FCA proposes permanent ban on marketing mini bonds

In summary, the Consultation Paper proposes to:

1. Extend the current ban on the marketing of speculative illiquid securities (“SISs”) (including speculative mini-bonds); and
2. Amend and clarify the temporary product intervention rules relating to SISs, including by expanding its scope to include certain types of listed bonds.

Permanent ban on marketing SISs

As mentioned in our article last year on the topic, the temporary ban on SISs was set to expire on 31 December 2020. The FCA has now proposes to make these rules permanent so that, in short any financial promotions in relation to a SIS:

• directed at retail clients must be restricted to sophisticated or certified high net worth investors;
• must also include certain disclosures, such as a risk warning, details of associated costs and charges, and the date on which the promotion was approved.

The rationale behind the permanent ban is based on academic research, in particular, a research note released by the FCA on 18 June 2020, which ran experiments relating to the effect of risk warnings on financial promotions for high risk investments. This research note set out that the use of the new standardised risk warning made it easier for participants to identify that they could “lose all” their money invested, and therefore the FCA concludes that it should be kept permanently.

Definition of a SIS

Subject to certain exclusions, a SIS is defined as:

1. a debenture or preference share, which: <br/>has a denomination or minimum investment of £100,000 or less; and<br/>has been issued, or is to be issued, in circumstances where the issuer or a member of the issuer’s group uses, will use or purports to use some or all of the proceeds of the issue directly or indirectly for one or more of the following: <br/>the provision of loans or finance to any person other than a member of the issuer’s group;<br/>buying or acquiring investments (whether they are to be held directly or indirectly);<br/>buying property or an interest in property (whether it is to be held directly or indirectly); or<br/>paying for or funding the construction of property;<br/>
2. a debenture which satisfies all the criteria in (1), which: <br/>is: <br/>admitted to official listing on an exchange in the United Kingdom or an EEA State; and<br/>is not regularly traded on or under the rules of such an exchange; or<br/> <br/>is: <br/>a newly issued debenture which can be reasonably expected to be admitted to official listing on an exchange in the United Kingdom or an EEA State; and<br/>can be reasonably expected to be regularly traded on or under the rules of such an exchange when it begins to be traded.<br/>

The FCA has also amended the current rules relating to SISs, as summarised below:

1. Expanding the scope to include certain listed bonds – as mentioned above in the definition of a SIS, the scope of the rules is being expanded to include certain listed bonds which are not regularly traded;
2. Excluding special purpose vehicle (“SPV”) structures – the FCA has proposed excluding SPVs set up to facilitate investment in a single company by using the SPV to hold investors’ funds, provided the investment made in the company is to fund its commercial or industrial activity;
3. Clarifying the Rules – the FCA intends to clarify the TPI rules, of particular interest should be the following: <br/>enabling issuances that fund single property purchases or purchases of multiple properties within a single development that are let for affordable or social housing in the UK (and do not represent ‘commercial rent’);<br/>clarifying that “income generating property” for the purposes of the single-property holding vehicle exemption must already be in existence and that it does not apply to property development;<br/>confirming that where a security meets the definition of an SIS that it is excluded from the definition of a non-readily realisable security; and<br/>clarifying that a general industrial or commercial purpose does not include buying or developing a property or buying an investment which is held for the purposes of renting, hiring, or leasing it to a third party; and
4. Clarifying how promotions are restricted for SISs and non-mainstream pooled investments (“NMPIs”) – this clarification would change the rules for SISs and NMPIs to make clear the order in which investors are vetted and can access financial promotions should occur. In this respect, the FCA intends for the steps which should be taken should be as follows: <br/>investors are assessed to determine whether they fall within an exemption (e.g. as a certified high net worth individual);<br/>investors are subject to a preliminary suitability assessment where required; and<br/>finally, the financial promotion can be made or directed to the eligible person.

Next steps

The FCA is looking for responses to the Consultation Paper by 1 October 2020, and it is looking to publish the final rules in a Policy Statement before the end of 2020, with the new permanent TPI rules coming into effect on 1 January 2021.