By Dominic Marsala
Published: 11 May 2023 Protection
What is amini-bond?
There is no legal definition of a ‘mini-bond’, but the term usually refers to a type of investment product.It isessentially a kind ofloanyou give to an investment company (the issuer).
For example,you(the investor)buyamini-bondfromtheinvestmentcompany (the issuer). In exchange,youreceivea fixed rate of interest over a set period.At the end of this period, theissuer should repay themoney from themini-bondback to you.
Are mini-bonds risky?
Mini-bondstend to carry higherrisks,butalso offerhigherrewards.
The reason for the high risk/rewardis becausemini-bondsare usually issued by:
- Small companies or start-ups
- Companies that find it difficult to raise funds from institutional investors, orloans from banks
If the issuer’s business fails, you could lose your investment.This type of company could face cash flow problems that delay interest payments.It could also fail altogether and be unable to repay any of the money investors have lent it.
Mini-bondsusually cannot be sold on(unlike with shares or bonds of larger companies). You are usually locked in until the bond‘matures’, andso won’t be able toexit your investment early.
In summary: you invest inmini-bondsat your own risk.
Aremini-bondsregulated?
In general,mini-bondsaren’t protected by FSCS or FCA. Businesses don't have to be regulated by the FCA to issuemini-bonds.
However,we do protect ‘investment services’provided by firms in relation tomini-bonds.
For example, ifanauthorisedcompanygivesinvestment advice about mini-bonds,then itmust make surethe adviceis suitable and in-line with FCA regulations.
But if you’ve invested in mini-bonds, and the mini-bond issuer fails,it'sunlikely we cancompensate you for any losses.
Mini-bond sales
Customers buying mini-bonds often come across sales tactics like these:
- Adverts promising high returns
- Being contacted out of the blue
- Feeling pressured to invest
Mini-bonds can be very attractive, seeing as banks and building societies offer low interest rates. Mini-bonds can often be marketed to seem like safe/deposit-style products, simply offering better returns than conventional savings products.
Should I invest inmini-bonds?
If you are thinking about investing inmini-bonds, it’s a good idea to first get professional financial advice. Especiallyif you’renotsure about what you’re investing in.
Here are some pointers:
- Somemini-bondswill be riskier than others
- Don’tinvest money youcan’tafford to lose
- Don’t invest money that youmight needbefore the investment termis over
- It'sgenerallya bad idea to invest more than 10% of your net wealth inmini-bonds
For more information onmini-bonds, we recommend reading theFCA’s mini-bonds page.
My mini-bond issuer has gone bust. What can I do?
If you’ve invested inmini-bonds,it’s unlikely we can compensate you for any losses.
So,if the mini-bond issuer fails, you could lose all your money.
Mini-bond scams
Whilemini-bondscan be a legitimate way for a business to raise money, there are also many scamsassociated with this kind of investment.
One example is a Ponzi scheme.Ponzi schemes nearly always offer a healthy profit. However, often this ‘profit’ is actuallyjust moneyfrom other investors– i.e. they’re not really profits at all.
Before you invest, be aware of the following:
- Adverts promising high returns
- Being contacted out of the blue
- Feeling pressured to invest
- Research the business’ reports and accounts
Find out more about how to avoid investment scams ontheFCA’sScamSmartpage.
Cryptoassets, crypto coins and cryptocurrency
In October 2020, the FCA has banned the sale of derivatives and exchange-traded notes (ETNs) that reference certain types of cryptoassets to retail consumers.
Cryptoassets – like Bitcoins and other digital currencies – are not protected by FSCS.
