Britain’s financial regulator has admitted its own ban on the marketing of mini-bonds to retail investors could harm existing bond holders.
The Financial Conduct Authority (FCA) has issued a ban on the marketing of the high risk investment products called mini-bonds to retail investors after 12,000 private investors lost a total of £236 million in a scheme which had been marketed as a low risk ISA by London Capital and Finance.
Now the regulator is warning that an unintentional side effect of the ban is that it could ‘negatively impact’ existing bondholders.
A spokesman said: “Bondholders could experience harm where market disruption from the measures exacerbates poor performance of existing products and the financial position of issuers that are already struggling, especially if an issuer is reliant on being able to raise further capital from retail investors with new issues and this becomes difficult.”
FCA chief executive Andrew Bailey said the regulator had no estimates of the number of investors potentially affected, but added: “We are in touch with firms involved, so where the firms are regulated entities we would expect to discuss this with them.”
The average amount invested per person is said to be more than £25,000.
A mini-bond could be described as a kind of IOU issued by a scheme organiser to an investor.
The investor is promised a fixed rate of interest over a set period of time and at the end of that period the investor’s money is supposed to be repaid.
But the investments are high risk.
If they pay off the return is many times more than could be achieved in a normal ‘safe’ investment, but if the scheme fails the investor could end up with nothing.
Personal finance expert Moira O’Neill says it is easy to understand the attraction of a mini-bond which could offer as much as an 8% return on your money when the best you can expect if your money is locked away for four years in a ‘safe’ investment is a quarter of that.
But she adds: “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.”