked to the mass-marketing of mini-bonds to retail investors was sufficiently "serious and immediate" to justify intervention without consultation.
The City watchdog said the permanent ban would protect against the most "complex and opaque arrangements" where funds raised are used to lend to a third party, buy or acquire investments, or to buy or build property.
It means products which fall under the ban could only be marketed to investors who firms know are "sophisticated or high net worth" and promotions by an authorised firm will have to include a specific risk warning.
Marketing material will also need to disclose any costs or payments to third parties which are deducted from the funds raised from investors.
Sheldon Mills, interim executive director of strategy and competition at the FCA, warned investing in these types of products could lead to "unexpected and significant loses" for investors.
He added: "We have already taken a wide range of action in order to protect consumers and by making the ban permanent we aim to prevent people investing in complex, high risk products which are often designed to be hard to understand.
"Since we introduced the marketing ban we have seen evidence that firms are promoting other types of bonds which are not regularly traded to retail investors. We are very concerned about this and so we have proposed extending the scope of the ban."
The FCA has proposed certain exemptions to the ban, including listed bonds which are regularly traded, companies which raise funds for their own commercial or industrial activities and products which fund a "UK income-generating property investment".
Whilst the watchdog has limited regulatory powers over the speculative mini-bonds market, it can step in where authorised firms market or approve promotions for products of that kind, or directly advises on or sells them.
The FCA has faced increased scrutiny in this area of the market in recent years following a number of high-profile mini-bond scandals, including the 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.
More recently mini-bond scheme Blackmore Bond collapsed into administration in April owing £46m to investors, who earlier this month were warned the property portfolio into which they piled funds was now worth a fraction of the amount originally invested.
Blackmore Bond used online marketing company Surge, the same agency which represented the scandal-embroiled London Capital & Finance, to source new investor funds and paid it a fee of 20 per cent.
rachel.mortimer@ft.com
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