By 
Becoming embroiled in a lawsuit can drain your bank account, but now investors could make 8pc a year by funding legal cases.
A new bond and fixed-rate Isa have launched that will raise money to sue financial firms, with profits being returned to investors.
Both the Isa and bond, which are available for three or five years, can be held within the Innovative Finance Isa tax-free wrapper. Investors need a minimum of £2,000 to take out the deals.
They have been launched by Just, an investment firm run by Rob Rutter, who once worked for wealth manager Merrill Lynch.
The legal professionals that sit on Just’s litigation advisory committee will recommend cases to the firm’s directors, who intend to focus on litigation that seeks redress against banks, corporations and professional advisors.
These could be areas such as mis-sold interest rate swaps, or cases where small businesses had to close due to bank negligence.
Mr Rutter said he has a pipeline of cases where “people have been severely wronged and ruined and their businesses put down”.
The 8pc yield on the bond and Isa is high in the current market, and will understandably get a lot of interest from investors tired of low returns.
Mexican restaurant chain Chilango last month relaunched its "burrito bond", also paying 8pc, repeating its earlier offering that raised £2m from 700 investors in 2014.
But high returns such as these come with strings attached and are not guaranteed.
Anna Sofat, of Addidi Wealth, a financial adviser, said: “You don’t get 8pc in the current marketplace without risk.”
Any investment in the Just deals is not covered by the Financial Services Compensation Scheme. This means you have no guarantee of getting your money back if anything goes wrong.
However, investors won’t have to foot the bill for unsuccessful litigation. The cost of any legal action by Just will be offset by a form of insurance that pays out if the firm loses. This insurance will cover the legal costs of the winning side, plus the cost of Just bringing the failed case.
Mini-bonds, such as the one offered by Just, can also fail dramatically. In 2015, investors lost £7m when Secured Energy Bonds failed. This was followed by Providence Bonds in 2016, which went into administration with £8m of investors’ cash.
- Reader Service: Gain trusted, friendly, face-to-face investments advice with The Telegraph
Ms Sofat said the low entry cost could mean well-meaning but unsophisticated investors might buy something with risks they did not properly understand.
Another possible drawback is that the deals do not pay any interest until the end of their terms. This is because winning legal battles against firms will take an uncertain length of time and Just does not want to commit to any mid-term payouts.
However, this means your money is locked away for longer before you see any returns. Should the scheme fail at any point you could walk away with nothing.
Comments