City A.M. reports on a long-awaited move from the top regulator. Mini-bonds, which have seen too many investors lose a lot of money, are on the way out. Here’s a an excerpt from the report.
The Financial Conduct Authority (FCA) today set out to ban the mass marketing of speculative mini-bonds to ordinary investors.
The watchdog said the unregulated bonds could cause harm to amateurs, following a spate of investor losses.
“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,” FCA chief executive Andrew Bailey said.
“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.”
Mini-bonds have come under scrutiny since the collapse of London Capital & Finance, which saw thousands of ordinary investors lose the money they had invested.
The watchdog warned today that there was “a real risk of consumer harm” and said the number of frauds and scams was rising.
Its ban on mini-bond marketing will restrict firms to promoting unlisted speculative mini-bonds only to “sophisticated” or high net-worth investors.
Companies must also include risk warnings on any marketing material and reveal any costs, such as third party payments, that would be deducted from money raised from investors.
Here’s a reprise of our thoughts on the difference between mini-bonds and platform lending, offered here back in March.
What We Don’t Offer: Mini-Bonds Explained
Mini-bonds are loans or credit notes issued directly by private companies; they typically have no listing on any exchange. This means that if you invest in a mini-bond, you will not be able to get your capital back until the end of the term. Mini-bonds generally have a term of between three and five years. During the term, interest is paid to the bond holders at regular intervals, usually every three or six months. Mini-bonds cannot be included in an Individual Savings Account (ISA) and so tax will be payable on the interest received.
Mini-bonds are unregulated. For investors, this means that there is a high degree of risk. If the company goes bust, an administrator will be appointed and account will be taken of all the company’s debts; there will be an order of priority in which those debts are honoured.
If a bank has lent to the company, it is likely that the bank will have a debenture over the company’s assets and will be repaid first. There may be other lenders that also rank ahead of the mini-bond holders. In addition, mini-bond holders are not covered by the Financial Services Compensation Scheme as the mini-bond issue will almost certainly be unregulated. Mini-bonds are generally unsecured, non-convertible, and not tradable – they carry a high degree of risk.
What We DO Offer: Platform Loans
Money&Co.’s loans are platform loans, also known as peer-to-peer (P2P) business loans; the lender is making a loan to the borrower directly. As a P2P platform, Money&Co. is regulated by the Financial Conduct Authority. However, P2P loans are not covered by the Financial Services Compensation Scheme. Money&Co. always ensures that security is provided by its borrowers, taking a debenture over each company’s assets. If we are making a loan to a property company, we also take a first charge over the underlying property. Although capital loaned is at risk, we try to protect our lenders’ money as much as possible.
Mar-Key 6, rated A+, is 30 per cent filled at the time of writing. The yield on offer is 7 percent. Platform lending of the kind we facilitate here at Money&Co. can be a lucrative activity. The average yield achieved by our registered lenders over more than five years of loan facilitation on this platform is more than 8 per cent, before we deduct our one per cent charge. That return has handsomely outperformed retail price inflation, which has averaged around two per cent over this time.
Historical Performance And IFISA Process Guide
That figure is the result of over £19 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2019/20 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.