Are mini-bonds investments a risk worth taking?

This is a guest post by Andrew Bailey.  All views expressed are Andrew’s own, and not necessarily shared by Which?. 

If you saw an investment opportunity offering returns of eight, 10 or even 12 per cent, would you be tempted to invest your cash?

If so, you wouldn’t be alone. ‘Speculative mini-bonds’, offer high returns – but at a high risk. You may have seen these products discussed in Which? Magazine or news stories.

The particular kind of mini-bond we’re concerned with is where a company raises money from investors with the intention of lending the money to a third party or investing in other companies, or property.

Being able to pay interest and repay the original investment depends on how these lending or investment activities perform. But product marketing often plays down the risk of losing your money. 

‘Returns may never materialise’

In a time of low interest rates, it’s not surprising that these products are attractive. The problem is that the promised returns may never materialise.

In reality, these products have a high chance of failure, with the result that investors could lose all of the money they invest.

You may be given the impression that the products are regulated by us, or protected by the Financial Services Compensation Scheme – but this almost always isn’t the case, meaning that if the issuer of the mini-bond goes bust, you’re unlikely to get the money you invested back. 

Under the current law, it is typically outside our scope to regulate companies that only issue these products. But we can place restrictions on how they’re marketed and who they’re marketed to.

Choosing suitable products

From 1 January, we’re severely restricting the marketing of these more speculative types of mini-bond to ordinary consumers.

We are so concerned about the potential level of consumer harm that we’re introducing these changes straight away to protect your savings. 

This means that you should only receive promotions for these products if you have a high net worth or are an experienced and thus sophisticated investor in them. And the promotions will have to be clear on an important point – if you invest in these products, you risk losing all your money.

They’re very unlikely to be suitable products for you to invest large amounts of your life savings or your pension into.

If you come across a speculative mini-bond product offering high returns being marketed openly on the internet after 1 January, there is a good chance that the person making that promotion is breaching our rules or the law, and the offer may be a scam.

You can visit our ScamSmart website for more information on spotting scams.

Further rule changes

These mini-bonds are just one example of a high-risk investment. We’re taking a closer look at this whole area.

We will be proposing further changes to our rules to protect consumers next year. In the meantime, remember that usually the higher the return promised, the higher the risk.

As a rule of thumb, it is a bad idea to invest more than 10% of your net wealth in this kind of asset. But never invest more than you can afford to lose.

If you want to learn more about the risks of investing in mini-bonds, you can find out more information here.

This was a guest post by Andrew Bailey.  All views expressed were Andrew’s own, and not necessarily shared by Which?.