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The UK’s top financial watchdog has moved to ban the advertising of high-risk ‘mini-bond’ investments online after a series of collapses that have left investors nursing millions in losses.
The Financial Conduct Authority on Tuesday announced it was banning the mass marketing of mini-bonds to ordinary investors. The ban will come into force from January and will remain in place for at least 12 months while the FCA draws up permanent rules for the new sector.
Mini-bonds are high-interest fixed-term debt products — for example, a bond issuing 7% interest over five years. Bonds were traditionally only marketed to sophisticated public market investors but the internet, the low interest rate environment, and pension freedoms have led to a boom in these products being marketing to regular individuals.
While these investments often offer an eye-catching rate of return, the companies behind them often run a high risk of going bust and leaving investors with nothing. An estimated £1bn has been lost from mini-bond firms going under so far this year, according to BondReview.co.uk, a blog that follows the space. Many companies also downplay or hide the risks associated with the investment, often by claiming its falsely ISA eligible.
Yahoo Finance UK has repeatedly highlighted the dangers of mini-bonds, which are unregulated, including highlighting how the products were being inappropriately marketed on Google and telling the story of a retired doctor who lost £50,000 investing in a collapsed mini-bond scheme advertised by a Liberal Democrat Lord.
The FCA said it had taken significant action over the last year, including investigating over 200 cases, but decided to introduce the ban after failing to stem the tide of risky investments.
“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,” FCA chief executive Andrew Bailey said in a statement.
Alongside the ban, the FCA will launch an advertising campaign aimed at educating investors on the risks associated with mini-bonds and other high-risks investments.
Bailey also called on internet companies to do more to crackdown on inappropriate ads, specifically calling out Google (GOOGL).
“I also want more action from Google — I think they can play a big role because it is the major channel now and we find these things just popping up all the time,” he told the BBC’s Radio 4 Today programme.
Bailey previously told Yahoo Finance UK it had “discussed the issues and particular instances with Google” but the response had not been “adequate.”
Laura Suter, personal finance analyst at investment platform AJ Bell, said: “Many likened their returns to cash or cash-plus, meaning that people who have grown weary of their cash savings earning next to nothing were lured into investing in the hope of getting a return on their money.
“But the fact is that most of these products aren’t suitable for the average person on the street.”
The term mini-bond can cover a range of investments and the FCA said its new ban would apply only to investments where money is raised to invest in property, companies, or to be lent.
These types of investments will still be legal and companies offering them will still be able to market them to sophisticated investors and high-net worth individuals.
The FCA’s actions are likely to draw criticism from investors who have already lost money investing in mini-bonds. The FCA has been repeatedly criticised for the slow pace of its reaction to the mini-bond crisis.
The new ban also excludes high-interest bonds issued by companies to fund their own business activities. These investments are also high-risk. Mexican restaurant chain Chilango raised £3.7m to fund expansion from 800 investors through a ‘burrito bond’ but the chain has recently called in restructuring specialists, leading to fears that investors could lose out.
The highest profile scandal in the mini-bond sector has been London Capital & Finance (LC&F), which raised over £236m ($287m) selling what many investors believed were fixed rate ISAs before going bust at the start of the year. Part of LC&F’s business was regulated by the FCA and victims believe they were misled.