DBS

10 TERMINOLOGY These debt instruments have a predetermined ‘maturity’ date (typically 3 to 7 years, but some providers focus on shorter timeframes and some on much longer terms) when the DBS is redeemed and investors are repaid their original investment. Although, some also offer capital repayment during the term, along with the interest. When it comes to regulatory terminology, the types of bonds, debentures and loan stock we’re referring to are usually defined by the FCA as debt securities, or in Europe, under MiFID as debt instruments. As they are typically illiquid, securities for which there is no, or only a limited, secondary market , they are subject to the rules for the term ‘non-readily realisable security ’. In the market, terminology can differ although an increasingly popular term is ‘crowd bonds’ – a bond sold to individual or advised investors through a web platform which arranges its crowdfunding. Another familiar term has been ‘mini bond ’. For some people, this has come to mean a single corporate bond issue which is not arranged by an FCA authorised business and where the investors are neither clients nor members of a regulated platform. But it has a range of meanings to different market participants. Consequently, we categorise unlisted bonds according to particular characteristics to break down the market more accurately. To be considered readily realisable, a security is defined in the FCA glossary as a security which is not any of the following: a readily realisable security; a packaged product; a non-mainstream pooled investment; a mutual society share; a deferred share issued by a credit union; or credit union subordinated debt. It follows, therefore, that a security that does not meet these criteria is a non-readily realisable security (NRRS). For comparison purposes, the FCA glossary definition of a readily realisable security is: a government or public security denominated in the currency of the country of its issuer; any other security which is: - admitted to official listing on an exchange in an EEA State; or - regularly traded on or under the rules of such an exchange; or - regularly traded on or under the rules of a recognised investment exchange or (except in relation to unsolicited real time financial promotions) designated investment exchange; a newly issued security which can reasonably be expected to fall within the bullet point above when it begins to be traded. DEFINITION TERMS, ISSUERS AND ASSETS THE FINER DETAILS DEBT BASED SECURITIES: SHORT EXPLANATION The term debt based securities is widely used in financial services to describe a variety of different models for deploying capital, usually involving a borrower, lender and interest rate over an agreed period. Debt based securities are designated investments as defined by the FCA Handbook. When these securities are not listed, they fall under the umbrella of ‘alternative finance’. This can include bonds, debentures or loan notes issued by a company, which can be bought directly by retail investors outside of a fund structure. Additionally, these securities are classified as ‘non-readily realisable’, which in turn brings the application of additional regulations. Increasingly, debt based securities within alternative finance are arranged through regulated crowdfunding platforms and web-based businesses rather than traditional financial institutions, and these products are becoming more sophisticated. For example, the inclusion of different types of crowdfunded offerings as permissible investments in the Innovative Finance ISA has brought debt based securities to the attention of a far broader range of financial advisers who are accustomed to using the much more mainstream and hugely popular ISA tax wrapper. This report aims to explain the different kinds of unlisted debt based securities, the regulations that apply and the key considerations for advisers when looking at alternative finance.