Shearman & Sterling LLP | FinReg | HM Treasury Launches Consultation on Regulation of Non-Transferable Debt Securities
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  • HM Treasury Launches Consultation on Regulation of Non-Transferable Debt Securities

    HM Treasury has launched a consultation on the regulation of non-transferable debt securities, colloquially known as "mini-bonds". The consultation was prompted by the collapse of London Capital & Finance PLC, an FCA- regulated issuer of bonds which stated on their face that they were non-transferable, issued primarily to retail investors, which fell into administration in January 2019. An investigation into regulatory failings in the supervision of LC&F was subsequently launched and chaired by Dame Elizabeth Gloster, culminating in a report that was highly critical of the U.K. Financial Conduct Authority's supervision of LC&F and included policy recommendations for HM Treasury. HM Treasury is now consulting on possible changes to the regulatory regime governing NTDS. Responses to the consultation should be submitted by July 12, 2021.
    NTDS are unlisted bonds which are not transferable, meaning they must be held to maturity, and are typically issued to retail investors. Since 2015, there has been an increase in firms using the funds raised to invest in third-party projects. This sort of activity would normally constitute a regulated activity such as "dealing in investments as principal" or "deposit-taking" and therefore be subject to a higher degree of supervision and higher regulatory capital requirements. However, because the NTDS are issued in return for investments but are not transferable, the regulatory regime does not usually apply.
    HM Treasury is considering two main options (which are not mutually exclusive and may both come into effect):
    • Option 1: making the issuance of NTDS a regulated activity, meaning issuers would need to obtain FCA-authorization and meet certain threshold conditions, including  having appropriate resources and a suitable business model. Only NTDS where the proceeds of the issue would be used to invest in a third-party business or project or where the issuer is FCA-regulated would be regulated. Non-regulated NTDS issuers who plan to use the proceeds for their own expansion or refinancing purposes will not be regulated. Crowdfunding platforms, which act as an intermediary between the NTDS issuer and the retail investor, would also be exempt.
    • Option 2: extending the scope of the Prospectus Regulation to cover NTDS, so that issuers wanting to offer NTDS to the public in the U.K. would have to publish an FCA-approved prospectus.
    HM Treasury also poses an Option 3, which would make no further changes and instead rely on existing changes recently made to the regulatory regime. In January 2020, the FCA implemented a permanent ban on the marketing of "speculative illiquid securities" (such as mini-bonds) to retail investors and last year consulted on the regulatory framework for the approval of financial promotions made by unauthorized firms. Responses to that consultation are currently under consideration.
    View HM Treasury's non-transferable debt securities consultation.
    View details of the FCA's ban on speculative illiquid securities
    View details of HM Treasury's proposals to amend financial promotion rules.
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