Savers lose out to the speculative mini-bond

ANY SAVINGS scheme offering interest rates of between 5 and 15 per cent a year is bound to tempt savers desperate for a decent return on their money. Especially if it is promoted to retired people looking to generate higher income in retirement and the sales literature downplays the risks.

Speculative mini-bonds are the latest such product to be given the hard sell, and like so many in the past, savers who took the bait have lost huge sums of money.

The Financial Conduct Authority (FCA) has banned promotion and mass marketing of these mini-bonds from January, but stay on your guard because the underlying problem will never go away.

BROKEN BOND

Savers have lost millions this year after investing in high-risk plans without understanding the dangers.

Mini-bond provider London

Capital & Finance (LCF) collapsed owing around 12,000 people a total of £236 million, an average loss of almost £20,000 each, of which they might get back just a quarter.

The FCA warned investors to shun unauthorised mini-bond firm Asset Life, which tempted 500 savers to hand over around £8 million in return for interest rates of 8.75 per cent.

Another mini-bond company linked to LCF, Blackmore Bond, which had raised £25 million, has also come under scrutiny.

The FCA is investigating more than 80 suspected cases of regulated activities carried out without authorisation, plus another 200 financial promotions that may have broken its rules.

Chief executive Andrew Bailey said it was acting to protect savers ahead of the forthcoming Isa season: “It is quite common for mini-bonds to have Isa status, or to claim such, even though they do not.”

NO RETURN

Interactive Investor head of personal finance Moira

O’neill said with savers getting just 2 per cent even if they lock their money away for four years, a mini-bond paying four times that amount or more is tempting.

The risk is that the company behind the bond could go out of business and this is difficult to assess. She added: “The sector has escaped the kind of in-depth analysis that is normal for the stock and corporate bond market.”

Chase devere chartered financial planner Patrick Connolly has never sold mini-bonds and recommended that the vast majority of people do not buy them.

He said never confuse them with savings accounts, as there is a risk you will not get your original money back: “Unlike most Uk-based savings accounts or investment funds, investors cannot fall back on the Financial Services Compensation Scheme (FSCS) if things go wrong.”

LONG HISTORY

This age-old problem nearly always affects retired savers looking to maximise their income.

So-called precipice bonds were an early example.around 250,000 savers invested £5 billion from 1999, but many lost their capital as promises of 10 per cent income a year proved unsustainable.

Zero dividend preference shares also flopped after being promoted as low-risk vehicles, as did with-profits bonds, due to high charges and poor performance.

Absolute return funds have been heavily promoted to older savers seeking a superior return to cash, but the reality has not matched the hype.

PEER PRESSURE

Now fears are growing that the Innovative Finance ISA or Ifisa could go the same way, despite being pushed by the Government.

The Ifisa is primarily a tax wrapper for peer-to-peer (P2P) lending platforms, which can offer doubledigit returns by lending money to start-ups and property developers, via crowdfunding. High-profile platform Lendy offered 12 per cent a year before going bust in May, leaving 22,000 waiting to see how much of their estimated

£165 million can be salvaged.

Bondmason also closed after struggling to make a decent return, although it said no investors should lose money.

AJ Bell personal finance analyst Laura Suter said the Ifisa’s days must be numbered, as the regulator and the Government are examining its suitability after the LCF scandal: “We would urge them to scrap the Ifisa.”

Damien Fahy, director of personal finance site Moneytothemasses.com, said new rules this month will tighten P2P protection and he criticised the FCA for reacting to obvious problems with mini-bonds rather than preventing them.

‘It is quite common for mini-bonds to have Isa status or to claim such even though they do not’

WORLDLY WISE

Which? head of money Gareth Shaw said savers should be on alert because mini-bonds can still be marketed until the end of the year, so check the FCA register to ensure any firm you deal with is listed. “This does not guarantee the actual products offered are regulated, but it does mean the company has to follow FCA rules, and you can complain to the

Financial Ombudsman Service if it does not,” he said.

Also check whether a product has FSCS protection, and consider taking independent financial advice, as you have recourse if anything goes wrong.