Some online adverts offering high-return investments may appear simple and safe but could potentially end up with people losing all the money they put in, the City regulator has warned.
The Financial Conduct Authority (FCA) has highlighted the risks of investing in loan notes and mini-bonds issued by unregulated companies, after continuing to see people lose money.
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 regulator said.
Investors in mini-bonds or loan notes are unlikely to be able to refer their complaints to the Financial Ombudsman Service or claim for losses through the Financial Services Compensation Scheme if something goes wrong, unless they dealt with an authorised person and the complaint relates to a regulated activity, the FCA said.
The FCA banned the marketing of speculative illiquid securities, including mini-bonds and loan notes, to retail investors from January 1, 2021.
But people 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.
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, the regulator said.
The FCA warned firms may be promoting high-risk investments without the permission they need.
People may also be encouraged to certify themselves as experienced or wealthy investors to enable investments to be promoted to them.
The regulator said there may be unclear fees or hidden conflicts, where those selling the investment may benefit themselves from consumers investing.
Lucy Castledine, director of consumer investments at the FCA, said: “Big, fixed returns are a warning sign, not a guarantee.
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“Loan notes, mini-bonds and other speculative illiquid securities are high-risk investments and are not suitable for most people.
The regulator warned people could end up losing everything they invest (PA)“Ordinary retail investors should only invest through regulated firms because if they invest through an unauthorised firm, they may have little or no protection if things go wrong.
“We are working hard to prevent harm, but consumers should still stop and check before investing.”
The FCA is encouraging anyone involved in distributing or funding high-risk investments to report anything suspect.
This includes regulated firms, banks, payment firms, lawyers, accountants and auditors who may be involved in getting investments to consumers.
The regulator said it 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.
People can use the FCA’s online Firm Checker tool to check if a financial firm is authorised by the FCA and has its permission to provide certain services.
The regulator said people can also help by reporting any suspect investments to it or if they believe they have been contacted by an unauthorised firm.
Giles Mason, director of campaigns at UK Finance, said: “Investment scams cause significant harm, with more than £220 million stolen last year.
“Criminals often impersonate legitimate firms so it’s vital to check who you’re dealing with before making any investment.
“You can verify whether a firm is genuine and properly authorised by using the FCA’s Firm Checker service.
“Follow the advice of the Take Five to Stop Fraud campaign and always take time to think before you invest. A genuine organisation will not pressure you to make an immediate decision or transfer money on the spot. If you think you’ve been scammed, contact your bank immediately.”
Sophie Legrand-Green, head of policy at the Investing and Saving Alliance, said: “We welcome the FCA sounding the alarm on this issue.
“When products promise unusually high fixed returns, particularly from unregulated businesses, it is essential that consumers stop, check the details and fully understand the associated risks, fees and protections before investing their money.
“This problem requires a collective response to maintain confidence in investing, and the wider industry also has an important role to play in identifying poor practice and protecting consumers.
“We look forward to working with the FCA and our members to support this effort.”