Following its announcement of a 12-month marketing ban on minibonds being marketed to the general public, the FCA has confirmed that it is well aware that this could lead to existing minibond investors losing their money.
In a 46-page document outlining the ban, more specifically outlining how the ban complies with UK anti-discrimination law, the FCA stated:
There may be indirect positive or negative effects on people with protected characteristics as they may be (i) existing investors in speculative illiquid securitiesor (ii) prospective investors. The former may experience harm if market disruption from our measures exacerbates poor performance of existing products and the financial position of issuers that are already struggling, especially if an issuer isreliant on being able to raise further capital from retail investors with new issues and this becomes more difficult.
(For those not au fait with UK anti-discrimination law, “people with protected characteristics” means people who belong to an ethnic group, people d’un certain age, people with disabilities, etc. As a regulatory body the FCA is required to show that it has thought about them before it takes action.)
Credit where credit’s due: The FCA is of course entirely right to acknowledge that the marketing ban may inhibit mini bond firms from sourcing new investment.
But if they were previously sourcing investment from investors that they did not know where sophisticated or high net worth – to whom the new ban does not apply – this should have been stopped long ago.
If an investment is reliant on new investment to stay afloat, then it is doomed to eventual failure. The only question is when it collapses and how much is lost.
If an investment has relied on nothing but new investment to stay afloat, and never had any source of external revenue sufficient to pay off its investors after all other costs, it is a Ponzi scheme.
Either way, the longer it goes on for, the more liabilities it accumulates.
Imagine I raised £10 million from investors promising to pay them 8% for 3 years, and I have no source of EBITDA to pay them their 8%. In order to pay them off it’s not enough to raise £12.4 million from a new load of investors. The new investors will want 9% per year for 3 years (I already tapped out the people willing to invest in my obscure company for 8%) so now I need to raise £15.7 million from the next load of investors to pay them off. And so on.
Liabilities increase exponentially – even before we consider additional investment on top of that needed to pay off existing investors.
The longer a doomed scheme is allowed to run on for, the more liabilities it accumulates, and the more damage it does when it collapses.
Whenever an unregulated scheme collapses, it is pretty common to see its organisers claiming “everything would have been fine if the regulator hadn’t shut us down”.
This is invariably bollocks, and a variant of victim-blaming. It constitutes an admission that the scheme relied on new investment to stay afloat. Which means it was doomed anyway. All the regulator did was limit the damage.
When unregulated investments are accumulating liabilities with no realistic plans to ever pay them off, prompt and decisive action is required by the regulator to limit the damage.
But I guess the FCA’s marketing ban is the next best thing.