A temporary ban on the sale of speculative illiquid securities to retail investors, introduced in January 2020, has been confirmed by the Financial Conduct Authority (FCA). From 1 January 2021 IFAs will only be allowed to sell speculative ‘mini bonds’ and other similar investments to sophisticated or high net worth investors who fully understand the risks of the products.
The FCA introduced the temporary ban without consultation last year as it was concerned that retail investors were being encourage to invest in high risk ISAs, lured by the prospect of high interest rates of up to 8%. Many retail investors were unaware of the highly speculative nature of the underlying investments, where the products raised money to lend to third parties or invest in other companies or properties.
The ban followed the collapse of mini-bond provider London Capital & Finance in 2019, which put the investments of thousands of investors at risk.
The permanent ban follows a consultation by the FCA and extends the restriction to the sale of listed bonds which are not regularly traded, and share similar features to speculative illiquid securities. The FCA found that admission to a listing alone was not enough to reduce the risk to investors.
Sheldon Mills, Interim Executive Director of Strategy and Competition at the FCA said: “We’ve today confirmed our proposals to make the speculative mini-bond ban permanent and extend its scope. These products are high risk and are often designed to be hard to understand. Consumers should always be wary of any investment promising high returns while downplaying risks.”
The FCA has also put online platforms on notice that they need to do more to stamp out fraud and misleading adverts. The regulators says these firms “bear clear legal liability for the financial promotions they highlight”.
James Burgoyne, Director – Claims & Technical, Brunel Professions says that IFAs should be wary of promoting high risk investments: “Advisers should make sure that their regulatory permissions and insurance cover permit them to advise on more speculative investments. With a ban on the sale of mini-bonds to retail investors, advisers active in the market must be very clear about how they identify ‘sophisticated investors’ and clearly document their decision-making processes.”
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