British savers are reportedly continuing to invest millions of pounds in risky, unregulated 'loan note' schemes, also known as mini-bonds, despite recent warnings from the Financial Conduct Authority (FCA). Lawyers representing victims of these schemes contend that the regulator has been slow to act, allowing new investors to fall prey to these high-risk financial products.
Loan notes are financial instruments that often advertise high returns with weak or unconventional guarantees, exposing investors to substantial losses. Evidence suggests that losses from failing mini-bond schemes now amount to billions of pounds, with tens of thousands of individuals, many of them pensioners, already victimized.
Martin Richardson, senior partner at Richardson Hartley Law, which specializes in loan note recovery, criticized the FCA's timing, stating, "The question is why it has taken until now." He noted that the marketing of speculative mini-bonds and loan notes to ordinary investors has been effectively banned since January 2021. "Five years on, we are still taking calls daily from people who were sold precisely these products, usually through unregulated introducers taking a substantial commission out of the money before it ever reached the project," Richardson said.
He added that new loan note schemes continue to launch, employing similar structures, "asset-backed" language, and trustee arrangements that have previously led to investor losses. "A warning is welcome, but what victims need is enforcement at the perimeter, and they need it before the money has gone," he urged.
A common feature of these schemes is the high commission paid to intermediaries. The FCA has highlighted the risks associated with unregulated financial investments, pointing to the recent £390 million collapse of Woodville Consultants, which raised funds through loan notes. Insolvency practitioners are investigating allegations that Woodville operated as a 'Ponzi' scheme, using funds from new investors to pay off earlier ones.
The City has previously experienced significant failures, including the 2019 collapse of mini-bond provider London & Capital Finance, which a High Court ruled was a Ponzi scheme. In the past year, Godwin Capital, which raised over £160 million, and The 79th Group, which lost investors an estimated £250 million, have also failed and are considered potential Ponzi schemes by insolvency practitioners.
Concerns are growing about the potential impact of these loan note losses on the broader financial sector, with questions arising about the role of banks and financial institutions in processing scrutinized transactions. If found negligent, these institutions could face a substantial compensation bill.
The FCA advises consumers to be wary of advertisements for loan notes and mini-bonds that appear in everyday places, including social media and online advertisements, particularly those promoting high fixed returns. Warning signs include pressure to act quickly, unclear explanations of potential losses, or unsubstantiated claims that an investment is "asset-backed."