The financial watchdog has used unusual powers to clamp down on marketing of so-called mini-bonds after a major scandal which could leave more than 11,000 small investors out of pocket.
The Financial Conduct Authority said that mass advertising of many such bonds will be banned under new rules, set to come into force at the beginning of next year.
To do so, the FCA was forced to activate an unusual clause which allows it to put a temporary ban in place without consulting the industry and customers first.
Mini-bonds are IOUs issued by a company to investors. The company will promise a fixed interest rate on the investor’s money, and will repay the loan at the end of a fixed period.
However, bondholders are not guaranteed their money back if the business collapses.
Around 11,500 bondholders have been waiting on news since January, when they were told they could lose their investment in London Capital & Finance as it went bust. They had £237 million tied up in LCF bonds.
The FCA has come under pressure since the collapse, and MPs in August called on the Government to give it more powers over parts of the financial sector.
The new ban will cover all unlisted bonds, which cannot be traded on the secondary market unlike their listed peers. Companies that use the funds for their own activities or to fund a single UK property investment will also be exempted.
It will also not cover high net worth or sophisticated investors.
The FCA said it had found “evidence of a growing incidence of promotions which are frauds or scams”. Some mini-bonds falsely claim they have individual savings account (ISA) status.
It investigated more than 80 cases over the last year of potentially unauthorised activities, and 200 promotions which may not follow FCA rules. The regulator has also been working with Google to remove adverts that may breach regulations.
“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,” said FCA chief executive Andrew Bailey.
He added: “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.”
The move was welcomed by Gareth Shaw, the head of money at Which?.
“Savers have been put at risk of losing their life savings by misleading adverts for high-risk investments for too long, so this strong action from the regulator banning the mass marketing of these products is positive,” he said.
“Until it comes into effect, savers should approach these adverts with caution, as if the returns look too good to be true, they probably are.”