Mini Bonds Warning

A mini-bond is essentially an IOU issued by a company to an investor, in exchange for a fixed rate of interest over a set period of time. At the end of this period, the investors’ money is repaid.

This is how bonds of all kinds are used. The investor gets interest on the ‘loan’ and the company gets  cheap money for a period, essentially.

There is no legal definition of a ‘mini-bond’, as opposed to a normal bond, but the term usually refers to bonds for relatively small businesses, often retailers, that may struggle to raise money on larger markets.

Typically, the bonds are for three to five years, and investors earn regular interest payments during the life of the mini-bond. Some bonds offer rewards in another form such as discounts on their products.

The return on investors’ money entirely depends on the success and proper running of the issuer’s business. If the business fails, investors may get nothing back.

The Financial Conduct Authority (FCA) say that Mini-bonds typically offer high returns and this reflects the much higher risks involved compared to other types of investments. A business does not generally have to be regulated by the FCA to issue mini-bonds and there is normally no protection from the Financial Services Compensation Scheme (FSCS).

Any investors should think carefully before investing in a mini-bond, and not invest any money they can’t afford to lose.

From 1 January 2020, it is against FCA rules for anyone to promote ‘speculative mini-bonds’ to retail consumers, unless they are considered to be ‘sophisticated’ or have a high net worth.

The specific type of mini-bond that the FCA consider to be the most problematic is where a company raises money from investors with the intention of lending the money to a third party or investing in other companies, or property. Being able to pay interest and repay the original investment depends on how these lending or investment activities perform. Where these products are marketed to ‘eligible’ investors, they will have to clearly state the risk of losing all of the investment, and also provide clear information on the costs and charges associated with the product.

This type of company could face cash flow problems that delay interest payments, or it could fail altogether and be unable to repay any of the money investors have lent it.

Mini-bonds cannot easily be converted into cash as there is normally no market for these bonds.

If you receive a regulated investment service, such as investment advice, relating to a mini-bond from an authorised person and they fail to meet DCA standards, you may be able to complain to the Financial Ombudsman Service.

If you have any experiences with mini bonds, do let me know, by email.

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