The Financial Conduct Authority is increasing scrutiny of regulated banks and other financial companies whose services have been used by unregulated loan-note schemes, widening the regulatory focus from the issuers themselves to the financial infrastructure surrounding them.
NatWest, Lloyds, and Barclays are among banks facing questions over relationships with businesses that raised large sums from consumers before collapsing or entering investigation. Providing banking services to an unregulated company does not establish wrongdoing, and the FCA has not concluded that the banks under scrutiny breached their obligations.
The regulator has said it is looking closely at regulated companies, including banks, where their services may have been used by unregulated loan-note businesses and has warned that it will act where regulated companies have fallen short.
The cases expose a long-standing boundary in UK financial regulation. Some companies can issue unlisted loan notes without the underlying investment itself being directly regulated by the FCA, depending on the product structure and how it is promoted.
Consumers can therefore encounter investments supported by professional marketing, property assets, fixed-return claims, and mainstream bank accounts without receiving the protections associated with a regulated deposit or conventional investment product.
The FCA has repeatedly warned that unlisted loan notes can be high-risk. Where the issuer is outside its regulatory perimeter, investors may have limited access to the Financial Ombudsman Service or Financial Services Compensation Scheme if the business fails.
The latest scrutiny concerns whether regulated service providers identified warning signs and met their own obligations. Banks are required to operate systems designed to detect money laundering, fraud, suspicious transactions, and other financial-crime risks, while understanding the nature of businesses using their services.
One scheme attracting attention is the 79th Group, which raised about £250m through property-linked loan notes before allegations of serious misconduct emerged. NatWest is facing questions over the handling of payments connected with the business, including transactions that continued after law-enforcement activity became public.
Lloyds has been linked to accounts used by Godwin Capital, while Barclays provided banking services connected with Halcyon Developments Group. The precise role of each institution differs, and allegations surrounding the underlying schemes remain subject to legal and insolvency processes.
Investor losses across failed loan-note businesses can be substantial because the ranking of creditors and the actual value of underlying assets may differ sharply from the way an investment was presented when funds were raised.
Lawyers acting for investors are examining whether regulated institutions ignored warning signs, processed suspicious flows, or otherwise failed duties capable of supporting civil claims. The existence of those potential claims does not establish liability, which would depend on the facts, contractual relationships, and duties applying in each case.
Banks process huge volumes of legitimate transactions for businesses that are not directly regulated by the FCA. Treating every unregulated company as inherently suspicious would be impractical, leaving compliance teams to identify patterns of activity or customer behaviour that require enhanced scrutiny.
The regulator has separately warned authorised companies to conduct due diligence on unregulated lenders and other counterparties where financial-crime risks are elevated. That approach places greater emphasis on the role of regulated businesses as gateways into the financial system.
The loan-note cases also revive questions over the perimeter between regulated and unregulated investment activity. Restrictions on financial promotions have tightened following earlier mini-bond failures, but investors can still encounter high-risk products where regulatory protection is much narrower than they assume.
The FCA’s intervention therefore expands the accountability question. Failed loan-note issuers remain central to the investigations, but banks and other regulated service providers are now being examined for the controls they applied while money was being raised and transferred.
Any enforcement action will depend on evidence that an individual regulated company fell below the standards required of it. The regulator’s current scrutiny nevertheless raises the compliance stakes for institutions providing routine banking infrastructure to businesses operating near the edge of the regulatory perimeter.
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