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Ordinary investors seeking to escape rock-bottom interest rates could be targeted by a glut of advertising for risky mini-bonds ahead of a marketing ban, experts have warned.
The Financial Conduct Authority (FCA), the City watchdog, announced that the promotion of the high-risk, high-return investments to retail investors will be outlawed from January.
The so-called mini-bonds are issued by companies in need of capital and are meant to be targeted at “sophisticated” or highly wealthy investors. The climate of low savings rates have made them attractive to the wider population, but many firms have taken advantage and marketed directly to investors with little experience.
Although the ban has been widely welcomed, investment industry experts and angry investors in the now-defunct London Capital and Finance (LCF) mini-bond have accused the FCA of taking too long to crack down on the industry.
Scott Gallacher, a financial adviser at Rowley Turton, said mini-bonds had long been a “disaster waiting to happen”.
David Turnball, a 75-year-old who lost his £45,000 pension in the LCF scheme, questioned why the watchdog had allowed them to operate for 14 months before acting.
The firm collected £237m from almost 12,000 investors before collapsing in January, leaving huge question marks over whether any money will be returned.
The new ban will come into force in January and will apply only to bonds where investors’ money is lent to a third-party, often to buy or develop property, meaning the type offered by firms such as Mexican restaurant chain Chilango, dubbed the “burrito bond”, will be unaffected.
Laura Suter, of investment company AJ Bell, said that whenever there was a delay between the announcement of a ban and it coming into force there was an upturn in the soon-to-be-banned activity.
She said: “They have moved very quickly on this, without the usual consultation period. It is strange that they would do that and not bring it in immediately.”
Andrew Bailey, chief executive of the FCA, played down this risk, saying firms would need to comply with guidelines immediately. “If they were to try a flurry of [marketing] activity between now and the end of the year they would have to take that guidance into account," he said.
Many of the investors in the LCF scheme were shown adverts on social media sites such as Facebook suggesting that, had the ban been in place, they may never have invested.
The adverts offered potentially huge returns of up to 8pc, far higher than those offered on fixed-rate bonds by high street banks. The firm said the money would be used to invest in various property developments and other schemes.
Mr Turnball came across an advert for LCF on Facebook. Living on a caravan site on the Welsh coast he had little in the way of assets and hardly any experience of investing.
However, after seeing the advert, he was convinced to invest his cash after being told it would be placed in an Isa. He also said he was told his money would be covered by the compensation scheme.
“It wasn’t until they were shut down in January that I even realised I was in trouble,” he said.
“They were using words like bond and Isa and it just made me feel more comfortable. I hope to make it through to 100 so I wanted to make my money last a little bit longer, so the returns of 8pc were very attractive. Now I’m without two pennies to scratch together.”
Mike Leech, 64, from Warwickshire, invested £70,000 after seeing an advert on Facebook. “If you look at inflation and what you get from the banks you are actually losing money,” he said.
“I saw 8pc returns with all the asset-backed protection that goes with it. I know now it was all garbage but I, along with many others, fell for it. I would never touch mini-bonds like this again.”
Ian Davis, 58, from Fife in Scotland, invested a large amount in LCF bonds. He had inherited the money several years before and had invested it in several bonds, growing in size substantially. “I have saved all my life and that was supposed to be my pension fund,” he said.
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Ms Suter said: “I think this ban could have prevented LCF from happening. If they hadn’t been able to advertise mini-bonds to the mass market it would have been prevented or at least the scale of it would have been vastly restricted.”
However, Mr Gallacher said the regulator had been too slow to act and questioned how the ban could be enforced against those operating outside existing rules.
He said: “Mini-bonds appear specifically designed to appeal to the general public who want higher returns but generally with less risk.
“However, the risk on particular mini-bonds is very hard to quantify and with little or no regulatory protection so I’d suggest people avoid them entirely for this reason alone.”
The FCA said it has a “specialist team” looking at firms involved in mini-bonds. In addition to the ban, a spokesman said it had already taken steps to prevent some firms from marketing and had placed 443 warnings on its website this year alone.
Mr Bailey pointed to 80 investigations carried out this year into regulated activities being carried out without authorisation and a further 200 reviews into marketing material appearing to breach the rules.
He said: "The rise of the mini-bond market has been quite pronounced. And of course, yes, none of us want to see people lose money.”
He added that a ban on marketing was the only avenue open to the regulator: "It’s the only lever [available] to us in the world of mini-bonds because we do not regulate the bonds themselves so the lever has to be via the promotions.”
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