Beware of the mini-bond market

Mini-bonds are unregulated by the Financial Services Compensation Scheme…

A mini-bond is a niche type of unregulated investment that you don’t hear about too often. But here at I&L, we like to discuss topics that will help to protect and educate our clients. As a result, mini-bonds is the focus of this post.

So what exactly is a mini-bond? Mini-bonds are a form of debt that effectively act as an IOU allowing stakeholders to invest in companies and receive:

  • Fixed returns over a set period
  • Their initial investment at the end of the agreement

In recent years, confectioner Hotel Chocolat and department store John Lewis issued mini-bonds to help secure debt-based finance.

Mini-bond market

Mini-bonds are an attractive option because the regulatory requirements surrounding them quite flexible. Mini-bonds are good for the company issuing them as they reduce paperwork and the hassle of dealing with banks. However, there will always carry some degree of risk for investors.

According to the Financial Services Compensation Scheme (FSCS), around 25 mini-bond issuers collapsed between December 2018 and December 2021. The Covid-19 pandemic, rather than mismanagement, may have led to these companies entered into administration procedures.

Remain vigilant

Nevertheless, all participating stakeholders must remain vigilant because mini-bonds are not protected by the FSCS. Consequently, investors will be forced to join a long queue of unsecured creditors if the issuer goes bust.

Mini bond tips

When investing in mini-bonds, ensure that you never invest:

  • More than 10% of your net wealth
  • Money that you cannot afford to lose
  • Money that you might need before the investment term is over

Call 0207 504 1300 if you are considering investing in mini-bonds or have invested already, but are struggling to collect a return

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