With average interest rates on savings accounts falling to under 1% for the first time, promises of 8% returns are bound to attract attention. But don’t be fooled into placing your cash in high-risk mini-bonds. A mini-bond is a high-risk form of corporate debt.
You lend your money to a company in return for a fixed interest-rate and the promise you’ll get your money back at the end of the term. The interest rates are attractive – typically around 8% – but you are taking a big risk with your cash. If the business goes bust, you are unlikely to get your money back.
This is something investors in restaurant group Chilango are just discovering. More than 1,000 people bought £5.8m of its mini-bonds. The investments were dubbed “burrito bonds” because if you invested more than £10,000 you could claim one free burrito a week. In November 2018 MoneyWeek warned readers to “think long and hard before you sink your money into the burrito bond”.
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Now the vast majority of those bond holders stand to lose their money after Chilango announced it is entering administration. They “will be reliant on returns from the sale of its assets, which the company warned last year could lead to them losing 99% of their investment”, says Sarah Butler in The Guardian.
This is only the latest example of the significant risk mini-bonds present. In 2015 Secured Energy Bonds collapsed, losing investors more than £7m. In January 2019 London Capital & Finance (LCF) went bust, leaving 12,000 investors facing a £236m loss. “Mini-bonds are examples of high-risk investment products that should come with a health warning,” Myron Jobson, a personal finance campaigner at Interactive Investor, told The Times. “If something seems too good to be true, it usually is.”
Mini-bonds are an unregulated product
The problem with mini-bonds is that while the marketing is regulated, the product isn’t. This means that, unlike cash savings, money invested in mini-bonds is not protected by the Financial Services Compensation Scheme, which will compensate you with up to £85,000 if your bank or building society goes bust.
There is also confusion because firms authorised by the Financial Conduct Authority (FCA), the City regulator, sell mini-bonds. This prompted a surge of investments in LCF’s mini-bonds as “the firm was able to boast of authorisation from the FCA, despite the fact that the risky ‘mini-bonds’ it sold were unregulated,” says Adam Williams in The Telegraph.The Treasury has said it intends “to tighten industry rules following concerns that there was not a ‘strong enough safeguard’ against unregulated financial firms whose adverts are misleading and unclear”, says Williams. The FCA brought in a temporary ban on marketing mini-bonds to ordinary savers in January and will now make it permanent.
“We aim to prevent people investing in complex, high-risk products which are often designed to be hard to understand,” Sheldon Mills, interim executive director of strategy and competition at the FCA, told the Financial Times.
As with any investment, make sure you understand it before you buy it. Remember, a higher interest rate usually means higher risk. Finally, don’t choose your investments based on the free food that comes with them.
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