Treasury has published an open consultation on bringing the issuance of mini-bonds (or, as the consultation refers to them “non-transferable debt securities) within the scope of regulation, as part of the package of measures related to the LCF failure. While LCF was an FCA-authorised firm, the majority of its revenue came from unregulated activities, specifically issuing NTDS. Because it was authorised, it could freely promote the NTDS without needing another authorised firm to approve its promotions.
Treasury is now seeking views on:
- making direct-to-market issuance of certain NTDS a regulated activity, where the proceeds of the issue are used to on-invest or on-lend; and
- extending the scope of the Prospectus Regulation to cover NTDS.
The consultation notes that dealing as principle in transferable securities is already regulated, but because NTDS are non-transferable, they are not MiFID instruments, and therefore firms can rely on the RAO exemption for dealing as principal without worrying about the MiFID override. Similarly, issuing NTDS is not deposit-taking, because a debt security is issued in return for the sum investors “deposit”. It also notes that FCA’s rules on Speculative Illiquid Securities will have significantly curtailed the NTDS market also.
Treasury feels the RAO exclusion is appropriate for businesses that need to fund expansion and refinance existing debt without the need for FCA authorisation, but that those that then use the funds to lend to or invest in third party projects with the aim of making a profit should not be able to benefit from the exclusion, as it shares characteristics with other financial services activities. And it feels the SIS marketing restrictions, while useful, do nothing to give any oversight to the design, governance and functioning of the product – and so the permitted individual recipients of promotions are still not protected, and there is evidence they do not understand the products. Regulation of the issuance could be achieved either by bringing NTDS within the scope of MiFID instruments or by narrowing the scope of the exclusion.
Alternatively or additionally, if the Prospectus Regulation were extended to cover NTDS, this would introduce an FCA approval process where the securities were offered to the public. However, the threshold of €8m below which a prospectus is not required would probably catch many such offers, so would need to be reviewed, perhaps to lower the threshold to €1m.
There is a third alternative, which is to rely on existing measures, including the current plans for the regulatory gateway for financial promotion approvals, but Treasury feels more than this is needed.
Consultation closes on 12 July.