Adviser guide - IFISA

11 WHAT CAN AN IFISA HOLD? 10 WHAT CAN AN IFISA HOLD? What can an IFISA hold? DBS, generally unlisted corporate bonds or loan notes, have a fixed-term (commonly 1-3 years although some are for up to 20 years) and regular income payments (which can be either fixed or variable). They are mainly used to fund smaller infrastructure projects, such as renewable energy installations or asset-backed businesses, such as pubs and care homes and the annual returns on offer are typically in the range of 5-8%. Debt Based Securities registered a twelve- fold year-on-year growth rate from 2015 to 2016 and, in contrast to P2P loans, are typically for £1m-£5m per bond, with an offer document for each investment signed off by an FCA authorised platform under section 21 of FSMA. Debt Based Securities (Crowd Bonds) DBS comparison with Listed Equities Greater returns and control over what funds are invested into than bank deposits Lower volatility than equities • Government support - IFISA eligible • Subject to existing securities regulation applied to bonds, rather than the new 36H regime • Platforms must categorise investors and carry out appropriateness tests. If the investor fails, they can’t invest. Platforms estimate a failure rate of c. 10%. • To qualify for IFISA, DBS must be approved by an FCA-authorised firm and offered via a platform that treats investors as their clients - in contrast, mini-bonds (typically single corporate bond issues that are not arranged by an FCA authorised business and where the investors are neither clients nor members of a regulated platform) are not IFISA eligible as there is no regulated entity responsible for the investors. • Stringent platform underwriting processes result in less than 1 in 7 proposed DBS projects being accepted to raise funds. (CCAF) FEATURES • Attractive rates available to investors and borrowers • Investors can see and control what their funds are invested into • Uncorrelated to equity markets • Larger scale investments, allow platforms to undertake higher levels of due diligence • FSCS Investment Protection Scheme applies • Investors’ capital is at risk • Potential for platform collapse (e.g. resulting from lack of deal originations/bad underwriting generating significant defaults) • Limited liquidity - classified as non-readily realisable securities • More concentration risk than P2P loans which are diversified, commonly by the platform on behalf of lenders • Limited analyst coverage can make individual bonds difficult to value/price DBS Regulatory Summary: DBS Platforms Investor is categorised Information approved Appropriateness test Offer document vs. prospectus Investment Before any potential retail investor sees specific information on a DBS offering inviting them to invest and giving them the means to do so, he or she must be categorised as one of four types of investor. All information provided to the qualified potential investor must be approved by an FCA authorised person. (incl. all of the marketing information, Information Memorandums, prospectus, offer documents, social media and websites) Potential retail investor is required to pass to proceed If the offer is for transferable securities where the raise limit for that 12 month period is less than €5 million or is for non-transferable securities, no prospectus is required. But, the information provided to potential investors must be fair, clear and not misleading and approved as a financial promotion by an FCA authorised person. If the offer is for transferable securities for over €5m then the offer document or prospectus must be signed off by the UKLA. The entity which arranges or makes the sale of the DBS must be FCA authorised to do so, or be the appointed representative of a firm with the relevant FCA permissions.