The UK Financial Conduct Authority (FCA) is warning consumers about the risks of investing in loan notes and mini-bonds issued by unregulated companies, after continuing to see people lose money in these high-risk investments.

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

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.

The FCA permanently banned the marketing of speculative illiquid securities, including mini-bonds and loan notes, to retail investors from 1 January 2021.

But 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 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.

Examples of the practices the FCA sees include:

• 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.

The regulator encourages anyone involved in distributing or funding high-risk investments to report anything suspicious. This includes 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.