Mini-bond regulation to be reviewed after high-profile collapse

London Capital and Finance’s mini-bond went into administration at the start of the year, leaving 11,000 investors at risk of losing most of their money.

The Treasury will consider whether regulation for mini-bonds needs to be introduced, following the recent collapse of a mini-bond run by London Capital and Finance.

According to Reuters, the newswire service, junior finance minister John Glen said in a letter to lawmakers published yesterday: “The Treasury will consider whether the current regulatory regime for these securities issued by companies to consumers is appropriate.”

London Capital and Finance’s mini-bond promised returns of 6.5% to 8% a year. It went into administration at the end of January, leaving 11,000 investors at risk of losing most of their money, as only 20% is expected to be recovered. The mini-bond was available in the Ifisa wrapper.

A month earlier, the FCA told London Capital and Finance to withdraw its marketing material, which it said was “misleading”. The FCA has been told by the government to conduct an independent review of the way it handled the collapse, which will consider whether the regulator was too slow to act.

Over the past seven years or so, a swathe of companies has appealed directly to income-starved savers. Juicy yields, some of which have been in excess of 7%, have been on the table.

These bonds are targeted at small investors, and they can be bought from as little as £1,000. The far larger corporate bond market is dominated by institutions and comes with much higher minimum investment requirements.

But important distinctions need to be made here. Retail bonds are tradable on the secondary market (via the London Stock Exchange's Order Book for Retail Bonds, Orb), whereas mini-bonds must be held to maturity, even if the firm falls into difficulty.

In addition, mini-bonds typically raise smaller amounts and are, on the whole, riskier. Moreover, unlike retail bonds, there is no requirement on issuers of mini-bonds to produce financial statements.

Both retail bonds and mini-bonds can be held in the Innovative Finance Isas (Ifisas). In April, the FCA warned that mini-bonds and peer-to-peer loans held within the Isa wrapper are “high risk”.

The regulator has also moved to tighten the rules around Ifisas, restricting retail investors that are new to the sector to having just 10% of their investable assets in P2P loans. 

Investing in bonds requires just as much scrutiny of company balance sheets as investing in shares. Investors should look at cash flow, debts and profits, among other things.

Those who invest are essentially taking a view on whether the issuer will grow as hoped in order to pay the interest payments. If the issuer fails, investors face the prospect of losing all their capital as they join the queue of creditors.

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