I know that it can be difficult to follow financial writing, but I hope that this post is more interesting than most.
It turns out that interest isn’t always interest.
Many investors in London Capital & Finance were recently surprised to find that the 8% per year interest they had been promised was unlikely to materialise, and the money they had invested was not protected by the Financial Services Compensation Scheme.
And that their investment was probably not eligible, after all, to be held in an ISA, and they may have some tax to pay as a result.
Of course, the old adage that “if it sounds too good to be true, it probably is” applies here, but the advertising was convincing.
The likes of Feefo and Trustpilot gave London Capital & Finance great ratings. Even well respected financial journalists didn’t point out that the company could collapse because its investments weren’t eligible for ISAs.
A brief search of today’s top one year bonds on the web reveals that several of the highest interest rates shown aren’t interest rates at all. They are “expected profit rates”.
These are the rates promised by Sharia-compliant banks. These rates have been paid in the past, but there’s no guarantee that they will be paid in the future.
In fact, the expected profit rate is the maximum return you can receive; despite taking the risk that you might get a lower return, you aren’t offered any upside.
It is generally easy to identify a Sharia compliant bank by looking at the name – Al Rayan Bank, for example.
But the marketing people seem to have realised that sounding Sharia-compliant isn’t good for business. So, for example, a new entrant into the market is called Gatehouse Bank.
The good news is that £85,000 of the capital you invest in Sharia compliant banks is protected by the Financial Services Compensation Scheme. But traditional banks are only paying 0.1% less per year in interest; is it really worth the extra worry just to have the potential of an extra return?
A good financial adviser can help you to avoid these pitfalls, so you can go and have some fun rather than reading banking small print!