What was the FCA announcement on 26 November 2019 about some bonds?
The Financial Conduct Authority (FCA) announced that they would temporarily restrict the promotion of some bonds to advised and unadvised retail investors from 1 January 2020, while they consulted with the industry.
We think that overall this is a good thing for the market and will help protect less experienced investors from being drawn into more complex products where it is difficult to assess the real risk and potential rewards.
When we met with the FCA's CEO, Andrew Bailey, in April 2019, we put the case forward that there was a myriad of misleading ads on Google, often from unregulated firms, offering double digit interest rates while not putting enough emphasis on risk.
So, in our view, this intervention is both timely, because it comes ahead of the ISA season, and justified because it will help protect investors and hold the industry to high standards.
What types of bonds are affected?
The new rules apply only to what the FCA term 'speculative illiquid securities' (SIS). This basically means unlisted debentures or preference shares issued by a company that then uses the funds raised to lend to or invest in other companies, or to purchase or develop property that is not for its own use.
Will this mean any changes to Downing products?
It may result in some of our bonds being available only for High Net Worth and Sophisticated investors. So if you are an everyday or advised investor, from 2020 you may not be able to invest in our full range of products.
I am an everyday / advised investor, but I want to continue to invest in the full range of products, what are my options?
You may find that you already qualify as a High Net Worth Individual, or a Sophisticated Investor in which case you can change your investor type in your Account area.
For example, if you have already invested in more than one Downing bond in the last two years, then you can choose to self-certify as a Sophisticated Investor based on this experience.
You should be aware, however, that changing your investor type will mean you can access more complex and potentially higher risk investments.
Will there be changes to the site or the way I invest in Downing bonds?
The new requirements are very much in line with how we market Downing bonds. To improve standards and enhance consumer protection across the industry, the FCA have set out explicit requirements on financial promotions - in particular, risk warnings. and we will be making a few tweaks to the site in December 2019 to make sure we meet or exceed the standards the FCA expects.
If you would like to understand this in more detail, there is a link to the FCA document below.
What is a High Net Worth Individual?
A high net worth investor is an individual who has signed, within the last twelve a statement that says:
“I make this statement so that I can receive promotional communications which are exempt from the restriction on promotion of speculative illiquid securities. The exemption relates to high net worth investors and I declare that I qualify as such because at least one of the following applies to me:
I had, throughout the financial year immediately preceding the date below, an annual income to the value of £100,000 or more. Annual income for these purposes does not include money withdrawn from my pension savings (except where the withdrawals are used directly for income in retirement).
I held throughout the financial year immediately preceding the date below, net assets to the value of £250,000 or more. Net assets for these purposes do not include:
- the property which is my primary residence or any money raised through a loan secured on that property; or
- any rights of mine under a qualifying contract of insurance; or
- any benefits (in the form of pensions or otherwise) which are payable on the termination of my service or on my death or retirement and to which I am (or my dependants are), or may be, entitled; or
- any withdrawals from my pension savings (except where the withdrawals are used directly for income in retirement).
I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on speculative illiquid securities.”
What is a Sophisticated Investor?
A self-certified sophisticated investor is an individual who has signed, within the period of twelve months ending with the day on which the communication is made, a statement in the following terms:
“I declare that I am a self-certified sophisticated investor for the purposes of the restriction on promotion of speculative illiquid securities. I understand that this means:
- I can receive promotional communications made by a person who is authorised by the Financial Conduct Authority which relate to investment activity in speculative illiquid securities;
- the investments to which the promotions will relate may expose me to a significant risk of losing all of the property invested.
I am a self-certified sophisticated investor because at least one of the following applies:
- I am a member of a network or syndicate of business angels and have been so for at least the last six months prior to the date below;
- I have made more than one investment in an unlisted company in the two years prior to the date below;
- I am working, or have worked in the two years prior to the date below, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises;
- I am currently, or have been in the two years prior to the date below, a director of a company with an annual turnover of at least £1 million.
I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me seek advice from someone who specialises in advising on speculative illiquid securities.