An 8% Property Bond, a Social Media Campaign and the Section 21 Gateway
Northgate Capital Ltd is an FCA-authorised investment firm with permission to advise on and arrange investments. Its marketing manager has produced a campaign for 'Riverside Bonds', a five-year unlisted bond issued by an unauthorised property developer. The bond pays 8% a year, is not listed on any exchange, and is secured by a second charge over a development site. The campaign is planned for Instagram, a free local newspaper and a webinar hosted by the issuer's directors. The headline reads '8% fixed returns - back British property', with the £5,000 minimum investment in small print and no other warnings. The target area has a high proportion of retired residents. The compliance officer is on holiday and the marketing manager says 'it is fine because we are authorised and we will approve it under section 21'. Northgate does not currently hold the permission to approve financial promotions for unauthorised persons. The issuer has raised £6 million of its £12 million target.
1. Explain whether Northgate can run this campaign as proposed, and what rules apply to the product itself.
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The campaign cannot run as proposed, for two independent reasons.
1. The product is a speculative illiquid security. Since 1 January 2020 the FCA has restricted the mass-marketing of speculative illiquid securities to retail clients. These include unlisted bonds of the kind described. A promotion may only be made to a retail client who is a restricted investor - broadly, a client certified as sophisticated or self-certified as high net worth, or one who has signed a statement confirming they will invest no more than 10% of their net assets in speculative illiquid securities - and it must carry the prescribed risk warning. Instagram and a free local newspaper reach the general public and cannot satisfy this. The £5,000 minimum is irrelevant; many retired residents in the area could lose a large proportion of their savings.
2. The promotion is not fair, clear and not misleading. The headline '8% fixed returns - back British property' emphasises return and omits that the capital is at risk, the bond is unlisted and illiquid, the security is a second charge behind another lender, and the issuer may not reach its £12 million target. A balanced promotion must give the risks equal prominence to the return.
Northgate also has a Consumer Duty obligation to act in good faith and avoid foreseeable harm to retail customers; promoting this product to a retired, general-public audience foreseeably risks serious harm.
2. What changes would be needed for any promotion of Riverside Bonds to be compliant, and which approval process must Northgate use?
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Changes needed:
- Remove the mass-market channels. The promotion could only be communicated to clients who meet the restricted investor conditions, with evidence of the certification or the 10% net asset statement kept on file.
- Add the prescribed risk warning and a clear statement that the investment is not suitable for most people, that capital is at risk, that the bond is unlisted and may be difficult to sell, and that it is not covered by the Financial Services Compensation Scheme if the issuer fails.
- Remove or balance the headline claim. '8% fixed' must be qualified by the risk of losing the capital, and 'back British property' should not be used to imply safety.
- Confirm the target market and ensure the promotion is only directed at that market.
Approval process: the marketing manager's assumption is out of date. Approving a financial promotion for an unauthorised person is itself a regulated activity. Since February 2024 firms must hold the specific FCA permission to approve financial promotions for unauthorised persons - the section 21 gateway - before they can approve anything for the issuer. Northgate does not hold it, so it cannot lawfully approve this promotion, and communicating it without approval would breach section 21 of the Financial Services and Markets Act 2000.
Northgate should apply for the permission or decline the mandate; the compliance oversight senior manager is accountable for the approval process.
3. What are the Consumer Duty implications of the target audience and the issuer's webinar?
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Target audience. The Consumer Duty requires Northgate to act to deliver good outcomes for retail customers across four areas: products and services, price and value, consumer understanding and consumer support. A campaign aimed at an area with many retired residents, for a five-year illiquid bond with a second-charge security, raises obvious questions about the products and services outcome. The likely target market is investors who can afford to lose the capital and understand illiquidity; a general local audience does not meet that. Northgate must be able to show it identified the target market and that the distribution strategy is consistent with it - the evidence here points the other way, since reach and cost-per-lead appear to have driven the channel choice.
The issuer's webinar. Northgate cannot distance itself. If the firm has arranged, approved or endorsed the webinar, it is likely to be treated as part of its own promotion, and the issuer's directors are unauthorised. The firm must control the content, ensure risks are explained, avoid unscripted projections of return, and consider how questions from retail investors will be answered. A recorded webinar that presents the bond as a safe income product would reinforce the misleading impression created by the advertising.
Practical consequence: the firm should pause the campaign, reassess the target market and value, and record the decision. If the promotion has already gone out, it must consider a corrective communication and whether notifications to the FCA are required.