In the latest twist to the mini-bond saga, the UK FCA or Financial Conduct Authority has issued a ban on the financial promotion of the asset class to retail investors.
A move which has left many in the markets scratching their heads, the regulator has said that the ban will remain in place for a minimum of twelve months while it works up new regulations for the product area.
The reason for the head-scratching is that while the FCA has historically not been responsible for regulating the issuance and sale of mini-bonds it has overseen their promotion or at least firms authorised and regulated by the FCA have had to approve/sign off on mini-bond financial promotions.
The FCA said:
The ban announced today will apply to more complex and opaque arrangements where the funds raised are used to lend to a third party, invest in other companies or purchase or develop properties. There are various exemptions including for listed mini-bonds, companies which raise funds for their own activities or to fund a single UK property investment.
You can read the release from the FCA on mini-bond marketing bans here.
It’s this type of regulatory grey area that allowed the London Capital and Finance scandal to develop in the first place.
- Readers will no doubt recall that LCF sold mini-bonds and investments linked to them, to more than 11,000 UK investors.
- The bonds were sold on the promise of high coupon payments and ISA eligibility
- A combination that many income hungry investors found too good to resist.
However, LCF turned out to be little, more than a glorified boiler room or Ponzi scheme with the company paying “commissions” of up to 25% of the money raised to marketing intermediaries.
LCF collapsed in December 2018 after the FCA ordered them to stop promoting the sale of mini-bonds and the SFO or Serious Fraud Office was called in to investigate.
The administrators of LCF, Smith and Williamson, have estimated that some £60.0 million was paid away in commission payments by LCF.
The SFO subsequently made four arrests in March this year and at the same time, the FCA launched an investigation to determine whether the existing regulatory arrangements around mini-bonds adequately protect retail investors.
The £230 million lost by investors in LCF suggests that it does not!
However, some commentators believe the losses run far deeper than those incurred by LCF investors, the Bond Review blog, for example, has calculated that as much as £1.0 billion pounds may have been lost to scammers in 2019 and many of these schemes have had a high yield component.
Investment and bond scammers and fraudsters are always with us I am afraid to say and there will always be unscrupulous elements who are prepared to look the other way for the payment of a” fat commission”
However, the question that must be asked and indeed answered frankly is how were LCF and its marketing partners able to exploit a regulatory loophole and ride roughshod over investor protections for so long? Under the very noses of the FCA and others without any action being taken, until it was too late?
Furthermore, what was the role of online advertising in the scandal? And how were, what were at best misleading, or perhaps even fraudulent advertisements, monitored by the technology companies that hosted or posted the ads?
According to the FT adviser magazine, there are moves afoot to try and make LCF investors eligible under the UK’s FSCS or Financial Services Compensation Scheme, which can provide financial redress to investors in regulated instruments. Of course, mini-bonds are not currently regulated or eligible for the scheme
Morally it might be right for the authorities to make recompense to LCF investors who some would argue they failed to protect.
But the bill for that compensation would fall on the shoulders of the regulated financial services businesses. Who, for the most part, comply with the regulations and conduct their business in a proper and professional manner. Reinforcing that view that the cost of doing the right thing is to pay for and clean up after other people’s “mistakes”.
Lessons need to be learnt here and regulatory loopholes closed quickly or in the worst case, such grey areas should be regularly and effectively policed.
Could the technology companies create a register of financial promotions or other adds that feature investment opportunities and share this information with the regulator, so that they can be alert to inappropriate or fraudulent activity in near real-time?
In the low-interest rate environment that we find ourselves in today investments that offer coupons or returns, well in excess of market benchmarks, will always look attractive to those seeking a yield pickup. But the old adage that “if it looks too good to be true then it probably is” should be our first line of defence.
The regulators clearly need to do more in these areas however retail traders also need to protect themselves by researching any investments thoroughly and questioning how an efficient marketplace would create such anomalies and in the third instance by seeking the appropriate advice from a regulated advisor.
Always use FCA regulated bond brokers when buying fixed-income investments.
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.