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 we’ve 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 we have 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 our register to see whether a firm is regulated by us 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.
Many of those who promote these high-risk investments don’t need to be regulated by us. Exemptions in the law mean certain high-risk investments can be marketed directly to those considered wealthy or if they’re an experienced investor, known as a ‘sophisticated investor’, under strict criteria.
In the UK, potential investors can self-certify that they are sophisticated.
If you’re asked to confirm that you are a sophisticated investor, think carefully about whether you genuinely have experience of similar high-risk investments, and whether it’s in your best interest. Otherwise, you could be exposed to investment opportunities that aren’t appropriate and certain regulatory protections will not apply.
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.
1. We urge people considering investing to check whether the firm they are dealing with and, if different, who they are investing their money with are regulated by us, and consider if the level of risk is right for them.
2. If it’s not regulated by us, opportunities for help if something goes wrong will generally be severely reduced.
3. Promises of high returns usually indicate high risk. If something looks too good to be true, it usually is.
4. In judging whether a promised fixed return is relatively high, which often indicates a high investment risk, it can be helpful to compare it with what is on offer on other fixed return products, like savings bonds.
5. If you’re asked to confirm that you are a sophisticated investor, think carefully about whether you genuinely have experience of similar high-risk investments.
6. Research recent reports and accounts from the firm offering the investment. This will help you to judge the prospects and level of risk involved. Seek guidance or financial advice if you’re unsure.
7. Consider diversifying your investments, so you're not exposed to the risk of a single investment failing.
8. A good rule of thumb is to limit any exposure to high-risk investments to only 10% of your portfolio.
9. Be wary if you’re contacted out of the blue and feeling pressured to make an investment.
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