Britain’s financial regulator has banned the marketing of mini bonds to ordinary savers from January.
The Financial Conduct Authority (FCA) has banned the marketing of the high-risk investments which have seen thousands of people losing their money. The ban is for an initial 12 months while the watchdog considers permanent rules.
It applies to arrangements were funds raised by a mini bond are used to lend to a third party, invest in other companies or buy properties.
The FCA can only ban the marketing of the products, not their sale. They can still be marketed to ‘sophisticated investors’ who could declare that they understand the risks, or high net worth individuals with an income of more than £100,000 or assets of £¼ million or more.
What are mini bonds?
A mini-bond is described by the FCA as a kind of IOU issued by a company to an investor. In return the investor receives a fixed rate of interest over a set period of time.
At the end of that period the investor’s money is supposed to be repaid.
But the return on the investment depends entirely on the success and proper running of the business invested in. If it fails, the investor could end up with nothing.
One of the worst cases of mini bond failure was the £236 million lost by the 12,000 investors in a scheme which was marketed as a fixed rate ISA by London Capital and Finance.
Though it was advertised as a low-risk ISA it didn’t actually qualify to be an ISA at all and when it failed all 12,000 investors lost their money.
Claims are now being considered by the Financial Services Compensation Scheme.
One of the victims of the LCF crash was Amanda Cunningham who had been saving for years to give her autistic son ‘the life he should have had’.
She said: “I can’t afford to keep him forever and if anything happens to me that money was there for his future.
“That money to me is lost. I can never see me being able to save that amount of money in my lifetime again.
“I won’t be able to afford the extra help for my son. If anything happens to me and he has to go into assisted living then there’s no money for that now.
Investors who put cash into two businesses started by TV’s Grand Designs presenter Kevin McCloud have just been warned they may have lost their money too.
The schemes were marketed by HAB Land Finance and its parent company HAB Land.
They were pitched as mini bonds with 8% returns, but the firms have now gone into liquidation after a period of ‘difficult trading’.
FCA chief executive Andrew Bailey said: “This is the sixth piece of intervention we’re doing this year. We are also in close discussions with the internet service companies, because we want to limit the marketing of these things through that channel.
“We think it is inappropriate to market the complex versions of these instruments to retail customers, not to the high net-worth individuals, but to retail customers.
“We want to see more action. I’m keen that the legislation that the government proposed on online harms – which I know addresses really important issues which are outside our world – can also include financial harms.
“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.”
Personal finance expert Moira O’Neill said it was easy to understand the attraction of mini-bonds, saying: “Savers are now in the unfortunate position where even if they can lock their money away for four years, they will only get 2%. So the prospect of lending money to a company via a mini-bond for a similar period and getting four times that amount, or more, is tempting.
“But mini-bonds are paying higher rates than bank accounts precisely because they do contain an element of risk – essentially the risk that the company could go out of business and it’s often too difficult for customers to assess if are they paying enough to take that risk.”