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Beginning on 1 January 2020 and running until 31 December 2020, the Financial Conduct Authority (FCA) has banned the marketing and sale of speculative mini-bonds to retail investors.
The FCA took the decision without prior consultation in response to their finding that at least 11,000 retail investors have invested in high-risk securities, often online, without adequate explanation of the risks and fees associated with such a decision.
This came to a head when many retail investors suffered terrible losses upon the failure of mini-bond issuer London Capital & Finance in 2019 who were found to have used false claims to market over £230m of mini-bonds to small investors.
Who are ‘retail investors’?
In practical terms, this is your average person. Not high net worth, not specifically trained or educated on the ins and outs of investments.
Legally, the Conduct of Business Sourcebook (COBS) provides definitions for the terms ‘retail client’, ‘retail customer’ and ‘retail investment customer’. All have the recurring theme that it is a person who is not a ‘professional’ and is acting outside of his or her trade, business or profession.
What is prohibited? And, more specifically, what products fall under the ban?
The ban restricts the marketing and sale of certain ‘speculative illiquid securities’. This means high risk, not easy to convert into cash financial instruments, and they are defined in COBS as “unlisted bonds and preference shares where the funds raised are used by the issuer to lend to a third party, invest in other companies, or purchase or develop property.”
The ban will not cover:
- listed mini-bonds;
- companies using unlisted securities for the purpose of buying or constructing property for their own commercial or industrial purpose; and
- investment vehicles only investing in property based in the UK.
Can I still market ‘speculative illiquid securities’ to sophisticated investors and high net worth individuals?
Yes, investments of this type may still be marketed to:
- Sophisticated investors; or
- High net worth individuals
WARNING: COBS 4.14 requires that sophisticated investors and high net worth individuals must be still be provided with specific risk warnings and disclosures in relation to the marketing of these products
If you are promoting financial products of any sort seeking advice to ensure compliance is recommended.
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