Treasury proposes raising hoop for unregulated investments to jump through

On 20 July the Treasury proposed a tweak to the rules surrounding promotion of minibonds and other high-risk unregulated investments sold to the public.

Currently, any firm which is authorised by the FCA, no matter what they are authorised for, can approve a financial promotion for an investment security, giving the investment the green light to be sold to the public.

It would not be fair to say that to be able to flog an unregulated investment security to the public, you need to cut out two tokens from a packet of breakfast cereal and send it to the FCA. What you need to do is hire someone else who at some point has sent in their tokens, and get them to approve your adverts.

Under the Treasury’s proposal, firms would need specific consent from the FCA to be able to sign-off financial promotions for unauthorised firms.

The Treasury’s consultation however leaves two glaring holes in the UK regulatory framework unaddressed:

  • unauthorised firms would still be free to run around Facebook, Google Ads and other advertising platforms running financial promotions, in the absence of any attempt by the FCA to clamp down on them
  • unregulated firms whose investments are advertised by the public would still be able to use “smaller company” exemptions to avoid filing full accounts and disclosing their financial position to any meaningful extent.

The Treasury seems to think the problem of billions of pounds of UK investor wealth being destroyed by inappropriate unregulated investments can be solved by taking the hoop that unregulated investment opportunities have to jump through in order to be able to enter this chaotic Wild West, and raising it slightly higher.

Without any meaningful attempt to stop such investments being marketed to unsophisticated investors, there is little evidence that this will have much of an effect.

Illustrating the scale of the problem, the Times revealed that, according to a Freedom of Information request, the FCA did not prosecute even one firm over misleading financial promotions between 2013 and 2019, fined only three groups and individuals, and did not remove a single firm’s permissions.

The FCA bleated that over 1,000 financial promotions had been amended or removed, but as promotions are often time-limited anyway, this is irrelevant unless action is taken to deter further misselling. It is equivalent to the Advertising Standards Authority’s famously pointless catchphrase “The advert may not appear again in its current form”.

The FCA’s failure to prosecute or shut down any firm between 2013 and 2019 suggests either

  • there wasn’t any problem with systemic and habitual misselling of investments between 2013 and 2019
  • the FCA doesn’t give a shit.

If anyone seriously believes the first, help is available, talk to your GP.

The FCA’s cultural belief that the misselling of high risk unregulated investments doesn’t matter causes it to act like a health and safety inspector which insists on ignoring the bloody severed limbs dangling out of every other machine. “Well you see, I’m a health and safety inspector, and those machines are clearly unsafe, so they’re not within my remit.”


13 thoughts on “Treasury proposes raising hoop for unregulated investments to jump through

  1. Increasingly promotions seem to split into 2 parts

    1) The investment company – they may do little or no advertising themselves so didn’t break any rules. Instead they get their business by paying large fees to Introducers (independent salesmen) who were supposedly told to pass on only high net worth or sophisticated investors.

    2) The Introducers – when challenged they say they don’t handle any client money, they just generate leads. Maybe they didn’t get their Facebook adverts checked by an FCA authorised company and they forgot to check if their leads were suitable. But it didn’t matter because they only passed on a lead, then it was up to the investment company to give them all the facts.

    That makes it harder to pin anything on anyone, so the police and FCA don’t bother. Particularly as introducers tend to shut up shop and vanish as soon as anything starts going wrong.

    So any tightening up of the Section 21 exemption is pretty irrelevant.

  2. The FCA has a category of investor called a Restricted investor in addition to Sophisticated & HNW. The “restricted investor” is permitted to participate in what are termed “non-readily realisable securities” providing they sign a declaration they have not invested more than 10% of their assets in such like securities in the previous 12 months and will not do so in the subsequent 12 month period. Assets in this instance do not include such things as the value of primary residence or benefits like pensions etc.

    Apparently these unregulated mini bonds are/were considered as falling in the category of “non-readily realisable securities”.

    Furthermore the introducer is not obliged to check the declaration is true.

    This is the basis on which Blackmore Bonds were sold to investors. I have a copy of the Blackmore Bonds application form (redacted):-

    These were generally pre-filled by the introducer, guiding the investor to sign the restricted investor declaration and saying “No” to both Sophisticated and HNW categories.

    The issue was, the minimum investment was £5000 which, if the declarations were correct, meant no investor had assets less than £50k not including their house or pensions etc. However, some investors invested everything they had, thus not adhering to the 10% declaration and many victims lost considerably more than the minimum which, if their loss represented at most 10% of their assets, meant in some cases they were high net worth. However I doubt any of the victims were HNW nor were they limiting their losses to just 10% of their assets.

    Why were people signing such declarations and then investing 100% of all they owned? (Before anyone jumps to the wrong conclusion – I am not a Blackmore Bonds Victim, I just happened to acquire an application form during my research. So don’t ask me why ‘cos I have no idea!).

    Who knows.

  3. @Anon – the ‘Sophisticated’, ‘HNW’ & ‘Restricted’ investor exemptions you refer to are not fit for purpose, need to be abolished and are exploited ruthlessly by investment fraudsters and their professional advisers. Many victims are hoodwinked into signing them by smooth talking sales people who are experts at gaining the trust of their victims. The biggest scandal though is the way that vulnerable consumers (for example people with dementia, dyslexia or other learning difficulties) are targeted and made to sign them. Also many people, not used to dealing with money, suddenly become HNW through an event such as bereavement, divorce, an accident which also makes them vulnerable. Whole thing stinks and Government and regulators should be ashamed of themselves for letting it carry on.

  4. @Anon: I think you pretty much answered your own question. Blackmore investors were handed a pre-filled form and told “This is some red tape, sign here”, and did what 99% of investors do when handed pre-filled application forms and tick-box declarations (I’m not just talking about unregulated investment victims here).

    They invested 100% of all they owned because they were duped and thought, with varying levels of vagueness, “it’s “secured” so it can’t go wrong”.

    Despite being aware of systematic misselling of Blackmore Bonds to retail investors for three years, the FCA made no attempt to check that Blackmore (or its introducers) had evidence on file confirming that all its investors qualified under the HNW, sophisticated or restricted investor definitions.

  5. The question was rhetorical ….

    I also said, and it’s easily verified with a little effort, the introducers were/are not required to check investors are making a truthful declaration or not in the case of Restricted. So evidence on file was not obligatory. Just the signed declaration.

    As for these exemptions being not fit for purpose. I agree, I never said they were. Just including the Restricted category into the mix since only Sophisticated and HNW were being mentioned …. I was simply adding to the discussion with evidence of the method being used by Blackmore Bonds plc. and presumably other unregulated mini bonds.

  6. There aren’t any solutions, if by that you mean something we do and then dust our hands and say “problem solved”. Unsophisticated investors and their money are always going to be parted if they are allowed to come into contact with shysters, and it’s impossible to stop that happening 100%. There are however practical, tried-and-tested legislative ways to reduce the problem that don’t amount to a shrug of the shoulders by the Treasury.

    The fact these aren’t even being debated a year and a half after the collapse of LCF shows that either the Government has had too much on its hands with problems both self-created (Brexit) and unforseeable (Covid), or that it still doesn’t grasp the scale of the billion-pound problem, depending on how charitable you are feeling.

  7. Don’t think its that big a problem for the government. I think more people probably lose money through mainstream investments than unregulated ones and no one cries about those guys either, and before you say it, those investors also do not have protection.

    Mainstream private pension pots that suddenly fall off a cliff a month before someone retires, no one cries about them…its an investment.

    At the end of the day, if you invest your whole life savings into one product no matter how high or low risk the product is, and you lose your money, ultimately its you, the investors fault for doing that.

  8. In that article you reference above, from April 2019, one thing you say is: “Unlike firearms, collapsed unregulated schemes do not kill people, but the impact on people’s lives is often comparable to losing a limb…” but I can tell you that is most untrue on so many levels.

    Having both faced the loss of my pension and loss of a leg I can say with certainty the two are incomparable.

    Losing a limb and there’s a fantastic, caring NHS that nurses you back to health – the nurses, physiotherapists and the prosthetists that build you another limb. I have had mine for 11 years and it’s now a part of me. Wear it every day and there’s very little I can’t do with it.

    The para-olympics is testament to what one can achieve even with a significant physical challenge.

    However, facing financial ruin at the hands of unscrupuplous “shysters” as you call them and you find you’re on your own. No one gives a shit. There is zero sympathy – many accuse you of being either stupid or greedy; there’s no “caring” authority to help you back to “financial health”, no one with a sympathetic ear and none of the authorities in any jurisdiction lifts a finger to bring the “shysters” to justice. You are on your own in a world that cares little about the crime or the victims and even less about fixing it.

    Trust me, losing a limb and losing a pension are nothing like one another and there are some victims that have been known to commit suicide (or so Angie Brooks claims, but it is easy to see how that might be true given the stress and sleepless nights one endures) so one could even say, “… unregulated schemes do ‘sometimes’ kill people…”

    From where I sit, if given a choice – lose a leg or lose your pension – it’s a no brainer!

  9. Mainstream private pension pots that suddenly fall off a cliff a month before someone retires, no one cries about them…its an investment.

    Mainstream private pension pots will, if sensibly diversified, recover their value over the course of the investor’s retirement if they’re using a drawdown strategy. If you’re using drawdown, you would expect several crashes over the course of your retirement and it should make little difference if one happens to come at the beginning.

    It is only a permanent loss if they use it to buy an annuity at the point of retirement, and hadn’t been de-risking in the run up to that fixed point as they should have been. (Investors who pay no attention to any of this are likely to be de-risked automatically by lifestyling default funds.) And even assuming you’re one of the few people who still wants an annuity and made the boo-boo of not derisking in advance, at least you have the option of undoing the damage by working a few years longer. A paper loss is not a permanent loss unless you encash, even if encashing is “forced” by lifestyle goals.

    None of this has anything to do with unregulated investments with a risk of permanent 100% loss, where there is zero possibility of recovery no matter what you do.

    At the end of the day, if you invest your whole life savings into one product no matter how high or low risk the product is, and you lose your money, ultimately its you, the investors fault for doing that.

    If you flog high risk unregulated loans to the public by misleadingly claiming they’re “secured” and “have made 100% of payments on time”, and fail to verify that they qualify as high net worth or sophisticated investors, and as a result hundreds or thousands of investors lose their life savings, that’s also your fault.

  10. I tend to believe that since the credit crunch the Government has encouraged the FCA to turn a blind eye to pension pots being invested in unlisted corporate debt and similar instruments that are wholly unsuitable for both retail clients and pensions.
    As banks cannot supply the level of credit required for businesses to function, private investment is needed and pensions were seen as a solution.
    Unfortunately shysters have exploited the FCA’s (encouraged) unwillingness to act.

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