The FCA has warned consumers about the risks of investing in loan notes and mini-bonds issued by unregulated companies.
It said it has seen a rise in people losing money in these high-risk investments.
A loan note or mini-bond usually involves lending money to a company for a set period in return for interest. If that company fails, consumers could lose every penny.
In its warning today the FCA referenced the recent failure of litigation funder Woodville Consultants. The firm had raised over £300m in capital from retail investors through unregulated loan notes, using the cash to fund law firms handling consumer claims related to motor finance.
The firm had over £240m owed to investors when it defaulted on repayments, with unpaid loan-note holders then pushing the firm into administration.
The FCA permanently banned the marketing of speculative illiquid securities, including mini-bonds and loan notes, to retail investors from 1 January 2021.
However many consumers may still come across adverts for loan notes and mini-bonds online, including social media, online adverts or websites promoting high fixed returns.
The FCA said that 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.
The regulator said it had seen 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.
It had also seen consumers being encouraged to certify themselves as experienced or wealth investors to enable investments to be promoted to them. The FCA allows sophisticated investors to invest in a wide range of options.
Scammers have also been 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.
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.”
The FCA has issued over 1,200 warnings so far this year as well as telling firms to stop unlawful promotions and referred cases to other law enforcement agencies where further action may be needed.
The regulator called on consumers to protect themselves by using tools such as its Firm Checker.