The Financial Conduct Authority (FCA) has permanently banned the mass marketing of speculative mini-bonds, following a series of scandals that left ordinary investors over £1bn out of pocket last year alone.
Mini-bonds have become a popular way for smaller firms to raise money. With the promise of bumper rates of return and/or perks such as 'burritos', these investments can be very attractive.
However, there have been mounting concerns that firms have been promoting these high-risk products to ordinary savers who don't understand the risks involved.
Here, Which? explains why the FCA has banned mini-bond marketing and looks at whether investors are fully protected from losing money to the speculative products.
The ban was spurred by the case of , which issued mini-bonds offering tempting rates of return. The firm went into administration in January last year and the collapse saw nearly 12,000 people lose £236m.
Even if a firm offering mini-bonds is authorised by the FCA, the sale of mini-bonds is not a regulated activity, meaning you're generally not protected in the same way as regulated savings and investments, and usually can't get money back through the .
Concerns have been raised that ordinary investors do not understand the risks mini-bonds carry and are unable to afford the potential financial losses involved.
New research by the University of Warwick conducted for the FCA asked people to pick between cash Isas, mini-bonds, and stocks and shares Isas, and found that mini-bonds were the second most popular choice after cash Isas.
What people chose had nothing to do with the advertised returns (when they hiked up the promised returns from the mini-bonds, investors became more sceptical), but because stocks and shares Isas were wrongly seen as riskier than mini-bonds.
Many struggled to understand the level of risk involved in the bonds and researchers questioned whether the use of the word 'bond' misled people into thinking these were secure investments.
Unfortunately, the ban may not fully protect ordinary savers.
Mini-bond ads have continued to appear on Google since the temporary ban came into force in January.
Furthermore, in March this year, Bank of England governor, Andrew Bailey, told the Treasury Select Committee that firms were 'innovating' around the temporary ban by 'morphing into introducers'.
An 'introducer' is an individual or company appointed by a firm to distribute financial promotions on its behalf.
While not all mini-bond ads are scams, they are a good example of the type of product which would be more likely to be subject to a scam due to their unregulated nature.
Consumer finance campaigner, Mark Taber, who has been heavily involved in campaigning to stop scam investment ads told Which?: 'In general, I think making the temporary ban permanent without addressing the fact it's not working is ridiculous.
'I've reported nearly 300 scam investment ads so far this year since the temporary ban came into force. There is a strong argument that the FCA ban making people move from advertising high-return bonds directly to hiding behind these fake comparison sites means more people are sucked in rather than less.
It's difficult to assess the overall risks of mini-bonds, as they're linked to the fortunes of the company that issues them.
Whatever the rate on offer they're usually issued by small firms and start-ups who may find it difficult to raise money from institutional investors such as banks - so carry much higher risks.
This type of firm is more likely to face cash flow issues that delay interest payments, or the company could go bust and be unable to pay any money back to investors. In addition to this, mini-bonds are highly illiquid - which means they can't easily be converted into cash.
They don't normally have a secondary market so they can't be sold on, which can make it difficult to get your money out. Also, bondholders don't have the same status as shareholders, so you won't necessarily have control over the activities of the company you're invested in. The return on investors' money is subject to the success and proper running of the bond issuer's business.
For example, investors in high-profile mini-bonds issued by Mexican food chain suffered heavy losses. Nearly 800 people who collectively poured £3.7m into Chilango's 'burrito bond' were given the option in 2019 of either receiving 10p in every £1 they invested or swapping their mini-bond debts for debt-like shares, which promised returns sometime in the future.
Mini-bonds aren't the only investments excluded from FSCS compensation rules. Other investments which aren't covered include:
Even if you see an FSCS logo, don't think it's legitimate. Websites offering fake investments are becoming more common, with many claiming FCA regulation and FSCS cover that doesn't exist.