Investment charges are becoming clearer

Anthony Morrow

Co-Founder of OpenMoney

May 31, 2019

In November of 2019, the FCA announced that from the 1st January, they would be prohibiting the marketing of mini-bonds. Mini-bonds essentially involve you purchasing company (issuer of the bond) debt for a set time, in exchange for regular interest payments[1].This is deemed to be a risky form of investment, as the money you get back is entirely dependent on the company you have purchased a bond from, staying afloat.

They may be risky, but that’s not to say they are necessarily a bad thing for the experienced investor. So why isn’t anyone allowed to promote them? The motivation for the FCA banning the marketing of this type of investment was to limit the risk to retail investors who do not have the experience to assess and manage the risks involved.[2]This form of investment can seem like an easy win to the untrained eye, but they should not be taken lightly or without doing the necessary homework.

What you should know before investing in a mini-bond

·      It’s vital that you look into the financial history of the company/issuer of the bond you’re buying. Due to the illiquid nature of mini-bonds, it’s not possible to sell them on or turn them into cash if the future of the company falls into question. You’re reliant on the issuer remaining in business for the agreed time limit to ensure that you get any kind of return.

·      Anything you invest in mini-bonds is not protected by the Financial Services Compensation Scheme (FSCS). This scheme is in place to protect your investments in the case of a firm ceasing to operate,and you are covered up to £85,000. Anything you invest in this way is solely at your own risk. A recent investigation by Telegraph Money[3] found salesmen of mini-bonds wrongly assuring prospective investors that their money would be protected by the FSCS. Be wary of any issuer using this as a sales tactic, it is factually incorrect and could be costly for you.

·      It’s common for mini-bonds to claim to have ISA status even if this is not the case so you may not be in line for the tax relief you were expecting.

·      The promised returns can be incredibly appealing and it’s no surprise that they attract many people when they are stumbled across online. It’s important to keep in mind that the rate of return is often indicative of the risk involved. The higher the return, the greater the risk. 

What’s a good alternative?

If your main goal is to build up funds with no risk, you could look at a Cash ISA. Rather than investing, this is classed as saving –they’re ideal for building up a rainy-day fund in around five years or less. You’re guaranteed a specific rate of interest and you will not lose any money.

If however you’re looking to invest and are new to the process, or simply don’t want the pressure of going through a company’s financial history with a fine-tooth comb, a Stocks & Shares ISA could be a good fit for you.

Yes, the potential for return is dependent on the performance of your Stocks & Shares within the market, but all investments carry some element of risk. The difference is, this is a regulated approach,with more flexibility to adapt and sell where necessary, and you are protected by the Financial Services Protection Scheme should anything happen to the company you have invested with.

Here at OpenMoney, one of the products we advise on is our Stocks & Shares ISA. If you are eligible to invest with us, we will recommend you one of our three model investment portfolios based on the answers you provide during our advice process. They vary in level of risk so there is something for those wanting to err on the side of caution and also the more experienced investor with a greater appetite for risk.