Bang goes the mini-bond

Well, nobody could really say they didn't see it coming, even if the announcement itself did come somewhat out of the blue.

From 1 January 2020, firms will not be allowed to market mini-bonds to retail investors. This is an all but immediate ban, without consultation, while the FCA consults on more permanent rules over the next 12 months.

The FCA rarely acts in such a decisive manner.

With a swift yank on the emergency cord, the mini-bond train for retail investors has been brought to a squealing halt.

Most changes to regulation are previewed to the market over many months, years in some cases, but the FCA has clearly been spooked by high-profile cases such as London Capital and Finance where it has been accused of sleeping on watch. The upcoming ISA season provides another incentive for it to act quickly.

With a General Election just round the corner and the prospect of re-energised or new paymasters being in post, Andrew Bailey, Chief Executive of the FCA, may have seen it as an issue of job security.

Will it make any difference?

Well, yes, it should. A ban is, after all, a ban and it sends a very clear signal out to investors of every type that these investments need to be considered very carefully indeed. The FCA talks about there being a very real risk of consumer harm.

But will it make any difference to legitimate bond issuers?

Again, yes it should, but not in a way that might be deemed catastrophic to business models.

The important distinction in the FCA ruling is that speculative mini-bonds can still be promoted to high net worth or self-certified sophisticated investors.

Any bond issuer worth its salt, with a legitimate investment to promote, should have been gearing its marketing towards this section of the market in any event. Retail investors are expensive to attract relative to the average amount invested and can be difficult to manage too. Many issuers have already found that marketing money is best directed towards non-advised high net worth investors who can meet sensibly high minimum investment hurdles.

The adviser market has rarely been a happy hunting ground for alternative investments and this looks set to remain the case. Advisers with an eye on PROD and their Professional Indemnity premiums are only going to get firmer in their stance following the FCA's actions.

On a more positive note, the fact that the FCA is acting to make life harder for the fraudsters and scammers can only be a good thing. Freed of the negative contagion that surrounds many speculative, high yield investments, legitimate and appropriately targeted products should fare much better.

Watch what you say

We can safely say that the risk of being pulled up for an incorrect financial promotion is now heightened if you are promoting a mini-bond. A thorough re-read of the FCA's rules on financial promotions is in order, no matter how well thumbed your copy may be.

Of course, there must be clarity on the website, or any other form of promotion about who the product is suitable for, the risks and fees must be clearly laid out, and there needs to be the self-certification checks on the sign-up pages.

Maybe it's time to take your friends in Compliance out for a pre-Christmas drink and make sure you've got all bases covered!

Defining mini-bonds

Mini-bonds are loans to a company for a set period of time, in return for which the investor receives interest. All being well, the capital is returned at the end of the term. Mini-bonds differ from Retail Bonds in that they're not listed, so there is no ready exit before the end of the term. They're not regulated and not covered by the Financial Services Compensation Scheme.

The FCA's ban applies to bonds where the funds raised are used to lend to a third party, invest in other companies or purchase or develop properties.