Investors warned against mini bonds after latest collapse
The Financial Conduct Authority has warned that retail investors are still coming across the risky products despite a marketing ban
Investors have been warned against putting money into mini bonds issued by unregulated companies just five years after the Financial Conduct Authority (FCA) banned promotions of the risky products.
The high-profile collapse of London Capital & Finance in 2019 – where 11,600 bondholders lost an estimated £237 million – prompted the FCA to ban the marketing of mini-bonds to retail investors in 2021.
They can now only be sold to high-net worth and sophisticated investors who can handle more risk in their investment portfolio.
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But the regulator remains concerned after the July failure of Woodville Consultants, a litigation funder that raised capital from retail investors through unregulated loan notes.
The FCA is now warning consumers about the risks of investing in loan notes and mini-bonds issued by unregulated companies, after it said it continues to see people lose money in these high-risk investments.
What is a mini bond?
A mini bond usually involves lending money to a company for a set period in return for interest.
Mini bonds were popular pre-pandemic when savings and interest rates were at record lows.
The rate of return is often high - even at double digits - to tempt investors and reflect the risk. But they are not regulated so you can’t get any recourse from the Financial Services Compensation Scheme or Financial Ombudsman Service if something goes wrong.
Ultimately, if the company fails, consumers could lose every penny.
Nouran Moustafa, practice principal for Roxton Wealth, said her starting point for an ordinary retail client with mini bonds is a very simple 'no'.
She said: “The word ‘bond’ sounds reassuring, but some of these investments are anything but. You can be lending to one unregulated company, with little liquidity, limited diversification and the possibility of losing every penny if that business fails.”
Moustafa feels they could “potentially” have a place, but if so “only for a very small minority of sophisticated investors who fully understand the structure" and who aren't relying on that money for the future.
“My rule is simple: if losing 100% of that investment would materially change your life, you should not be anywhere near it," said Moustafa. “No yield is worth destroying your financial plan.”
What is the latest mini bond warning about?
Despite promotions of mini bonds to mainstream investors being banned since January 2021, the FCA said consumers may still come across adverts for loan notes and mini bonds in everyday places including social media, online adverts or websites promoting high fixed returns.
The adverts can look simple and safe but may be scams, said the FCA.
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.”
Anita Wright, chartered financial planner for Ribble Wealth Management said mini bonds can be seductive but investors should ask why the offer reached them.
She said: “Credit this good doesn't need retail money, banks price it for a living, and private credit funds fight over the scraps. When the capital is raised instead from savers through a commissioned introducer, every desk with a credit team has already looked and walked away.
“You are not early. You are last,” Wright said, adding that the only people who know the business they are lending to and can afford to write off the investment completely should consider buying one.
“Even then the deal is lopsided,” she continued. “If the business fails you lose like a shareholder, if it thrives you still only get your interest.”
