The Financial Conduct Authority (FCA) is warning consumers about the significant risks associated with mini-bonds and loan notes issued by unregulated companies, following continued reports of investors losing money through these high-risk investments.

The regulator is particularly concerned about promotions promising attractive fixed returns, which can make speculative investments appear safer than they really are.

Recent Investment Failure Highlights the Risks

The recent failure of Woodville Consultants Ltd, a litigation funder that raised money from retail investors through unregulated loan notes, highlights the potential risks faced by consumers investing in these products.

A loan note or mini-bond typically involves lending money to a company for a specific period in exchange for interest. However, if the company experiences financial difficulties or fails completely, investors could lose some or all of their money.

Mini-Bonds and Loan Notes Are High-Risk Investments

The FCA permanently banned the promotion of speculative illiquid securities, including mini-bonds and loan notes, to retail investors from 1 January 2021.

Despite the restrictions, consumers may still encounter advertisements for these investments through social media, online advertising, websites, and other channels.

Promotions may highlight attractive fixed returns or describe investments as secure and asset-backed. However, the FCA warns that consumers should carefully investigate such claims before committing any money.

Warning Signs Investors Should Watch For

Some investment promotions can appear professional and straightforward while concealing significant risks. Consumers should be particularly cautious when they encounter:

• Pressure to invest quickly or claims that an opportunity is available for a limited time.
• Unclear explanations of how investors could lose money.
• Claims that an investment is “asset-backed” without clear information about the assets supporting it.
• Promises of unusually high or fixed returns.
• Unclear fees or potential conflicts of interest involving the people selling the investment.

Common Practices Identified by the FCA

The FCA has identified a number of practices associated with the distribution and promotion of high-risk investments.

• Unregulated introducers: Unregulated firms may refer consumers to other unregulated companies offering high-risk investments, sometimes receiving substantial fees or commissions that reduce the amount initially invested.
• Investor certification: Consumers may be encouraged to certify themselves as experienced or wealthy investors in order to gain access to investments that would otherwise not be promoted to them.
• Unauthorised promotions: Some firms promote high-risk investments without having the regulatory permission required to do so.
• Hidden fees and conflicts: Investors may not receive clear information about fees or circumstances in which the person promoting the investment could financially benefit.
• False credibility: Scammers may attempt to create an impression of legitimacy by highlighting connections with overseas exchanges or mentioning an FCA-authorised firm involved elsewhere in the investment structure.
• Complex legal structures: Some arrangements use trusts or other structures in an attempt to avoid falling within FCA regulatory requirements.

High Returns Should Not Be Mistaken for Safety

Lucy Castledine, Director of Consumer Investments at the FCA, warned consumers that unusually high fixed returns should be treated as a potential warning sign rather than a guarantee of investment performance.

The FCA stresses that mini-bonds, loan notes, and other speculative illiquid securities are high-risk investments and are generally unsuitable for ordinary retail investors.

Check Whether an Investment Firm Is Regulated

Consumers should carefully check the regulatory status of any company offering financial products or investment opportunities before transferring money.

Investing through an unauthorised firm can leave consumers with little or no regulatory protection if something goes wrong.

The FCA advises consumers to stop and check before investing, particularly when an opportunity promises unusually attractive returns or is being promoted by an unfamiliar company.

FCA Calls on Industry to Report Suspicious Activity

The FCA is also encouraging organisations involved in distributing or funding high-risk investments to report suspicious activity.

This includes regulated financial firms, banks, payment providers, lawyers, accountants, and auditors who may encounter questionable investment arrangements during their work.

The regulator has issued more than 1,200 warnings so far this year, instructed firms to stop unlawful financial promotions, and referred cases to other law enforcement agencies where further action may be required.

Investment Scams Can Be Difficult to Stop

The FCA recognises that investment scams can be complex, fast-moving, and difficult to disrupt. The challenge can be even greater when operations are based overseas or deliberately structured to avoid regulatory oversight.

As a result, tackling investment fraud requires continued cooperation between financial firms, banks, payment providers, regulators, government agencies, and law enforcement authorities.

Protect Yourself Before Investing

Mini-bonds and loan notes can carry significant risks, particularly when they are issued or promoted by unregulated companies. Attractive returns should never be viewed as a guarantee that an investment is safe.

Before investing, consumers should verify who is offering the investment, check whether the firm is authorised, understand how the investment works, identify how they could lose money, and carefully consider whether the level of risk is appropriate for them.

The FCA’s warning reinforces an important message for investors: stop, check, and understand the risks before handing over your money.