The FCA is clamping down on mini bonds, but according to Andrew Bailey this is just the start.
Speaking to S&P Market Intelligence, Bailey said that the move should be seen as a sign of its growing assertiveness.
“Some of the most complex issues we deal with are things on the regulatory perimeters. Mini bonds are not within our regulatory perimeter, but the promotion of them can be,” he told S&P Global Market Intelligence.
On 26th November, the FCA said it was intervening to ban the mass marketing of mini bonds to anyone other than high net worth and sophisticated investors. The ban will remain in place for a year until they can think of an alternative permanent arrangement.
Mini bonds were integral to the £236 million collapse of London Capital & Finance which leaves almost 12,000 investors in danger of losing their savings. Because mini bonds are not usually covered by the financial compensation scheme, if things do go wrong, investors can be left exposed.
An independent investigation into the FCA’s handling at the behest of the Treasury is underway which has highlighted a number of shortcomings from the regulator.
The FCA has come in for extensive criticism from all quarters for a host of issues and is under pressure to up its game. This is a sign that it is willing to do this and to stray into areas which have not normally been under its sphere of its influence.
The problem was that FCA regulated London Capital & Finance but not the complex high risk investments themselves, which gave some investors a false sense of security. Because they saw London Capital & Finance was regulated, they naturally assumed that so were the investments, and that they would be covered by the financial compensation scheme.
London Capital & Finance, for the most part, were willing to allow that misconception to continue unchallenged. This grey area of regulation has now come under scrutiny, although the Government rejected a recommendation from the Treasury Select Committee to give the FCA more powers beyond its remit to expand the perimeter of what comes into regulation.
While some people believe the perimeter should remain where it is, Bailey argues this position is no longer tenable for most people. The idea that the FCA should not be responsible for enforcing regulation against some companies ‘is no longer sufficient.’
The ban is a year long temporary measure but the FCA plans to replace it with something more concrete. It’s a sign that they are willing to be more aggressive in their powers and expand the perimeter of what they plan to regulate.
The grey area will be squeezed and the regulator says it is working closely with Google to report those sites which are not following their guidelines. The message for companies selling unregulated products is that the loophole is closing. The FCA is pushing against its own perimeter and will expand its powers to the limit.
London Capital & Finance also contains a wider lesson for the financial world. Aside from the action from regulators, the public are less inclined to accept the difference between regulated and unregulated products. They will expect the same standard of clarity and responsibility across the entire spectrum.