Calling a halt on mini-bonds

The Financial Conduct Authority has announced a temporary ban on the promotion of most ‘mini-bonds’.

Have you ever been tempted by those advertisements offering 8%+ yields on property-backed bonds?

If you have, then you’ve probably been looking at a promotion for ‘mini-bonds’. These investments are not always what they seem and have already resulted in losses for investors, notably in the case of the failure of London Capital Finance (LCF) at the start of 2019.

There is no legal definition of what constitutes a ‘mini-bond’, but generally it is a fixed term bond that cannot be traded on the stock market and is typically issued by a small, unquoted company. As securities, rather than deposits, mini-bonds are not covered by the £85,000 depositor protection given by Financial Services Compensation Scheme (FSCS).

At the end of November 2019, the Financial Conduct Authority (FCA) announced that it would be banning the promotion of most new mini-bonds to all but high net worth and sophisticated investors from the start of 2020. Many thought the FCA’s move was overdue, as there have been other failures since LCF.

A lesson from the whole sad mini-bond saga is that unadvised investors can end up taking risks which are not sufficiently explained and/or which they do not fully understand. Many of the mini-bonds appeared to have some form of property backing, but the existence of a reference to bricks and mortar is no guarantee of capital security. Investors should be particularly wary if the property involved is a speculative development.

The high interest rates on offer ought to be a warning of potential dangers. At a time when bank base rates were under 1%, red lights should have been flashing at interest rates over 7% higher for ‘secured’ loans. Remembering the adage that “If it looks too good to be true, it probably is”, could have saved some mini-bond investors five-figure losses.

Next time you come across an investment that quotes returns well above normal market rates, think twice before going any further. And if you decide you are still interested, take independent financial advice before parting with your money. That way you are firmly within the FCA’s regulatory remit and associated compensation schemes.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

20th December 2019