FCA Bans Marketing of Mini-Bonds amid Concerns over Investor Losses

Marketing of Mini-Bonds

Last week, in a sorely needed move, the Financial Conduct Authority (FCA) set out to ban the mass marketing of speculative mini-bonds to ordinary investors. This action was taken after it claimed that unregulated bonds could cause significant financial damage to inexperienced retail investors. The ban follows a spate of investor losses where retail or ordinary investors were attracted to a series of offerings by high returns and glossy marketing.

“We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risks involved,” FCA chief executive Andrew 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.”

Mini-bonds have come under scrutiny since the collapse of London Capital & Finance (LCF), which unfortunately saw thousands of ordinary investors lose money. The FCA warned that there was “a real risk of consumer harm” and said the number of frauds and scams was rising, causing raise issues for genuine offerings in real firms where the mini-bond market (to suitable investors) is an essential part of financing their business.

By the nature of mini-bonds, the marketing and investing is appropriate only to ‘sophisticated’ or ‘high net worth’ investors, but many unregulated firms have taken to mass marketing of these offerings, without verifying that recipients are suitable. This welcome announcement from the FCA will restrict firms to promoting unlisted speculative mini-bonds only to ‘sophisticated’ or high net worth investors. This will mean that companies must also include risk warnings on any marketing material and reveal any costs, such as third party payments, that would be deducted from money raised from investors.

This is an essential move to stabilize this important financing market and further protect the investment public.

High Risk Warning of Mini-Bonds

At Diversified Property, we welcome the FCA’s crackdown on the promotion and sale of high-risk investments such as mini-bonds. We believe that sound investments are made when you completely understand the risks involved. Unfortunately, unscrupulous investment advisers and brokers continue to play on consumers’ lack of investment experience to sell unproven – or worse, non-existent – products, without ensuring that proper due diligence is undertaken.

Mini-bonds have become tempting to ordinary savers as a way to bypass low interest rates, but the risks are not always clear and in most instances, too great. Although they generally pay higher rates than bank accounts, this is due to the high levels of risk involved and the strong potential for issuers to go out of business.

The rise of mini-bonds has been hard to ignore. Meanwhile, the sector as a whole has escaped the kind of in-depth analysis that is normal for both the equity and corporate bond market.

The regulator said the ban was part of wider efforts over the past 12 months to tackle risks around mini-bonds, which have involved persuading internet service companies to take down websites that fall foul of UK regulation.

Google Advertising Condemned as “Irresponsible”

Many investors have called for more action from internet firms such as Google in taking responsibility for false or misleading advertising. Savers have been put at risk of losing their life savings by misleading adverts for high-risk investments and so this strong action from the regulator banning the mass marketing of these products is very positive.

If It Sounds Too Good to be True………

We’ve all heard this expression and ultimately understand that not everything is as it seems, particularly when it comes to promoting and advertising investments. There is no substitute for due diligence and choice of partner firm as genuine product providers now begin to move forward with regulated partners, leaving behind the unregulated and unchecked mass marketing agents.

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