The high-profile collapse of mini-bonds provider, London Capital & Finance (LCF) plc, highlights the perils of solely chasing an interest rate.
London Capital & Finance offered an 8% annual return to investors through an ISA but went into administration at the end of January after being ordered by the Financial Conduct Authority (FCA) to cease marketing its product and stop its regulated activity.
It also transpired that investments into LCF bonds – used to make loans to corporate borrowers to provide capital for further investment – were, in fact, not ISA-eligible.
The FCA estimates that 14,000 people are invested in the bonds and it is thought that £214m was invested through the bonds.
This is a horrible situation for the savers and investors who were duped into a highly attractive interest rate. The company cleverly used aggressive marketing campaigns and social networks to attract investors.
Critics often focus on P2P lending being risky, but mini-bonds such as these seem to get an easier time, despite several high-profile failures in recent years such as Secured Energy Bonds and Providence Bonds, worth £7.5m and £8.15m respectively.
Mini bonds sit in a strange area of regulation – unlike P2P lenders that have to comply with FCA rules and be fully authorised.
Issuing mini-bonds is not a regulated activity, however, the promotion of mini-bonds is a regulated activity. All promotions need to be fair and non-misleading. The FCA directed LCF to withdraw promoting their bonds immediately in December 2018 but it seems it was too late by then as many people had already invested.
Mini-bonds are unlisted, unregulated debt securities. They are non-transferable and illiquid. Supporters highlight that they give investors a cheaper way of accessing corporate debt than through retail bonds.
But if investors want exposure to non-listed credit investments, P2P platforms are more heavily regulated and have stricter controls on what they can do with the money.
Investing in the alternative lending market is complicated and there are a lot of options for investors to choose. It is easy to get blinded by the rate, while not understanding the risk.
One of the big risks of both mini-bonds and P2P is the collapse of the platform and the underlying assets. Fraud is also a factor, so it is important to check on who you are investing in and the team behind the investments.
The best way around these risks is diversification. It is hard to do this with one mini-bond but there are ways of spreading your money and risk across several P2P platforms.
Ultimately, you should be aware of chasing high returns and shouldn’t sacrifice prudent management and due diligence when investing in alternative and indeed any assets
The Orca platforms enable investors to invest across multiple P2P platforms efficiently from one ISA. This offers investors cross-platform, cross borrower and cross lending sector diversification. Orca further conducts in-depth due diligence on the market, working with leading P2P platforms.