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The FCA bans the promotion of mini-bonds to retail consumers: what does this mean and what does it say about FCA thinking?

The FCA bans the promotion of mini-bonds to retail consumers: what does this mean and what does it say about FCA thinking?
  • United Kingdom
  • Financial services and markets regulation


On 26 November 2019 the FCA announced that it was using its product intervention powers to ban the promotion of so-called “speculative mini bonds” to retail consumers. The ban will come into force on 1 January and will last for 12 months, though it is likely that the FCA will introduce permanent measures once the temporary ban lapses. Firms offering, or providing authorisation to another firm offering these products will have to take immediate action.

However, other financial institutions should take note of the move and the guidance on Approving financial promotions that accompanied the suspension order. The note explains the FCA’s thinking begin the recent ban and offers a useful insight into how new financial products might be treated by the regulator. We go into more detail about the potential implications below.

Why were mini bonds targeted?

The term mini bond covers a wide range of investments. The FCA’s retail consumer ban specifically targets the promotion of unlisted debentures and preference shares the proceeds raised by the sale of which are: 

  • lent to third parties,
  • used to finance the construction and development of property, or
  • used to acquire other investments.

While many of these arrangements are entirely legitimate, according to the FCA a number of bad actors targeted illiquid, speculative assets, while offering high fixed rates of interest (of 8% or more) to investors that committed to invest for a fixed period. With minimum durations of five years or more, a number of baked-in fees and limited scope to sell or transfer investments during that time, the potential for significant losses was accordingly high. This issue was compounded by the fact that many of these products are issued by unauthorised figures and are generally ineligible for the Financial Service Compensation Scheme. The regulator estimates that around 11,000 consumers are invested in these products and with an estimated average commitment of £25,000, the impact of these schemes could be considerable.

The FCA has been under pressure to take action for a while, particularly once high profile scandals – like the collapse of former Grand Designs presenter Kevin McCloud's property bond – began hitting headlines. The temporary intervention order acknowledged that inaction risked “significant consumer harm”, explaining that the 1 January deadline ensures that the ban will be firmly in place by April 2020, the point at which “many retail consumers will look for new ISAs or ISA-eligible investment opportunities”.

The regulator is expected to issue a consultation paper in the first half of 2020, setting out proposals for permanent measures which will replace the temporary ban. It is possible that these measures may go further than the suspension order, targeting these products directly rather than merely their promotion.

Are there any exceptions to the ban?

Yes, companies using unlisted securities to buy or construct property used for their own commercial purposes – i.e. not for sale or lease – will not be affected by the intervention order. There is also a limited exemption for investment vehicles that only invest in a single UK property, or properties within a single development in the UK.

What does this mean going forward?

While the unfolding mini-bonds saga offers a clear justification for the temporary ban, the simultaneous release of the FCA’s guidance on approving financial promotions indicates that it has wider concerns about the conduct of authorised entities issuing, and providing oversight for those issuing these promotions. The note draws attention to two issues in particular: “ensuring that a financial promotion is fair clear and not misleading” and ”ensuring that a promotion complies with the financial promotion rules”.

Fair clear and not misleading:

The FCA is keen to stress the importance of proper analysis and due diligence controls. This has been a major issue in the case of mini bonds, which were promoted aggressively on the merits of their high fixed interest returns, with little to no explanation of the accompanying risks. The guidance note highlights a number of key factors that firms need to verify before issuing (or approving the issuance of) future promotions:

  • the authenticity of the proposition and the figures associated with it
  • the commercial viability of the product - a proper review should also account for its complexity (would a potential investor understand the product and could they reasonably determine its viability for themselves?)
  • whether the advertised headline rates are reasonable, or indeed achievable
  • that the fees, commissions and other changes within the investments structure are reasonable and proportionate
  • that the product is indeed eligible for any preferential tax treatments advertised
  • whether the regulated (or non-regulated) status of the product is clear to investors
  • the terms “guaranteed”, “protects” and “secure” are only used if they can be fairly applied and all the necessary supporting information is clearly and prominently included 

The FCA placed particular emphasis on this final point, noting that similar restrictions apply to the terms “secured” and “asset-backed”. Neither term should be used unless the target investor is likely to understand how such protection works and has the capacity to assess its deficiencies. In all cases both the presentation and substance of the promotion must be taken into account. In short: is the underlying product sound and is it fairly represented?

Complying with the financial promotion rules:

A number of other issues came up in the FCA’s review. Authorised entities are urged in particular to ensure that:

  • risk warning are afforded sufficient prominence
  • comparisons are meaningful and presented in a fair and balanced way (comparisons to banks savings were flagged as a particular concern)
  • the promotion contains sufficient information to enable prospective investors to make an informed decision
  • any use of social media follows best practice, as set out in the FCA guidance paper (FG 15/4)

Though it should be clear from the timing of the guidance note, the FCA took pains to stress that authorised firms have a duty of oversight and cannot simply rely on the assurances of third parties. Clearly, the factors outlined above do not cover all the conceivable requirements, but their inclusion suggests that these have been identified by the FCA as areas of concern. A high standard applies to all promotions, but authorised firms should take particular care when scrutinising the workings of unauthorised entities. Expect more from the regulator in the coming months.