Don't be enticed into this 'banned' investment!

This investment has been banned for all but sophisticated and high-net worth investors. How could this cold-call scammer tell if I met those requirements?

Regulator the Financial Conduct Authority (FCA) has a clear warning for investors. If someone phones you out of the blue with a mind-blowing investment concept, then they are up to no good, no matter how well-oiled their presentation and how swish their online offer.

I paraphrase a little. Officialdom does not go for blunt speaking. But ask anyone at the regulator for an unvarnished, non-attributable, version and you would end up with something remarkably similar. All cold-callers are bad news – those trying to prise thousands and tens of thousands of pounds from bank accounts are the absolute pits.

Invest a 'minimum' £325,000

Alex was more ambitious. He phoned me unannounced and, once he had established that I was interested in a regular high income stream, he tried to sell me a concept not for tens of thousands but for a minimum £325,000, though he later announced I could go in a for a more modest £50,000. Whatever the sum, here was an unknown person from an unknown company on the phone trying to get me to hand over a fortune.

What would I get for my money (if I had it)? It was a “virtually guaranteed” 14% income flow, although that was cut back to 8.5% if I opted for the £50,000 deal.

Before asking him how he could produce this fantastic income, I questioned where he had found my details. He came up with some vague stuff about his firm doing a lot of investor shows and so my details had come across his desk as someone who would be interested in this opportunity. He was careful not to say that I had attended any such show, because I haven't.

So no nearer finding out where he found my closely guarded mobile phone number, I moved on to the main agenda. How could I get my safe 14%?

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Never invest in something you don't understand!

It was through the magic of Brazil, the host country of the next World Cup, the Olympics and the famed (but now deeply flawed) economic miracle. Alarm bells should always ring at the mention of Brazil – it has been the backdrop to a number of land, property, forestry and mining scams.

To make matters worse, I would be investing in a firm specialising in “factoring”, a way for small companies to finance themselves without going to a bank. At its most basic, a factor looks at what a company can expect to bring in over the next three or so months if all those who owed it for goods and services paid up. Suppose that is £100,000. The factor will then offer £80,000 upfront but keep the £100,000 when it arrives. There are variations on this model, of course.

I know very little about factoring – and even less about how it works in Brazil. If investment rule one is never trust cold callers, number two is always say no to something which you don't fully understand.

Still Alex assured me that the ultimate firm that I would be investing in – there were layers here, all confusingly with much the same name – controlled two thirds of the factoring industry in Brazil.

I find that hard to believe. A report for the Brazilian National Association of Factors (known as Anfac after its initials in Portuguese) stated there were some 2,000 factoring firms in the country of which about 750 were members. That one firm has a 66% market share and the 2,000 others share the balance is seriously stretching credulity. It was not explained why one firm had such an apparent stranglehold on financing the vast number of small businesses in Brazil.

It was an “act now, supplies are strictly limited" deal. He told me that if I failed to send in my money at once, the funds he had marked as mine would go to “Middle East investors”. They are welcome to it.

Banned to all but the most sophisticated investors!

Taking everything at face value, factoring remains a high-risk investment. Ratings agency Fitch has said these risks are more acute: “In recent transactions sponsored by various types of Brazilian small-sized factoring companies where it is evident in some transactions that there are inadequate checks and balances, with over reliance on a single, low-rated party to perform credit origination, collection, and servicing. Many factoring companies have employed aggressive growth strategies, levering up their operations via securitisation.”

Again, assuming that this factoring fund is the best in its class and is operating in the best of all worlds, what should I make of the small print warning on what Alex called “the prospectus”? It is not really a prospectus, rather a few documents, but one contains this line: “The fund is an unregulated collective investment scheme (UCIS) and cannot be sold or promoted in the United Kingdom other than under the exemptions permitted by the Financial Services and Market Act 2000.”

Back in June last year, the FCA banned UCIS sales to investors other than those deemed “sophisticated” and “high net worth”. The FCA found that only one in every four advised sales of UCIS to retail customers was suitable and that many promotions breached the existing UCIS marketing restrictions.

And that three out of four bad score came from regulated advisers. I was asked to put at least £50,000 into a scheme on the basis of a phone call and an emailed application form. One to decline.

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