The UK’s financial services watchdog The Financial Conduct Authority (FCA) has issues a warning for investors and advisers to beware of ‘high-risk investments from unregulated firms’
The regulator said in a statement earlier today that it is “concerned” 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 Financial Conduct Authority (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, the FCA said. “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.
The FCSA has listed some of what it calls “particularly risky products” citing unlisted loan notes or mini-bonds as examples.
“Unlisted loan notes or mini-bonds come in several forms and are often used to finance property developments,” the FCA statement said. “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.
Unregulated
“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.
The FCA has urged investors to, use its register to see whether a firm is regulated by the FCA and consider if the level of risk is right for you.
Everyday investors
The regulator added that it is important to stress that some investments, including unlisted loan-note or mini-bond investments, are not suitable for everyday investors, but such opportunities are allowed as often an experienced investor, known as a ‘sophisticated investor’, might spot an opportunity and feel comfortable working with an unregulated entity, though this should be under strict criteria
“Many of those who promote these high-risk investments don’t need to be regulated by us,” the FCA added. “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.”
The regulator summarised by stating that taking higher investment risks “can be right for some people”, depending on circumstances. But investors always need to make sure they are aware of the risks they are 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,” the FCA concluded. “By diversifying your investments like this, you can smooth out the effects of one performing badly, while still reaping benefits when others do well.”
The FCA has issues a series of tips for investors and advisers:
- 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.
