Due to the potential for losses, the Financial Conduct Authority (FCA) considers these investments to be high risk.
What are the key risks?
You could lose the money you invest
Investments in property related shares are typically made through single purpose companies for a specific project. Investors in these shares can lose 100% of the money they invested.
Most bond investments are in start-up businesses. Investors in these bonds often lose 100% of the money they invested, as most start-up businesses fail.
Many peer-to-peer (P2P) loans are made to borrowers who can’t borrow money from traditional lenders such as banks. These borrowers have a higher risk of not paying you back.
Advertised rates of return aren’t guaranteed. If a borrower doesn’t pay you back as agreed, you could earn less money than expected. A higher advertised rate of return means a higher risk of losing your money.
Certain investments can be held in an Innovative Finance ISA (IFISA). An IFISA does not reduce the risk of the investment or protect you from losses, so you can still lose all your money. It only means that any potential gains from your investment will be tax free.
Simple Crowdfunding carries out limited checks on the businesses you are investing in, more details can be found in the Risk Statement. You should do your own research before investing.
You are unlikely to get your money back quickly
Even if the business you invest in is successful, investment projects can overrun which can extend the length of time your funds are tied up in the investment.
Property investment projects rarely offer to pay you back through dividends. You should not expect to get your money back this way.
The platform does not offer a secondary market. While another investor may be interested in buying your investment, there is no guarantee you will find a buyer at the price you are willing to sell.
Don’t put all your eggs in one basket
Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
The P2P platform could fail
If the platform fails, it may be impossible for you to collect money on your loan. It could take years to get your money back, or you may not get it back at all. Even if the platform has plans in place to prevent this, they may not work in a disorderly failure.
The value of your investment can be reduced
If an investment project overruns (time or costs) the company may issue new shares or increase its borrowings. This could mean that the value of your investment reduces as a result of more debt to pay or more shareholders to be repaid.
Any new shares or additional borrowing may be payable before the existing shares or bonds which could further reduce your chances of getting a return on your investment.
You are unlikely to be protected if something goes wrong
Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investments in P2P loans or poor investment performance. You may be able to claim if you received regulated advice to invest in P2P, and the adviser has since failed. Try the FSCS investment protection checker here.
Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.