The City watchdog has announced plans to permanently ban the marketing of risky “mini-bonds” to DIY investors.
Speculative mini-bonds have been under the spotlight since investors lost millions of pounds after pouring cash into these high-risk, unregulated schemes.
Mini-bonds are sold when a businesses is looking to borrow cash from investors. However, the nature of the investment means they are virtually impossible to trade meaning savers cannot sell out like with shares. There have been several cases where bond providers have collapsed leaving investors with large losses.
The regulator, the Financial Conduct Authority, temporarily banned the marketing of mini-bonds to DIY investors because they were too risky in January and now wants to make that move permanent.
The regulator said there were concerns that customers did not understand the risks involved and could not afford the potential losses.
London Capital & Finance was the most high-profile failure of a mini-bond provider. Almost 12,000 people invested a total of £236m into the firm, which then collapsed in January 2019.
Investors will receive back a fraction of what they put into the company’s mini-bonds. Given the unregulated nature of the bonds, customers had virtually no protection from industry compensation schemes.
The FCA was heavily criticised for its role in the collapse of LCF and is now subject to an independent review into its actions.
Under the new rules announced today, mini-bonds can only be marketed to people who are “sophisticated investors” or high-net worth individuals.
Sheldon Mills, of the FCA, said: “We know that investing in these types of products can lead to unexpected and significant losses for investors.
“We have already taken a wide range of action in order to protect consumers and by making the ban permanent we aim to prevent people investing in complex, high-risk products which are often designed to be hard to understand.”
Mr Mills said that since the temporary marketing ban was introduced, some firms had switched from offering mini-bonds to other risky bonds. This has prompted the regulator to widen the scope of the ban to include other illiquid bonds which are traded infrequently.