The Financial Conduct Authority says it’s concerned people are being encouraged to invest in high-risk schemes offered by unregulated firms without appreciating the risks involved.

Many of the firms offering these products don’t need to be authorised by the FCA, as they rely on exemptions in the law that take them out of our remit.

The authority says that if a firm offering an investment is not regulated by the FCA there are generally far fewer protections. For example, you are unlikely to be able to take complaints to the Financial Ombudsman Service and you’re unlikely to be able to make a claim through the Financial Services Compensation Scheme. That may make it much harder to get your money back if something goes wrong.

Some of the particularly risky products it takes exception to are unlisted loan notes or mini-bonds.

These come in several forms and are often used to finance property developments. This involves an investor lending money, often via a third-party firm, to fund property developments. While all investments come with risk, for these products the risk can be particularly high and they are generally for experienced investors who feel confident in assessing the quality of the company’s business and the likelihood of being repaid.

People selling high risk, unregulated investments typically draw people in with enticing websites, marketing campaigns and social media finfluencer promotions. If someone introduces you to the investment, they may take a fee for doing so. This would generally be taken from the amount you’ve invested.

The opportunities seen by the authority typically come with a fixed, high rate of return, which is a promised annual rate of interest paid to investors. But it says behind this can sit high risk, opaque or even non-existent enterprises.

Many of those who promote these high-risk investments don’t need to be regulated by us. Exemptions in the law mean certain high-risk investments can be marketed directly to those considered wealthy or if they’re an experienced investor, known as a ‘sophisticated investor’, under strict criteria.

In the UK, potential investors can self-certify that they are sophisticated.

The FCA says: “If you’re asked to confirm that you are a sophisticated investor, think carefully about whether you genuinely have experience of similar high-risk investments, and whether it’s in your best interest. Otherwise, you could be exposed to investment opportunities that aren’t appropriate and certain regulatory protections will not apply.

“Taking higher investment risks can be right for some people, depending on your circumstances. But you need to make sure you’re aware of the risks you’re taking. And you should also be wary of putting all your eggs in one basket. Instead, spread your investments across different products and areas so you’re less dependent on any one pick to perform well for you. By diversifying your investments like this, you can smooth out the effects of one performing badly, while still reaping benefits when others do well.”