FCA sounds customer warning over mini-bonds and loan notes

The latest warning serves as an important reminder of the ongoing litigation and regulatory risks to both lenders and customers investing in mini-bonds, loan notes and other high-risk illiquid securities, an expert has said.

The warning was triggered by the recent collapse of Woodville Consultants Ltd, a litigation funder that had raised significant capital from retail investors through these types of unregulated loan notes.

It is estimated that Woodville raised more than £390 million from investors through these instruments, with the administrator's initial review finding that the firm's books and records appeared "unsatisfactory for a business of the company's size and are in a state of disarray". Following a contested administration order by the company’s own directors, the High Court appointed administrators on 16 July to oversee the bankruptcy process.

This isn’t the first time the regulator has raised alarm bells about the potential risks these products can pose for investors, including consumers. In January 2020 the regulator placed a 12-month moratorium on promoting unlisted speculative 'mini bonds' after concerns were raised that widespread marketing of these products, particularly online, was too high-risk and complex for most retail investors to understand.

Following a consultation, the regulator decided to permanently ban the mass-marketing of speculative illiquid securities, including mini-bonds and loan notes, to retail investors from 1 January 2021.

Despite the ban, the regulator acknowledged that consumers may still come across adverts for loan notes and mini-bonds in everyday places. The FCA said it was using the recent examples of high-profile failures to raise public awareness of potentially misleading adverts and scams, including on including social media, online adverts or websites promoting high-fixed returns.

The FCA says it has issued more than 1,200 warnings to firms so far this year to crack down on unlawful promotions. It said it had also referred a number of cases to other law enforcement agencies where further action may be necessary.

Commenting on the warning, Jessica Wicker, a corporate and financial litigation expert at Pinsent Masons, said: “The FCA's announcement serves as an important reminder that regulatory scrutiny of mini-bonds, loan notes and other speculative illiquid securities remains high”.

She added: “While the FCA specifically calls on anyone involved in distributing or funding high-risk investments, including regulated firms, banks, payment firms, lawyers, accountants and auditors, to report anything suspicious in connection with these products, this has direct relevance for lenders who may, in the ordinary course of business, extend credit to, or receive payment flows from, entities involved in issuing or promoting mini-bonds and loan notes.” She said there is also likely to be further scrutiny of the role and duties of lenders in what are often complex lending chains.

The FCA is actively encouraging banks, lenders, lawyers, accountants and other market participants to help identify and report potentially harmful investment structures and promotions. To address the harm from unregulated investments, regulated firms like banks and payment providers are expected to continue working alongside regulators, the government and law enforcement.

The regulator’s warning also flags concerns that some are firms finding loopholes in existing legislation to market these types of high-risk investments. These often involve unregulated introducers that target consumers with high-risk investments and typically retain a large fee or commission.

Raam Hargan, a litigation and regulatory specialist at Pinsent Masons, noted that it is likely that the FCA and the Solicitors Regulatory Authority will continue to monitor the activities of law firms and litigation funders, particularly in a mass claims scenario.

In its perimeter report, published in March, the FCA called on the government to review the legislative exemptions that currently mean certain high-risk investments can still be promoted despite the FCA ban.