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Mini-Bonds = Risk

Peter Hemple reports

The Financial Conduct Authority (FCA) is the conduct regulator for 59,000 financial services firms and financial markets in the UK and the prudential regulator for over 18,000 of those firms.

However, on 25 July it was announced that an independent investigation is taking place into the relevant events relating to the FCA’s regulation of London Capital & Finance (LCF), between 1 April 2014 and 30 January 2019 following the firm’s failure.

Background to the LC&F review
The FCA acknowledges that LCF became a FCA-regulated entity on 7 June 2016. However, the regulation only extended to the promotion side of the business, not the actual products. It was not until 10 December 2018 that the FCA ordered LCF to stop promoting the bonds because it deemed the investments ineligible for ISAs, and on 13 December it froze the company’s assets because of “serious concerns about the way the firm was conducting business.”

The LCF products were structured as “mini-bonds” that carry zero protection from the Financial Services Compensation Scheme (FSCS), but which have in recent years been heavily promoted to investors.

On 30 January 2019, LCF entered administration following action by the FCA in December 2018 directing LCF to immediately withdraw its promotional material on the basis that the way the firm was marketing its retail investment products was misleading, not fair and unclear.

LCF issued mini-bonds to 11,625 investors, with a value of just over £237m. The FCA’s view is that issuing mini-bonds is not normally a regulated activity so that firms issuing mini-bonds do not usually need to be authorised by the FCA. However, when an authorised firm approves a promotion for mini-bonds, they must ensure that it is in line with FCA rules that the financial promotion is fair, clear and not misleading. This means, for example, that risks are required to be appropriately communicated.

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