The Financial Conduct Authority (FCA) has warned investors about the risks of mini bonds and loan notes issued by unregulated companies, following the July failure of Woodville Consultants, a litigation funder that raised capital from retail investors through unregulated loan notes.
The warning comes five years after the FCA banned promotions of mini-bonds to retail investors, a move prompted by the collapse of London Capital & Finance in 2019, in which 11,600 bondholders lost an estimated £237 million. Mini bonds can now only be sold to high-net-worth and sophisticated investors.
Despite the ban, the FCA said consumers may still see adverts for loan notes and mini bonds on social media, online adverts or websites promoting high fixed returns. The adverts can look simple and safe but may be scams, the regulator said.
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.”
Nouran Moustafa, practice principal for Roxton Wealth, said her starting point for an ordinary retail client with mini bonds is a 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.”