An 8.2% Mini-Bond Sold Through a Call Centre
Northgate Investments launched a six-year 'Secured Income Bond' paying 8.2% a year, secured against a portfolio of commercial loans. Between January and March the firm's 40-seat call centre sold £86m to 1,900 retail clients. The average investment is £45,000; 38% of buyers are over 70; 62% invested more than half their investable assets. Advisers are paid 3.5% commission and a monthly bonus for sales above target. The suitability script asks five questions and records no risk tolerance score. The financial promotion was approved by one executive director and states 'capital at risk' in footnote 9 at 7-point font. A training slide describes the bond as 'low risk because it is secured'. The firm has no post-sale review process. Two clients have complained that they were told the bond was 'as safe as a savings account'. The FCA has published concerns about similar products.
1. Assess the main conduct failures in the design, promotion and sale of the bond, referring to suitability, financial promotions and conflicts of interest.
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Failures span product governance, promotion, suitability and conflicts. The target market was not properly defined; a six-year secured income bond sold to retail clients with a 38% over-70 concentration and 62% investing more than half their investable assets is unlikely to be suitable for many of them. The sales process had no risk tolerance score and only five questions, so suitability could not be demonstrated. The 3.5% commission and sales bonus created a clear conflict, aggravated by a script that described the bond as 'low risk because it is secured'; security does not eliminate credit, liquidity or default risk. The financial promotion was approved by one director, with the risk warning in a 7-point footnote, which is unlikely to be fair, clear and not misleading. The absence of post-sale review meant no check on outcomes. These are not minor documentation issues; they go to the firm's obligation to act honestly, fairly and professionally and to the Consumer Duty outcomes on products, price and value, consumer understanding and support.
2. What remediation would you recommend for existing customers and how would you prioritise?
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Remediation should start with the highest-risk customers: those over 70, those with more than 50% concentration and those with no recorded risk assessment. The firm should conduct a file review, contact customers proactively and offer redress where the sale was unsuitable, including cancellation or transfer to a suitable product, with interest and without penalty. A skilled person or independent reviewer may be needed. Complaints should be handled under the firm's complaints procedure and reported to the FCA if systemic. The firm should pause new sales until the review is complete. Prioritisation should be risk-based: vulnerability, size of holding, liquidity needs and time horizon. The firm should keep a register of affected clients and report progress to the board and, if required, to the FCA. Redress should be calculated consistently and documented.
3. What notifications and governance actions should the firm consider, and what are the risks of delay?
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The firm should consider notifying the FCA under its breach reporting obligations and, if the matter is serious, under Principle 11 on openness and cooperation. It should also consider whether the financial promotion breaches the financial promotion regime and whether the matter is a reportable conduct breach. The board should establish a sub-committee or use the audit and risk committee, appoint an independent chair for the review, and ensure the executive director who approved the promotion is not overseeing the remediation. Delay increases the risk of further unsuitable sales, of customers suffering loss and of the regulator finding the firm has not been open. The firm should also consider its SMF responsibilities and whether the senior manager responsible for the product has breached conduct rules. Legal advice should be taken, but privilege should not be used to delay notification.