The UK Financial Conduct Authority (FCA) today issued a warning regarding high-risk schemes offered by unregulated firms.
Many of the firms offering these products don’t need to be authorised by the FCA, as they rely on exemptions in the law that take them out of FCA’s remit.
If a firm offering an investment is not regulated by the FCA there are generally far fewer protections. For example, you are unlikely to be able to take complaints to the Financial Ombudsman Service and you’re unlikely to be able to make a claim through the Financial Services Compensation Scheme. That may make it much harder to get your money back if something goes wrong.
Some of the particularly risky products the FCA has seen have been unlisted loan notes or mini-bonds.
Unlisted loan notes or mini-bonds come in several forms and are often used to finance property developments. This involves an investor lending money, often via a third-party firm, to fund property developments. While all investments come with risk, for these products the risk can be particularly high and they are generally for experienced investors who feel confident in assessing the quality of the company’s business and the likelihood of being repaid.
People selling high risk, unregulated investments typically draw people in with enticing websites, marketing campaigns and social media finfluencer promotions. If someone introduces you to the investment, they may take a fee for doing so. This would generally be taken from the amount you’ve invested.
The opportunities the FCA has seen offered typically come with a fixed, high rate of return, which is a promised annual rate of interest paid to investors.
However, behind the glossy promotional and eye-catching brochures can sit high risk, opaque or even non-existent enterprises.
If you’re considering investing, use the FCA Register to see whether a firm is regulated by the FCA and consider if the level of risk is right for you. It is important to stress that some investments, including unlisted loan-note or mini-bond investments, are not suitable for everyday investors.
Taking higher investment risks can be right for some people, depending on your circumstances. But you need to make sure you’re aware of the risks you’re taking. And you should also be wary of putting all your eggs in one basket. Instead, spread your investments across different products and areas so you’re less dependent on any one pick to perform well for you. By diversifying your investments like this, you can smooth out the effects of one performing badly, while still reaping benefits when others do well.
