The UK Financial Conduct Authority (FCA) has issued a fresh warning to consumers about the dangers of investing in loan notes and mini-bonds offered by unregulated companies, noting that people continue to lose money in these high-risk products.

The regulator pointed to the recent failure of Woodville Consultants Ltd, a litigation funder that raised capital from retail investors through unregulated loan notes, as an example of the potential risk to investors.

A loan note or mini-bond typically involves lending money to a company for a set period in return for interest. If that company fails, consumers could lose every penny, the FCA said.

The FCA permanently banned the marketing of speculative illiquid securities, including mini-bonds and loan notes, to retail investors from 1 January 2021. However, consumers may still encounter adverts for these products in everyday places, including social media, online adverts, or websites promoting high fixed returns.

The adverts 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.

Practices the FCA sees

  • 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.

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.

Lucy Castledine, director of consumer investments at the FCA, said 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.

The FCA encourages anyone involved in distributing or funding high-risk investments to report anything suspicious, including regulated firms, banks, payment firms, lawyers, accountants and auditors who may be involved in getting these investments to consumers.

The FCA has issued more than 1,200 warnings so far this year, told firms to stop unlawful promotions and referred cases to other law enforcement agencies where further action may be needed. But scams can be complex, fast-moving and hard to stop, especially when run from overseas or designed to avoid regulation.

To address the harm, regulated firms like banks and payment providers, regulators, government and law enforcement need to continue to work together. Consumers need to be alert to the risk of harm and protect themselves using tools like the FCA Firm Checker, and report any concerns to the FCA if they see a suspicious investment or think they've been contacted by a fraudster or unauthorised firm.