Property developers will longer be able to finance themselves by issuing mini bonds following this morning’s announcement by the Financial Conduct Authority (FCA) that it has banned their sale for a year while it consults on more permanent measures.
Mini bonds are ‘IOUs’ that companies issue in return for a fixed annual return, usually at attractive net interest rates of up to 15% per annum.
A burgeoning market in this type of risky and unregulated financial instrument has grown up in recent years, particularly via online crowd-funding platforms and ‘specialist’ property investment sites, because they face looser regulation than other types of investment.
For the same reason the FCA says this type of mini bond is also increased used as a front for scams and frauds.
Whether legitimate or not, they offer small investors the opportunity to buy into property companies indirectly rather than investing in specific properties or developments, usually through a tax-free wrapper such as an ISA. The ban covers the sales of these bonds to the public via ‘retail’ websites and investment companies; high net worth and more experienced will still be able to invest in them.
Mini bonds have been a particularly popular way for developers to raise funds to purchase and develop properties without having to be too specific about what investors are putting their cash into.
The FCA refers to these kinds of mini-bonds as ‘the more complex and opaque investments’ although they can still be issued for investment in individual properties.
Andrew Bailey, Chief Executive of the FCA (left) said: “We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risks involved.
“This risk is heightened by the arrival of the ISA season at the end of the tax year, since it is quite common for mini-bonds to have ISA status, or to claim such even though they do not have the status.”
“Although there are currently restrictions on the marketing of unlisted mini-bonds to retail customers, the FCA has increasingly been taking Enforcement action and finding that mini-bonds are being sold to retail investors for whom they are wholly unsuitable,” says Sushil Kuner, principal associate at law firm Gowling WLG.
“Tightening up of the FCA’s financial promotion rules in this area and the FCA’s commitment to launch a consumer awareness campaign around the risks for investors should help prevent mini-bonds from being sold to lower income savers and investors.”
The ban is to start on 1st January 2020. Read more about FCA regulations.