Mini bonds under the microscope in the UK - Financial watchdog to ban marketing

Welcome to iCalculator's monthly Tax and Finance guide and news for November. On this month's news we take a look at:

1. Ban on promoting certain type of mini bonds by the Financial Conduct Authority (FCA).
2. Kind of bonds that will be affected by the ban.
3. Duration and type of bonds that are excluded from the ban.
4. The Ban will be on promoting the mini bonds to retail investors.
5. Exemption and exclusion of the bank.
6. The importance of the ban and type of investors exempted from the bank.
7. Is it too late to impose the ban?

Key points in Tax and Finance guide and news for November

1. The Ban will be applicable on the marketing of mini bonds for a year.
2. The listed mini bonds and certain other bonds are exempted from the bank.
3. Mini bonds can still be promoted to high net worth individuals and sophisticated investors.
4. The bonds are popular for high returns, but they involve high risk as well.
5. Lots of people, including pensioners have lost their money during this year, amounting to hundreds of million pounds.
6. It is too late for some investors, but potential investors can be saved from the frauds and scams by the steps taken by the FCA.

In a press release on 26 November 2019, the FCA has announced a restriction without consultation on the promotion and marketing of speculative mini bonds using its powers of product intervention. The ban is speculated to lay behind a financial scandal that left almost 11,600 people at risk of losing their hard earned money.

The Ban is supposed to last for 1 year, while FCA plans the implementation of rules of a perpetual nature. The ban will be applied to a certain type of mini bonds that has their range of investment options.

What is a mini bond and what are the exclusions?

Mini bonds can be defined as the loans to small businesses by investors that provide high returns but have high risk as well. They are kind of IOU issued by a business to retail investors. The investors are supposed to be repaid at the end of a pre selected period on a fixed rate of interest.

The ban will apply to the bonds that are more complex and do not have a transparent arrangements. The bond issuer companies use the invested funds to purchase or develop properties or lend the money to third parties or invest in other companies.

Exclusions: The listed mini bonds, and the companies that raise funds to invest in the single property in the UK or use the funds for their own activities. However, these activities should not include the activities listed above. These companies will be exempted from the ban.

The ban will not be applicable to so called " sophisticated investors". These are the firms or self certified individual who can demonstrate sufficient knowledge and experience of relevant investment by providing an attestation on understanding of risk involved.

Additionally, these funds can be promoted to high net worth investors who have an annual income of £100,000 or above or have net assets of £250,000, excluding the value of certain assets defined by the FCA. This exemption requires a declaration acknowledgement of the understanding of a high risk nature of the investment and privilege of seeking professional advice.

Why is the ban necessary?

The mini bonds are popular for high return, but have a high risk factor as well. As per reports, earlier this year, almost 12,000 people lost their money (in London capital and finance collapse) that sums up to a total of a whopping £236 million. This happened because they were marketed as a fixed rate individual savings account (ISA) even though they were not qualified as an ISA.

Moreover, according to FCA press release, there is evidence of growing incidences of frauds and scams, where the investors are promised high returns, but the issuing companies do not have any intent to meet the financial promotion rules.

Is it too late to ban the marketing of mini bonds??

The FCA has been criticized for late response to the London capital and finance scandal. People have already lost a lot of money that included first time investors and pensioners as well. However, the FCA has given a list of activities that it has undertaken over the last year. It includes the investigation of more than 80 cases of activities carried out without right FCA authorization and assessing over 200 cases of financial promotions that were not according to the FCA rules and regulations.