This article was written by Anna Davis and Ciara Davies.
As outlined in our blog post from 2 January 2020, the FCA’s temporary product intervention aimed to prevent consumer harm by banning the mass-market promotion of high risk speculative mini-bonds to retail customers. At that time the focus was on unlisted bonds and preference shares. However the FCA has seen the harm caused by mini-bonds start to migrate to some listed bonds, and so it is proposing to bring listed bonds, which have similar features to SISs and are not regularly traded, within the ban also.
Overall the aim of the SIS ban was to:
- prevent the mass-marketing to retail investors of certain types of speculative investment which the FCA identified as not generally suitable for them
- improve the disclosure of key risks and costs to the high net worth and sophisticated retail investors who can still receive promotions for these types of investment.
The FCA is planning to make the prohibition (which applies where the issuer uses the proceeds to lend money to third parties, buy or acquire investments, or buy or fund the construction of property) permanent with a small number of changes which are designed to:
- provide an additional exemption for SPV structures for single-company investments (as the FCA considers this is consistent with the original intention of the prohibition and such structures remain subject to the rules relating to NRRS)
- ensure the exemptions provided for in the temporary rules operate as intended
- clarify certain other aspects of the temporary rules
- clarify how promotions should be made to, or directed at, investors under the rules, and the rules that apply to the marketing of NMPIs in COBS 4.12.
The FCA also plans to expand the scope of the current rules so that they apply to any listed bonds with similar features to SISs which are not regularly traded. Since the temporary ban was introduced the FCA has become aware of over 40 UK-based issuers that have speculative bonds admitted to listing or trading on exchanges, primarily elsewhere in the EEA. Often these are the same companies that have previously issued speculative debentures that were not admitted to listing or trading. These bonds are similarly directed to UK retail investors, are similarly complex and pose similar (or in some cases, greater) risks. Issuers have also encouraged holders of previously unlisted SISs to roll over into a listed security that serves to re-finance the same venture and avoids the temporary rules restricting their marketing. As such, the FCA proposes to extend the ban to bonds admitted to listing or trading where the bonds have the same speculative features as SISs and are not regularly traded, to prevent regulatory arbitrage.
There will remain a variety of exemptions to the ban, including for listed bonds which are regularly traded, companies which raise funds for their own commercial or industrial activities, and products which fund a single UK income-generating property investment.
The new FCA rules will ensure that the speculative investments covered by the rules can only be promoted to retail investors that firms know are sophisticated or high net worth. Firms will also need to carry out a preliminary assessment of the suitability of a security for any certified high net worth or self-certified sophisticated investor.
The FCA is consulting on these measures and is asking for responses by 1 October 2020. Final rules should be published before the end of the year and will come into force on 1 January 2021.
The consultations forms only part of the FCA’s ongoing work on high-risk investments (“HRIs”). When the temporary ban was published in November 2019, the FCA said it would consider additional proposals to strengthen its financial promotions regime for HRIs, and it now plans to engage more widely on this issue and publish a discussion paper inviting further views. It has also consulted on proposals to undertake a consumer harm campaign to warn consumers of the dangers of HRIs. It is clear that making the SIS ban permanent is not the end of the FCA’s work in this area.