Is more regulation on securities promotion a death sentence for SMEs?

With a clampdown on unregulated practices seeming increasingly likely from the FCA, there are concerns this could disproportionately impact SME operators.

With the chancellor recently announcing increased parliamentary scrutiny of the FCA, a regulatory clampdown on financial services seems imminent. The looming question that businesses now face is where this regulation will land. 

For some time, regulators have been slowly chipping away at the grey areas of the financial services market. These grey areas are occupied by intermediary companies that do not directly market speculative illiquid securities, but rather promote them to high-net-worth individuals and sophisticated investors. Regulation that applies to the actual sellers of these (usually high risk) securities don’t apply to these intermediary promotion companies. The majority of these companies make efforts to align themselves with regulation.  

Unfortunately, there are of course a handful of companies that prioritise cashflow over proper due diligence, which has attracted the unwanted attention of the FCA. Indeed, the FCA have banned regulated intermediary companies from marketing high risk mini bonds to retail consumers. These rules blocked off a considerable income stream for the sector and pushed promotion into the unregulated sphere. In particular, SMEs in the sector suffered as a result.  

Protecting SMEs 

Whilst few would argue against the need for more robust regulation in order to weed out foul players, the government’s approach seems to have neglected one critical factor; how will the introduction of these new rules affect the SMEs that make up the majority of this market?  

There is good reason for SMEs acting in the sector to be concerned. Following the introduction of a ban on the marketing of mini-bonds to retail consumers, SMEs were suddenly forced to review the entire structure of their operations to ensure that they maintained compliance.  

Unlike their larger counterparts, SMEs were faced with an insurmountable bill that pushed many close to (and some over) the edge. This has also included the additional costs of recruiting additional compliance personnel to ensure they remained in the regulators’ good graces.  

If the government pushes ahead with the proposed regulations to the intermediary securities promotion market, there is a chance of a regulatory misfire that could prove fatal to the SMEs propping up the sector. The current approach appears a clumsy attempt to bring all relevant companies into line with sweeping changes to how these companies can legally operate; but this needs to be fine-tuned to ease the pressure off SMEs.  

Focusing efforts elsewhere 

Rather than further regulation and legislation, which is restrictive by nature, and has also been proven to be ineffective in clamping down on the bad apples operating in this sector, regulators should focus efforts on enforcement.

Resources would undoubtedly be better spent in bolstering regulators’ ability to enforce the existing rules at play. After all, the large companies, whose scandals has spurned on this ‘need for regulation’, have the resources at hand to navigate around any new regulations with relative ease. 

Ultimately, SMEs need to prepare themselves for the regulatory changes on the horizon. By taking note early on and having a plan in place for the expected change in regulation, SMEs should be able to mitigate the cost of compliance and give themselves a fighting chance of survival.