The FCA has indefinitely extended the temporary ban on the mass marketing of minibond investments. Following a review into the higher risk investment instruments which are used by start-ups and growing companies to raise funds through debt as an alternative to equity-based raises, the Financial Conduct Authority decided to extend the marketing ban first implemented in January. Minibond investments will now only be marketable to ‘sophisticated’ and ‘high net worth’ investors.
Minibonds have been popular with retail investors, with as many as 63,000 savers investing £1.4 billion in the securities. However, after the high profile failure of a number of minibond investments, concerns were raised that the securities are too high risk for smaller, inexperienced investors.
They will now only be allowed to be marketed to investors categorised as experienced and able to understand the risks involved, as well as being able to absorb losses if things don’t go to plan. The ban will also be extended to some more illiquid bonds listed on exchanges.
In January of last year, London Capital and Finance went into administration after the company had raised almost £240 million from 11,600 small investors. Many of those investors were elderly and now face heavy losses. The FCA concluded that the level of risk involved was neither fully appreciated nor adequately impressed upon investors.
The fallout from the scandal provoked the temporary January ban on the marketing of minibonds, which has now been extended indefinitely. Blackmore Bond and Basset & Gold, two more minibond companies, also failed in April of this year.
The FCA estimates that as much as £1.4 billion of retail investor cash is still in invested in illiquid minibond and preference share securities. That sum is spread between around 63,500 bond holders with average investments of around £22,000 currently at risk.
Minibonds are unregulated bonds issued by smaller companies, which means they are typically illiquid. They are attractive to investors because they usually offer attractive interest rates but, as debt funding young companies, they are also inherently risky investments.
More experienced investors are deemed to be able to appreciate the level of risk they are taking on with minibond investments. They also tend to understand that their money has to be split between riskier investments to spread risk, with the higher returns realised through those that are successful compensating for those that are not.
Smaller, less experienced investors more commonly put all their eggs in one or a small number of baskets, when it comes to riskier options such as minibonds. They are also more vulnerable to less scrupulous sales representatives pushing investments marketed to the general public. This means they can be badly burnt when things go wrong and why the FCA has now restricted the marketing of minibonds to more experienced investors.
This article is for information purposes only.
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