The City watchdog is to ban the promotion of speculative mini-bonds to small investors after facing severe criticism over its handling of the collapse of London Capital & Finance.
The Financial Conduct Authority is using its intervention powers to introduce the ban on 1 January, when financial firms start encouraging people to put money into their individual savings accounts (Isas) before the end of the tax year. Many mini-bonds have Isa status.
The regulators said it was concerned that retail customers do not have the experience to evaluate the risks involved in complex mini-bond arrangements, where funds are used to invest in other companies or to buy and develop a string of properties.
The ban will not cover mini-bonds used by companies to raise money for their own activities or to fund a single UK property investment.
The intervention comes just months after the high-profile collapse of London Capital & Finance, which had been peddling bonds with table-topping returns of 6.5% to 8% a year. But the company fell into administration in March, owing £236m to more than 11,000 customers.
The FCA came under severe criticism by former LC&F customers and MPs for its handling of the collapse, after it emerged that the City regulator’s enforcement team was warned three years before about the company but failed to act.
It is now facing an independent inquiry into the scandal led by a leading high court judge Dame Elizabeth Gloster. LC&F is also under investigation by the Serious Fraud Office, which arrested and released five individuals as part of its probe.
LC&F was authorised by the FCA, but while the marketing of mini-bonds is covered by the watchdog, the sale of the products is unregulated.
FCA chief executive Andrew Bailey said: “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.
“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.
“In view of this risk, we have decided to complement our substantial existing actions with a further measure which will involve a ban on the promotion and mass marketing of speculative mini-bonds to retail consumers. We believe this will enable us to further consumer protection consistent with our regulatory principles and the FCA mission.”
Gareth Shaw, head of money at Which?, said: “Savers have been put at risk of losing their life savings by misleading adverts for high-risk investments for too long, so this strong action from the regulator banning the mass marketing of these products is positive.
“Until it comes into effect, savers should approach these adverts with caution, as if the returns look too good to be true, they probably are. Any adverts promoting high-risk investments with guaranteed returns after the ban is in place should be avoided, as these will almost certainly be scams. “The FCA must ensure all financial firms promoting these products comply with the ban, and the next government must put more responsibility on online platforms to prevent fraudulent adverts appearing on their sites.”