Initially it seemed as if the customers of a failed mini-bond firm would not have recourse to the Financial Services Compensation Scheme (FSCS), and that they would need to register as creditors with the firm’s administrators – in these circumstances they may have received only 20% of the compensation they were due.

However, the FSCS has given hope to some of the 11,625 investors who collectively invested £237,207,497 in 16,706 mini-bonds. This is because, although the mini-bonds themselves are not regulated by the Financial Conduct Authority (FCA), giving financial advice is a regulated activity, so those investors who received advice on taking out a mini-bond may still receive the full amount of compensation from the FSCS.

The FSCS has carried out a review of call recordings and emails to investors and now believes that a third-party firm, acting on behalf of the mini-bond firm, provided misleading advice to a number of customers. The third-party firm is not regulated by the FCA but was acting on behalf of the regulated mini-bond firm, so the mini-bond firm has liability for this advice.

The FSCS has requested that investors complete a pre-application questionnaire so that it can assess the extent to which advice was provided.

Promotional material from the mini-bond firm is reported to have promised returns of up to 11%. These promotions also stated that the product was a low risk investment and falsely claimed that it qualified as an Individual Savings Account (ISA). Concerns have also been expressed that the promotions prominently stated that the firm was regulated by the FCA, without also stating that mini-bonds were not a regulated product.

The investors’ funds were invested in 12 firms, but only two of these were independent of the mini-bond firm – of the other 10, many were controlled by people also involved in the mini-bond firm. A hotel development in the Dominican Republic and the refurbishment of a leisure park in Cornwall are some of the projects that the mini-bonds invested in.

An FCA statement on this issue reads:
“Our concerns are mainly about the unsustainability of its business model, as it appeared that coupon (interest) payments to existing investors were being funded by new bond issuances. Also, we considered that not all the corporate borrowers to which [NAME OF FIRM] made loans were unlikely to be able to support the rates of return that [NAME OF FIRM] advertised.

“Finally, we had concerns that a number of the corporate borrowers had close connections with the individuals who ran [NAME OF FIRM].”

The Government is investigating the circumstances of the collapse of the firm, along with whether the FCA supervised the firm effectively. Former Appeal Court judge Dame Elizabeth Gloster, who specialises in corporate failures, finance and fraud, is leading this enquiry.

Meanwhile, the Treasury is looking at future regulation of mini-bonds and 12 MPs have called on FCA chief executive Andrew Bailey to resign over his organisation’s handling of the matter.

The firm is also being investigated by the Serious Fraud Office, and at least five arrests have been made so far.

John Glen MP, the economic secretary to the Treasury, said:

“We urgently need to get to the bottom of the circumstances around the collapse of [NAME OF FIRM].

“Dame Elizabeth will bring her vast experience and rigour to this important investigation, which will help ensure this type of thing doesn’t happen again.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article