High-risk mini-bonds banned by regulator

The UK financial regulator has confirmed it will permanently ban the mass marketing of high-risk “mini-bonds” to retail investors, after introducing a temporary prohibition in the wake of the £236m collapse of issuer London Capital & Finance.

On Thursday, the Financial Conduct Authority said new rules originally proposed this year would come into force from January 1, with minor changes to extend the ban on retail promotions to “other speculative illiquid securities”.

News of the permanent measures comes just days before an independent review of the FCA’s handling of the LCF collapse is set to be published.

Dame Elizabeth Gloster, the former Court of Appeal judge leading the review, submitted her draft report to the Treasury last month, and it is due to be released alongside the FCA’s response before the parliamentary recess at the end of next week.

LCF’s collapse in January 2019 left most of the 11,600 people who bought its high-interest mini-bonds unable to claim compensation — because the bonds themselves were not regulated by the FCA, only their marketing, or the provision of advice on them.

However, the Gloster Review is expected to criticise the regulator. “In its response to the Gloster report findings on LCF, the FCA will now be able to point to today's permanent marketing ban,” said Michael Cavers, a financial services partner with law firm CMS. But he added: “There is speculation that the review will also suggest the FCA should have acted more quickly following earlier warnings about similar mini-bonds.”

CMS believes the Gloster review will also reopen the debate about allowing holders of failed mini-bonds to claim on the Financial Services Compensation Scheme.

Until now, only those investors who bought LCF mini bonds via transfers from individual savings accounts or with formal financial advice have been eligible for payouts from the FSCS, as these are regulated activities.

But lawyers believe there could be grounds for further payouts, if the Gloster review finds the FCA failed in its duty. 

Mini-bonds had been used by small businesses to raise loan finance from individuals by promising generous interest payments. Accountancy group BDO said a ban would therefore impact the ability of some firms to raise funds. Overall, though, it welcomed the FCA move for protecting retail investors from unsuitable products.

Matt Hopkins, head of digital banking and fintech at BDO, said: “This was one of the last few truly high-risk investment products that could be sold to retail investors. Bearing in mind the scandals surrounding retail bonds, this permanent ban is a good thing.”