Bonds Advice

New mini-bond promising 6.85pc launches despite collapse of London Capital & Finance

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A new mini-bond is being offered to investors amid calls for regulation of the troubled sector.

Ocea Group, a property developer, aims to raise up to £5m over five years through a mini-bond it expects to generate £25m in profits before returning capital to investors.

It will target an annual interest rate of 6.85pc, paid quarterly for each year of the life of the bond.

News of the bond issue comes days after Nicky Morgan MP, chair of the Treasury committee, questioned whether mini-bonds should be regulated by the City watchdog, the Financial Conduct Authority (FCA), after she called for a statutory investigation into the collapsed mini-bond of London Capital & Finance (LCF).

LCF sold mini-bonds promising returns of up to 11pc a year but fell apart in January after taking £236m from more than 11,500 savers.

Mrs Morgan said: "The FCA should set out whether firms are using their authorisation in a way that may be misleading to consumers, whether consumers need greater clarity on what such an authorisation does to protect them, and whether mini-bonds should now be regulated.

"The stories of those affected by the actions of LCF are distressing. The Government and the regulator must do all they can to prevent history from repeating itself."

The Serious Fraud Office, working in conjunction with the FCA, arrested four people in connection with LCF; they have been released pending further investigation. It said its inquiries were ongoing.

The FCA has now said it will investigate its own supervision of LCF and whether existing regulation adequately protects consumers. 

While the promotional material of mini-bonds is regulated by the FCA, the investments themselves are not.

Justine Curtis co-founded Ocea in 2015. The company converts commercial property into affordable homes, with the aim of addressing the "UK’s chronic housing shortage". She said "an independent security trustee" would protect bondholders in the "unlikely event" that the company defaulted.

With a team of 13, Ocea says it has already developed 19 projects worth more than £100m and provided "significant returns" for investors, including Aldermore and United Trust Bank.

The bonds can be held within an innovative finance Isa and are being sold on the online fundraising platform crowdfunds.net.

Ms Curtis said: "There have been many successful and high-profile mini-bonds over the years that have provided investors with high rates of return, but there are also a number that have failed, so it is very important that such investments provide the necessary investor protection."

Mini-bonds are not covered by the Financial Services Compensation Scheme, so there is no recourse for investors if the investment fails. Unlike conventional bonds, mini-bonds are not tradable on the open market, meaning investors cannot get their money back before maturity.

Mark Taber, a bond expert, said mini-bonds could never be described as safe. "In recent years the lack of regulation and low interest rate environment seem to have attracted a number of unscrupulous and dishonest players into the sector offering high headline rates," he said.

"References to ‘FCA authorisations’ and ‘security trustees’ are downright misleading as mini-bonds are unregulated investments and security trustees are passive and play no role in verifying or monitoring the real value of any security.

"Mini-bonds are completely unsuitable for the vast majority of investors and any attempt to promote them alongside savings accounts is grossly misleading."

He urged investors to stick with listed corporate bonds with recognised credit ratings, which could in many cases, he said, yield as much as "extremely high-risk and dangerous mini-bonds".

harry.brennan@telegraph.co.uk

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