Capital Markets Corporate

November 29, 2019

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Across Instinctif Partners’ Financial Services team, we are always keeping an eye on the key developments taking place across the sector to evaluate their impact on the many businesses we work with. Here we share our picks of the week’s most interesting news, and our expert views.

Credit Union urges customers to ‘Buy Nowt’ on Black Friday
In a joint project, a local Credit Union in Bradford and charity Artworks are hosting a day of free “distracting crafting” in a backlash against Black Friday spending. The event, titled “Buy Nowt Day”, aims to help people spend more wisely. Black Friday spending among Brits is expected to reach almost £8bn in online purchases alone.  (From BBC, 28 November 2019)

Giving a friend a lift could invalidate insurance
Car insurance policies may become invalid if a driver gives someone a lift in their car. Motorists are legally permitted to receive money that specifically covers petrol costs during a shared journey – but not a penny more. In other words, if you’re financially rewarded for giving a lift then you technically become a taxi, invalidating your insurance and potentially facing fines of up to £2,500. (From Daily Express, 27 November 2019)

State pension pessimism
A study by Hargreaves Lansdown reveals that only 28% of people aged under 35 and 35% of 35-54s believe the state pension will still exist once they retire. While the current state pension forms the bedrock of most people’s retirement income, the study found that many are resigned to the possibility that Government help may not be there in decades to come. This comes despite the Labour, Conservative and Liberal Democrat election manifestos pledging to retain the current ‘triple lock’ on state pensions. (From Money Marketing, 26 November 2019)

Married couples with joint finances face financial risk
Only one in 10 married couples aged 50+ have shared finances in a joint current account, a recent study by Saga Personal Finance has found. While a joint savings account may simplify a range of financial responsibilities in partnerships, they do pose risks to overall financial safety for individuals. The report notes that an unexpected loss of income or sickness could place a significant burden on couples with shared finances, where one partner becomes finally dependent on another. (From Daily Express, 27 November 2019)

Mortgage “bet” could save homeowners thousands
Switching from a fixed rate mortgage to a riskier variable rate deal could save homeowners up to £1,300 a year, according to new estimates. While up to 90% of borrowers prefer the reliability of fixed-rate loans, many of these customers may be paying more than necessary in a low rate environment. Analysis by Telegraph Money suggests that customers could save £700 per year on their mortgage – and potentially an additional £600 if rates fall in 2020 – by selecting a variable rate mortgage. (From Daily Telegraph, 23 November 2019)

Storm in a mini bond

The FCA this week cracked the whip on the dubious mini-bond market, using emergency powers to ban the marketing of such products to retail investors. But with complex rules around which types of mini-bonds are covered by the ban, and the products themselves still able to be issued, is enough being done to protect people from risky investments?

This move by the regulator follows the highly publicised collapse of London Capital & Finance (LC&F). The organisation peddled mini-bonds to almost 11,600 investors, but folded in early 2019. As much as £236 million was invested, but administrators warned most of the businesses LC&F invested in had been unable to provide proof that they would be able to repay their loans. As such, investors can only expect to get 20% of their investment back. Such is the severity of the case that a Serious Fraud Office inquiry has been triggered, with five individuals arrested and released, pending further investigation.

Mini-bonds are illiquid debt securities that can seem attractive to investors as they typically offer rates of 8% or more. But their high rates of return mask equally high risks.

Mini-bonds are not regulated investments, so are not covered by the Financial Services Compensation Scheme (FSCS). This means if the mini-bond issuer fails, investors could lose all their money.

Not all mini-bonds are bad, with reputable borrowers such as John Lewis and various sporting institutions issuing them in the past. But they can be complex and opaque – LC&F for example did not make it clear to investors what they were investing in, nor how much security they had when investing their money. They were also billed as low-risk ISAs, despite this being completely inaccurate.

The FCA’s decision is being described as a tough response, with such a ban only introduced on two previous occasions.

But not all mini-bonds are affected: the ban is focused on speculative mini-bonds where the funds raised are used to lend to a third party, invest in other companies or purchase or develop properties.

One such bond that would seemingly be exempt is the Chilango “Burrito Bond”. The UK Mexican restaurant chain issued two “burrito bonds” promising 8% returns and perks such as free food, raising £5.8 million in total from around 1,500 investors.

As the debt was used to fund the company’s own operations – reportedly refinancing existing debt and expanding the business – it seems such a bond would be untouched by the FCA’s marketing ban. The eatery has since plunged to a £256,520 loss before tax and interest in the three months to March, with restructuring and possibly administration on the table – an ominous sign for investors who are unlikely to get their money back should the company fold.

Aside from some mini-bonds not being covered by the ban, another notable detail is that only the marketing of such products is affected. As mini-bonds are unregulated, the FCA has no power over the creation of the products themselves but does have the authority to step in when an authorised firm approves or communications a financial promotion, or directly advises on and sells, these products.

There is a chance, then, that investors could still access these risky products through routes other than marketing. This has raised questions over whether the perimeter of regulatory influence should be updated when it comes to these types of bonds.

Marketing of speculative mini-bonds can also still be directed at retail investors who have been pre-categorised as either sophisticated or high net worth, though the product must be initially assessed as being likely to be suitable for them.

With these loopholes in mind, it is quite possible that another mini-bond scandal could hit UK investors. The wider investment industry will naturally be keen to distance itself from this type of furore. The key to doing so lies in one of the main issues at hand: transparency.

Investment firms can position themselves on the right side of the debate by maintaining clear, transparent communications around their offering and products, including a balanced and realistic appraisal of the potential upside and downsides involved. An open and honest approach will ensure investors are armed with as much information as possible, so they can make educated financial decisions about whether the rewards are ultimately worth the risk.

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