Financial Conduct Authority  

'No such thing as a free lunch' as FCA bans mini-bond ads

'No such thing as a free lunch' as FCA bans mini-bond ads

Experts have warned investors there is "no such thing as a free lunch" as the City watchdog confirmed its permanent ban on the mass-marketing of mini-bonds to retail consumers. 

The move follows a temporary ban introduced by the Financial Conduct Authority 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 regulator then consulted on making the ban permanent in June and proposed extending its scope to include some listed bonds which are not regularly traded and have similar features to speculative illiquid securities.

The new rules will come into force at the beginning of next year and mean products which fall under the ban could only be marketed to investors who firms know are "sophisticated or high net worth".

It will also see promotions by an authorised firm include a specific risk warning and disclose any costs or payments to third parties which are deducted from the money raised from investors.

Sheldon Mills, interim executive director of strategy and competition at the FCA, warned: "These products are high risk and are often designed to be hard to understand -consumers should always be wary of any investment promising high returns while downplaying risks."

The FCA has faced increased scrutiny in this area of the market in recent years following a number of high-profile mini-bond scandals.

The collapse of mini-bond provider London Capital & Finance, which promised clients 8 per cent interest, put the funds of more than 14,000 bondholders at risk. 

More recently mini-bond scheme Blackmore Bond collapsed into administration in April owing £46m to investors, who were warned last month the property portfolio into which they piled funds was now worth a fraction of its original value and they faced 100% losses on investments. 

Myron Jobson, personal finance campaigner at Interactive Investor, said the ban was only a matter of time following the ordeal experienced by investors of London Capital & Finance.

Mr Jobson said: "The temptation to invest in a mini-bond offering an impressive yield and, in some instances, additional perks to sweeten the deal has been significant – compounded by the low interest rate environment which has wreaked havoc on saving rates.

"But the high-risk nature of these products is not something that is easily understood by experienced investors, let alone the everyday investor.

"They are not listed on the stock exchange and typically must be held to maturity before you can get your money back.

"It’s another cautionary reminder that there is no such thing as a free lunch when it comes to investments."

Mr Jobson urged investors investors to "look under the bonnet" of investment propositions and do their homework to ensure that they understand the risks involved. 

Pressure on search engines 

The issue of misleading or high-risk financial adverts online has been an increasing area of frustration for the FCA in recent years.