‘LCF mini-bond loophole’ to be closed under new proposals to protect savers

Financial firms looking to promote unregulated investments and digital currencies will have to jump through a new series of hoops designed to protect investors from harm, under fresh proposals laid out by HM Treasury. 

It wants the Financial Conduct Authority, the City watchdog, to force firms to seek express approval before putting out any promotion that offers unauthorised investments to consumers. It has also asked the regulator to clamp down on the digital currency market, bringing certain types of crypto currency under the FCA’s purview for the first time. 

This marks an initial step in the sewing up of a harmful loophole in the rules, highlighted in a campaign by this newspaper calling for it to be closed. The gap allows regulated firms to offer risky, unregulated deals that are typically inappropriate for most people. 

The quirk in the regulation came into the spotlight following the high-profile collapse in 2019 of London Capital & Finance, a regulated firm that had sold unregulated “mini-bond” investments worth £236m to around 12,000 investors. Savers have only had a small fraction of their money returned so far via compensation payouts.

The Treasury said the current system, which only requires an unregulated firm to be granted approval from an authorised provider before promoting high-risk bets, was no longer a “sufficient safeguard”. 

City Minister John Glen said: “It’s important that people can understand the financial products they see promoted. If adverts by unauthorised firms are misleading, or don’t fully outline the risks, then people can end up losing money.”

Newly proposed rule changes would force firms to obtain specific consent from the regulator before working with unauthorised entities.  

The regime change would also tighten the screws on the promotion of digital currencies and crypto assets such as Bitcoin, which have boomed in popularity in recent years and are often promoted via social media. 

Around 2.6 million people have now purchased some form of crypto asset, according to FCA research. More than a third who did so said they were encouraged to via an advert, with 83pc of buyers making purchases via exchanges based outside of Britain. 

Laura Suter of investment firm AJ Bell said the FCA would have its job cut out policing the “wild west of the crypto market”, which she said was populated by scammers and fraudsters as well as legitimate businesses.

“With so much of the advertising and false claims made online, on social media and directly to retail investors, weeding out the rogues in the market is a job of gargantuan proportions,” she said. 

The regulator has been working with the Government and the Bank of England to understand and address the harms associated with crypto assets, which are known to be highly volatile and high risk, although it declined to comment on the changes the Government has proposed. 

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