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What has happened?

The Government is consulting on proposals to bring the issuance of non-transferable debt securities (popularly known as ‘mini-bonds’) within the scope of financial services regulation. This consultation closes at midday on 21 July 2021.

What do you need to do?

London Capital & Finance (LCF) which issued non-transferable debt securities (NTDS), entered administration in January 2019, impacting 11,000 investors who had collectively invested more than £230m. Issuing NTDS is currently an unregulated activity and investors, therefore, benefitted from few regulatory protections when investing in the products.

Following the failure of LCF, the Treasury announced it would review the regulatory arrangements in place for the issuance of NTDS to retail investors. An independent investigation into the FCA’s supervision of LCF, carried out by Dame Elizabeth Gloster, which was published in December 2020, also made a recommendation that the Government should consider bringing the issuance of NTDS into regulation.

This consultation is the culmination of the Treasury’s review and it explains that the activity carried out by LCF, and other similar NTDS issuers had the characteristics of a financial services activity and set out proposals for how the issuance of these securities could become regulated.

The consultation considers the following two main options;

Option 1 – Under this option, the issuance of NTDS where the proceeds are used to invest in or lend to third party businesses or projects would become a regulated activity. It is the Government’s intention that this measure would not cover issues where an entity acts as an intermediary between the issuer and the retail investor (such as a crowdfunding platform) and is carrying out a regulated activity in doing so. The measure would therefore apply primarily to the issuance of ‘direct-to-market’ NTDS. Under this approach, firms wishing to carry on the activity of issuing NTDS would need to be authorised by the FCA.

To achieve this policy option, the Dame Elizabeth Gloster report recommends that the scope of the onshored MiFID investment service, ‘execution of orders on behalf of clients’, would be extended to capture non-transferable securities.

Option 2 – Under this option, the scope of the Prospectus Regulation would be extended to cover public offers of NTDS. This change would mean that any issuer wishing to offer NTDS to the public in the UK would be required to produce a prospectus, which would have to be approved by the FCA before the offer could take place. Issuance of NTDS would under this option remain as an unregulated activity.

An alternative Option 3 would be to not introduce any additional regulation regarding the issuance of NTDS and instead rely on changes made or planned to be made to the UK’s financial promotions regime.

How can we help you?

If you’d like to know more about how we can help you with your arrangements for issuing non-transferable debt securities/mini-bonds, or any other regulatory compliance issues, our expert team is here to help.

Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.