The Financial Conduct Authority (FCA) recently announced plans to ban the marketing of mini-bonds to casual investors – a ban which is set to come into action from the 1st January 2020. The decision comes after the FCA were criticised for their handling of the London Capital & Finance scandal, which happened at the start of 2019.
The FCA have openly identified the issues associated with mini-bonds for small investors. They’re often complex, speculative arrangements, with the funds being used to buy properties, for example, or provide investment for other companies.
According to the regulator, these types of investment are usually too complicated for a casual retail investor to grasp, and as such, they may not be aware of the financial risk. Andrew Bailey, chief executive of the FCA, commented: “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.” (1)
Why was the decision made?
Earlier in the year, London Capital & Finance collapsed. It emerged that the firm had been selling risky mini-bonds, and when they went into administration, they owed £236 million to over 11,000 clients.
The FCA’s handling of the situation was heavily criticised by both the clients and the government, as it was found that the regulator had been aware of the issue three years previously, but hadn’t done anything about it.
As such, it was decided that the promotion of mini-bonds should be banned for a period of 12 months initially, as they’re considered too problematic for casual investors. Andrew Bailey also adds: “This 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.”
Mini-bonds – too good to be true?
On paper, there’s no denying that mini-bonds look attractive. Many offer high returns, not to mention additional perks. However, they’re not listed on the stock exchange, and usually they must be held in maturity before customers can reclaim their money. They’re also incredibly high risk.
For an experienced investor, mini-bonds can be a lucrative option. But for casual investors, they’re not ideal. In the past, customers have been sold mini-bonds, only to find that they haven’t produced the results they were hoping for. Indeed, it has all the marks of another big mis-selling scandal.
Things to keep in mind
With mini-bonds (or any investment) the key thing to remember is, if it looks too good to be true, it probably is. From January 1st, access to mini-bonds will be restricted, but until then, it’s advisable to proceed with caution.
If you suspect that you may have been mis-sold an investment bond in the past (for example, if your financial advisor failed to properly detail the risks involved) then you could be entitled to compensation. If this is the case, get in touch with Goodwin Barrett to find out how we can help - on 0808 163 1659 or email email@example.com .