The Financial Conduct Authority (FCA) today set out to ban the mass marketing of speculative mini-bonds to ordinary investors.
The watchdog said the unregulated bonds could cause harm to amateurs, following a spate of investor losses.
“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 saw thousands of ordinary investors lose the money they had invested.
The watchdog warned today that there was “a real risk of consumer harm” and said the number of frauds and scams was rising.
Its ban on mini-bond marketing will restrict firms to promoting unlisted speculative mini-bonds only to “sophisticated” or high net-worth investors.
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.
“The FCA have taken on board the lessons of the LCF scandal and felt it time to take what, in regulatory terms, is the nuclear option,” said BDO director Matt Hopkins.
“With so much of the marketing of these mini-bonds taking place through low cost, anonymous and hard-to-police internet and social media marketing schemes the FCA has been left with little choice,” he added.
Moira O’Neill, head of personal finance at Interactive Investor, welcomed the FCA’s crackdown.
She warned that mini-bonds have become tempting to ordinary savers as a way to bypass low interest rates, but the risks are too great.
“Mini-bonds are paying higher rates than bank accounts precisely because they do contain an element of risk – essentially the risk that the company could go out of business,” she said.
“And it’s often too difficult for customers to assess if are they paying enough to take that risk.
“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.”
AJ Bell personal finance analyst Laura Suter also praised the crackdown, adding: “The fact is that most of these products aren’t suitable for the average person on the street.”
Suter also warned investors to be vigilant over the growing risk of mini-bond scams, which are not covered by the FCA’s clampdown because they are illegal.
“Investors will…still need to be on their guard for scams and be wary of anything that looks too good to be true,” said Suter.
The FCA announced a review into how it regulates firms back in June following the collapse of mini-bond lender London Capital & Finance.
Investors in the firm, which collapsed in January owing £237m to more than 11,000 bondholders, stand to regain just 25 per cent of the money they put up.
Administrators Smith & Williamson have delayed an initial dividend to bondholders that was meant to be paid by the end of the summer.