Britain’s financial regulator is warning consumers about the risks of investing in loan notes and mini-bonds issued by unregulated companies, after continuing to see people lose money in these high-risk investments.
The recent failure of Woodville Consultants Ltd, a litigation funder that raised capital from retail investors through unregulated loan notes, shows the potential risk to investors, the Financial Conduct Authority (FCA) said.
A loan note or mini-bond usually involves lending money to a company for a set period in return for interest. If that company fails, consumers could lose every penny, the watchdog warned.
The FCA permanently banned the marketing of speculative illiquid securities, including mini-bonds and loan notes, to retail investors from 1 January 2021.
But consumers may still come across adverts for loan notes and mini-bonds on social media, online adverts or websites promoting high fixed returns.
The ads can look simple and safe, but warning signs include pressure to act quickly, unclear explanations of how money could be lost, or claims that an investment is “asset-backed” without clear evidence of what stands behind it.
Examples of the practices the FCA sees include:
Unregulated introducer firms passing consumers on to unregulated companies offering high-risk investments often taking a large fee, or commission, so reducing their initial investment
Consumers encouraged to certify themselves as experienced or wealthy investors to enable investments to be promoted to them
Firms promoting high-risk investments without the permission they need
Unclear fees or hidden conflicts, where those selling the investment may benefit from consumers investing
Scammers seeking to add ‘halo’ associations to infer legitimacy; whether that be listing on overseas exchanges, or highlighting an FCA regulated firm being involved in the wider administration
Using trust structures or other arrangements to try to stay outside FCA rules
Lucy Castledine, director of consumer investments at the FCA, said:
Big, fixed returns are a warning sign, not a guarantee. Loan notes, mini-bonds and other speculative illiquid securities are high-risk investments and are not suitable for most people.
Ordinary retail investors should only invest through regulated firms because if they invest through an unauthorised firm, they may have little or no protection if things go wrong. We are working hard to prevent harm, but consumers should still stop and check before investing.
The FCA encourages anyone involved in distributing or funding high-risk investments to report anything suspicious. This includes regulated firms, banks, payment firms, lawyers, accountants and auditors who may be involved in getting these investments to consumers.
