Budding investors are being warned they could struggle to get their money back from some high-risk schemes with “glossy promotions” if something goes wrong.
The Financial Conduct Authority (FCA) said it is concerned that people may not appreciate the risks involved from putting money into schemes offered by unregulated firms.
People selling high-risk, unregulated investments often attract people with enticing websites, marketing campaigns and social media influencer promotions, the regulator said.
It added that if someone introduces another person to the investment, they may take a fee for doing so – which could be taken from the amount you’ve invested.
The regulator said many firms offering such products do not need to be authorised by it – meaning consumers have fewer protections if something goes wrong.
For example, people would be unlikely to be able to take complaints to the Financial Ombudsman Service or to be able to make a claim through the Financial Services Compensation Scheme, the FCA said.
Some investments are not suitable for everyday investors, the regulator said.
Some of the risky products it has seen have been unlisted loan notes or mini-bonds. These come in several forms and are often used to finance property developments.
This involves an investor lending money, often via a third-party firm, to fund property developments.
While all investments come with risk, for these products the risk can be particularly high and they are generally for experienced investors who feel confident in assessing the quality of the company’s business and the likelihood of being repaid, the regulator said.
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The products the regulator has seen offered typically come with a fixed, high rate of return.
The FCA suggests that someone considering investing should use its register to see whether a firm is regulated by it and consider if the level of risk is right for them.
Certain high-risk investments can be marketed directly to those considered wealthy or if they are an experienced investor. In the UK, potential investors can self-certify that they are sophisticated, the regulator said.
It added that if someone is asked to confirm that they are a sophisticated investor, they should think carefully about whether they genuinely have experience of similar high-risk investments, and whether it is in their best interests.
Otherwise, they could be exposed to investment opportunities that are not appropriate and certain regulatory protections will not apply.
The FCA is encouraging people to bear in mind that promises of high returns usually indicate high risk.
People should research the firm offering the investment and consider diversifying their investments so they are not exposed to the risk of a single investment failing, the FCA suggested.
It also said people should be wary if they are contacted out of the blue and feeling pressured to make an investment.
