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Due diligence - If it's too good to be true it probably is!

February 21th 2019 – Written by Jonathan Chorley

Due Diligence - If it's too good to be true it probably is! 

In late November 2018 an existing client brought to our attention an FCA registered institution offering a significant ‘secure’ return for their mini-bond and ISA products.

At this time, the rate of interest on traditional cash accounts and the 6 month decline of the FTSE 100 PR (-9.72%), may have seen many investors cast more than a second glance at an account offering eye watering returns. The marketing material for this account was often included as advertisements in the financial press, arguably adding credibility for the institution.

The client, an experienced investor, asked that we undertake some due diligence. In our investigations it quickly became apparent that –

  • The institution was a not traditional deposit taker such as Bank or Building Society, but rather a corporate lending company. The lending being securitised against the borrowing company’s assets;
  • The Bond did not permit early withdrawals in any instance before the maturity date;
  • The Bond was not tradable and there were no regular valuations of the investment;
  • The Bond did not offer protection under the Financial Services Compensation Scheme (FSCS);
  • The institution had no track record of capital and profit redemptions in times of market turbulence.

In subsequent months, the institution became subject to an FCA investigation, with the FCA estimating that almost 14,000 customers are affected. Most recently, administrators have been appointed with the objective of returning funds to investors.

This example demonstrates the importance of moving past the glossy brochure and headline returns to fully considering the institution, the product type and most importantly the protection afforded to customers.  

EST. 1999