A recent article in the redoubtable FT Adviser looks at the Financial Conduct Authority’s (FCA) rules on “speculative illiquid assets”. We welcome the advent of the rules, as we do the media analysis of them.
But it’s very, very important to distinguish between these investments (known in many cases as “mini-bonds”) and platform lending.
We offer an extended excerpt from the FT Adviser piece below.
The FCA recently announced the introduction of temporary product intervention measures in connection with the promotion of speculative mini-bonds to retail investors.
The new rules took effect for a temporary 12 month period, effective on 1 January 2020.
These rules significantly restrict the sale of certain mini-bonds described by the regulator as ‘speculative illiquid securities’, to retail investors.
The FCA has highlighted the dangers of less sophisticated investors, and investors less capable of bearing the risk of total loss of their investment, being drawn to these products by promotions.
The FCA noted that these types of products appeared within the top results of online searches for ‘high investment returns’ or similar phrases.
The regulator is concerned that investors may be attracted to the lucrative returns offered, but that such promotions down-play the key risks and imply that these products are ‘safer’ than they are in practice.
Although legally structured as a bond with fixed returns, or occasionally as preference shares, the risks associated with speculative illiquid securities are seen by the FCA to be similar to unauthorised collective investment schemes.
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.