The FCA dramatically announced yesterday that it would ban minibonds from being marketed for a period of 12 months, starting on 1 January.
In addition, all marketing material approved by an authorised firm will have to declare any commissions paid to third parties (something we’ve already seen from Blackmore and The Capital Bridge in recent months).
During the temporary 12 month ban, the FCA will consult on more permanent measures.
What exactly this is supposed to achieve is difficult to see, until you remember that a decision on who will replace Mark Carney as the UK’s top economic panjandrum is expected any day now. Former bookies’ favourite Andrew Bailey is badly in need of something that makes it look like he has a grip. This is something.
Many unregulated investments are already promoted under the pretense that its investors are all high-net-worth or sophisticated investors. The FCA’s supposed “ban” is not a ban as a ban is something that stops you doing what you want to do. Not an extra hoop to jump through that many are jumping through already.
To quote Simon Marshall who commented on IFA trade rag New Model Adviser:
I was contacted the other day by one of these outfits. The guy said to proceed I needed to select whether I was High Net Worth, Sophisticated or Retail. He then pointed out that pretty much everyone was in the sophisticated category, which shows that they are already looking at a workaround.
Other workarounds commonly employed by the dodgier end of the minibond market include getting investors to click-through a declaration that they are high net worth or sophisticated (which many will do so without reading in the same way they dismiss cookie notices) or electronically sign a document before receiving investment literature.
Investors are often told that this is “just some red tape”. And in the absence of the FCA running spot checks on unregulated investments and their introducers to check that they hold evidence that their investors actually are high-net-worth or sophisticated (not just declaring they are), as they are required to, it remains exactly that.
The FCA’s press release contains a list of actions it has taken to stop UK retail investors losing money in unsuitable unregulated investments:
Investigating more than 80 cases of regulated activities potentially being carried out without having the right FCA authorisation.
Assessing over 200 cases of financial promotions that appeared not to have complied with the FCA rules.
Seeking to persuade the internet service providers, particularly Google, to take more action, for instance to take down websites promptly where they are likely to involve a breach of law or regulations.
Contact with the Department of Culture, Media and Sport to urge inclusion of financial harm in the proposed legislation on online harms.
Developing tools for data analysis, for instance introducing web scraping to assist in the identification of mini-bond promotions.
If this list was meant to disabuse us of the impression that the FCA prefers visiting fellow bureaucrats in the Ministry of Fun or big companies like Google for tea and biscuits, instead of getting its hands dirty with those breaking the rules, it’s not succeeding.
Conspicuously absent from the list is any sign of action taken against the numerous unregulated schemes still currently standing to check that they have complied with their regulatory obligations to obtain evidence that all their investors are actually high net worth or sophisticated.
We should also bear in mind that the ban only affects companies using the mini-bond structure, and has no affect on other unregulated investment structures like “invest in a hotel room with 8%pa assured rent”.
Bailey stated that the timing of the announcement was with a view to “ISA season” (when ISA managers of all varieties encourage investors to use their ISA allowance before the tax year rolls over in April).
The other interesting thing about the timing of the FCA’s announcement is that if any unregulated schemes collapse as a result of new investment drying up, it will be after a decision is made on the Bank of England appointment.