FCA bans marketing of mini-bonds to retail investors

Issuers of speculative mini-bonds can no longer advertise the controversial investments directly to consumers, the City watchdog has announced.

The Financial Conduct Authority said on Tuesday it was banning the mass marketing of speculative mini-bonds to retail customers, using its intervention powers to introduce the restriction without prior consultation.

Mini-bonds, which the FCA called “complex and opaque”, are a range of investments where funds raised are used to lend to a third party, invest in other companies, or purchase or develop properties. The FCA has limited powers over issuers of these bonds, which are often both complicated and high-risk.

Andrew Bailey, chief executive of the FCA, said: “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. The 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.”

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “This particular kind of mini-bond has always posed huge risks for retail investors as they embody a lethal combination of fiendish complexity and high risk.

“At this time of year there’s always the risk that inexperienced investors are tempted by a complex mini-bond claiming to be an ISA and seeming to offer attractive returns without understanding what they’re getting into.”

Laura Suter, personal finance analyst at AJ Bell, said there had been a “flood” of advertising from mini-bond specialists during the last ISA season. “Many likened their returns to cash or cash-plus, meaning that people who have grown weary of their cash savings earning next to nothing were lured into investing in the hope of getting a return on their money.

“But most of these products aren’t suitable for the average person. They aren’t regulated, they aren’t covered by the compensation scheme and they are often higher risk than advertised.”

The FCA added that there was growing evidence that a number of promotions for mini-bonds were illegal frauds and scams.

The restriction will come into force on 1 January 2020 and remain in place for 12 months while the FCA consults on making permanent rules.