FCA Regulation Changes & Property: What You Need to Know
We thought it would be important to highlight recent regulations changes made by the FCA to protect investors looking to get involved in property.
The FCA issued new guidance for investors and property professionals alike in November 2019 following a large seller of ‘mini-bonds’ in the property industry going into administration (London Capital and Finance), which caused investors to lose millions.
The number of individuals investing in property-related companies for so-called guaranteed returns is on the rise, with many falling foul to the risks involved in this market.
For this reason, from 1st January until 31st December 2020, the FCA has placed restrictions on individuals looking to invest in speculative illiquid securities. Speculative illiquid securities include unlisted bonds and preference shares where the issuer uses the funds raised to lend to a third party; invest in other companies, or purchase or develop property.
Therefore any company you may consider working with for property-related financial returns will need to ensure they comply with the new FCA regulations.
The FCA outline some of the areas where investors may potentially need to be wary:
- The promise of high annual returns, often presented as ‘fixed’, often starting at 6- 8% – well above rates offered by traditional cash-savings products
- Exposure to high-risk, speculative assets that are difficult for an investor to value or verify
- Complex legal structure to a product, or between a promoter and issuer
- High upfront or embedded costs and charges
- Often misleading financial promotions that:
- Focus on attractive headline returns
- Imply capital protection or other features (diversification, asset-backed) as reducing risk, which may not be effective protections in practice
- Do not disclose costs and charges to the investor or embed them in the arranging or structuring of the product, with fees of 20% or more of funds raised in some cases
- Advertise that the investment is eligible to be held in a tax-incentivised ‘wrapper’ (e.g., an IF ISA or SIPP) when it does not meet the qualifying criteria
- Use the role of HMRC in overseeing tax wrappers (e.g., IF ISAs or SIPPs) to imply oversight or endorsement by the government
If you have any concerns about investing in property for ‘fixed’ returns on your investment, or working in partnership with a property professional in a joint venture type profit share, please consult FCA guidance (see the link at the end of this article).
Individuals who wish to invest in property-related businesses may still be able to so in certain circumstances. The FCA will still allow property-related businesses to promote their products or services to a niche retail market for whom they are likely to be suitable but remove the ability to ‘mass market’ specific products to the public.
To comply with FCA regulations, any property-related business may work with investors so long as they fall into one of two categories:
- Classed as a high net worth individual (simply put: either a salary of £100,000 per annum or more or £250,000 in assets – excluding family home or pension)
- Classed as a sophisticated investor
If you would like to find out more about risks involved in property-related investments and whether you are suitable to invest in property-related businesses, please click the links below to be taken to the FCA regulations.
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