The Financial Conduct Authority has expressed concern that people
are being encouraged to invest in high-risk schemes offered by
unregulated firms without appreciating the risks involved.
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 our 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 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.
Our top tips to investors
- 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.
- If it's not regulated by us, opportunities for help if
something goes wrong will generally be severely reduced.
- Promises of high returns usually indicate high risk. If
something looks too good to be true, it usually is.
- 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.
- 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.
- 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.
- Consider diversifying your investments, so you're not exposed
to the risk of a single investment failing.
- A good rule of thumb is to limit any exposure to high-risk
investments to only 10% of your portfolio.
- Be wary if you're contacted out of the blue and feeling
pressured to make an investment.
