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20/06/2020

FCA to ban permanently retail marketing of mini-bonds

Subject: Finance and funding/Shares and debentures

Source: Financial Conduct Authority

The Financial Conduct Authority (FCA) has announced proposals to make permanent its ban on the marketing to retail investors of mini-bonds and other ‘speculative illiquid securities’. The FCA introduced the ban without consultation in January 2020 following concerns that speculative mini-bonds were being promoted to retail investors who neither understood the risks involved, nor could afford the potential financial losses.

The term ‘mini-bond’ generally refers to a debenture or bond (i.e. a loan taken out by a company from a single or multiple lenders upon the terms of one debenture agreement) issued by a small or medium-size company, repayable at the end of a fixed period (usually 2-5 years), at a high rate of interest and which is not listed on a stock exchange or if listed is not easily realisable.

The FCA ban will apply to certain types of mini-bonds and fixed rate redeemable preference shares where the funds raised are used to lend to a third party, or to buy or acquire investments, or to buy or fund the construction of property. There are certain exemptions including listed bonds which are regularly traded, companies which raise funds for their own commercial or industrial activities, and products which fund a single UK income-generating property investment.

The FCA ban will mean that products caught by the rules may only be promoted to investors that firms know are sophisticated or high net worth. Marketing material produced or approved by an authorised firm will also have to include a specific risk warning and disclose any costs or payments to third parties that are deducted from the money raised from investors.

 

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