Should investors who buy high-risk bonds be compensated when things go wrong? The obvious answer is no, with the clue in the word risk. But what if a bond is marketed to small investors with a quarterly interest rate, and is approved for inclusion in an Isa, and is promoted by a financial advice firm authorised and regulated by the Financial Conduct Authority. Would you expect the bond to lose not just the interest, but all the money you deposited? This is the type of scenario in which many investors in so-called mini-bonds have found themselves.

About 11,000 investors in London Capital & Finance's mini-bonds could lose a total of up to £236m, in one of the worst financial scandals for a decade. Mini-bonds are just an IOU to a company, are rarely secured on anything, and are usually completely illiquid and cannot be traded. They are simply too risky for the average small investor. Even if the interest rate on the bond is 8%, it's hardly enough to compensate for the evidently high risk of losing your shirt. Now Charles Randall, chairman of the Financial Conduct Authority (FCA), has conceded that it was clear that there's too much confusion about what investments were covered by the regulator and which were not. 

About the Author: Glen Callow

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