AJ Bell is calling for a ban on innovative finance Isas as the Financial Conduct Authority introduces a temporary ban on the marketing of mini-bonds to retail investors.
The 12-month FCA ban will take effect from 1 January, limiting the promotion of the products to sophisticated investors and high net worth individuals. During this period, the FCA will consult on permanent rules.
The temporary ban is a response to the collapse of mini-bond issuer London Capital and Finance in January. The collapse hit 11,625 investors with £237.2m invested.
“We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risks involved,” said FCA chief executive Andrew Bailey (pictured).
“This risk is heightened by the arrival of the Isa season at the end of the tax year, since it is quite common for mini-bonds to have Isa status, or to claim such even though they do not have the status.”
Minibonds touted more widely thanks to Isa status
AJ Bell personal finance analyst Laura Suter urged the regulator to ban the innovative finance Isa (Ifisa) in which mini-bonds can be held alongside peer-to-peer and crowdfunding investments.
The Isa status of the mini-bonds allowed some mini-bonds to be touted to a wider market, Suter said.
“The regulator and government are already looking at the suitability of the Ifisa as part of the review into London & Capital Finance, and we would urge them to scrap the Ifisa for the safety of savers.”
Innovative finance not the only risky investments allowed in Isas
But Shore Capital director Ben Yearsley said the FCA should address poor marketing practices in the innovative finance space without banning the products from Isas altogher.
Aim-listed shares, frontier markets, leveraged ETFs and other risky investments don’t get the same scrutiny as minibonds, yet are allowed in an Isa wrapper, said Yearsley, who holds crowdfunding investments via an innovative finance Isa.
“If you’re going to ban one risky product, should you ban all risky products?”
The role of minibonds in a portfolio
Hargreaves Lansdown personal finance analyst Sarah Coles was also concerned dropping innovative finance from Isas would be tantamount to “throwing the baby out with the bathwater”.
“Not all retail bonds are the same, and not every peer-to-peer investment is identical,” Coles said. “As long as investors understand the risks involved, and the drawbacks of this kind of investing as well as the potential benefits, it may well make sense as a small part of a large overall portfolio for some investors.”
The innovative finance Isa allows investors to hold money via a peer-to-peer platform while still holding a stocks and shares Isa elsewhere.
She said one solution could be to let investors hold more than one stocks and shares Isa in any one year.
