Marketing of speculative investments known as mini-bonds to ordinary savers is to be banned by the City watchdog after a string of scandals that have caused hundreds of millions of pounds in losses.
Companies have frequently marketed mini-bonds offering returns far in excess of those available on more mainstream investments. But the Financial Conduct Authority (FCA) said on Tuesday that from January they cannot be advertised to retail investors.
The ban will initially last for a year and comes after the FCA has been heavily criticised for failing to stop scandals such as London Capital and Finance (LCF) which saw 12,000 people lose money. LCF is now under investigation after it advertised its products as low-risk ISAs but in fact they were risky investments.
Last month, two property development companies started by Grand Designs presenter Kevin McCloud told investors that they would lose their cash. HAB Land Finance and its owner HAB Land had offered the potential of 8 per cent returns but eventually called in liquidators after experiencing financial problems.
The term mini-bond refers to a range of investments that allow people to earn a return by funding a company’s growth. Investors can lose all of their money if the company goes bust.
The ban announced today will only apply to more complex and opaque arrangements, where funds raised are lent to a third party, used to invest in other companies or to purchase or develop properties, the FCA said.
Companies which use mini-bonds to raise funds for their own activities or to fund a single UK property investment, will still be able to market to retail investors.
“Sophisticated” investors who have at least £250,000 in assets and earn over £100,000 per year can still invest in mini-bonds, as long as they declare that they understand the risks.
The FCA warned that there was evidence of a growing incidence of promotions which are frauds or scams and involve no attempt to meet financial promotion rules.
These are already illegal so will not be affected by the advertising ban.
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.”
Andrew Bailey, chief executive of the FCA 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.”