In January this year the FCA announced a temporary ban on the mass-marketing of speculative illiquid securities, including speculative mini-bonds, to retail investors. In June it then announced proposals to make the ban permanent with a number of changes and clarifications, and put these out for consultation.
Allia C&C recognises and shares the concerns of regulators on the failures of certain mini-bond issues, which have left investors with significant losses and damaged the reputation of the market as a source of attractive investment opportunities. We are therefore supportive of measures to restrict the sale of speculative and poorly-structured illiquid products to retail investors, though we believe this should be accompanied by moves to free up the listed public market to retail investors.
For all mini-bonds, we believe that:
- Greater emphasis should be placed on the quality of the credits being offered to retail investors
- The terms of should commit the issuer to adhering to a code of governance requiring a comparable level of disclosure and transparency as for listed bonds
- Where bonds are issued by funding vehicles making investments in companies that are not in the same group as the issuer, such vehicles should be governed by independent boards of directors to provide appropriate oversight and approval of transactions.
In addition, we have two significant concerns about the proposed amendments to the rules.
The ‘regular trading’ test
The FCA proposes to bring listed bonds into the scope of the ban if they are not ‘regularly traded’, yet most corporate bonds are not liquid. We consider that appropriateness is a more suitable test than levels of secondary trading. Furthermore, there is no objective definition of what constitutes ‘regular trading’, nor is frequency of trading relevant where the securities have a registered market maker.
The temporary ban covered all SPV structures where the SPV is not in the borrower’s group, and the FCA has now proposed that such structures be excluded where investors have a look-through exposure to the underlying borrower.
We consider this entirely appropriate. However the draft handbook text considers only ‘single-company holding vehicles’ – which in our experience are not common in market practice – and does not allow for SPVs which make multiple issues, each looking through to a different single underlying company on a limited recourse basis. This risks catching vehicles like Retail Charity Bonds PLC, which goes through a rigorous process of scrutiny, oversight and disclosure on underlying credits and has been designed to serve multiple borrowers in order to reduce the high costs of issuing on a regulated stock exchange.