Don’t worry, this isn’t going to be some nerdy blog and video about the ins and outs of financial services regulation.
As well as reporting on some of the steps the Financial Conduct Authority has taken in the past year to keep you safe from financial harm, I’m going to share six scam warning signs that you need to know to avoid being ripped off by investment fraudsters.
You really do need to know these because, as you’ll hear in just a moment, these nasty scammers are literally at every single turn now. Stay tuned.
In a new report out today, the Financial Conduct Authority (the FCA) has shared details of the various ways in which it is working to protect consumers from investment harm. The report featured various initiatives designed to stop and disrupt potentially harmful firms and activities in the sector.
It covers the first ten months of 2020, during which time many of us felt our personal finances come under increasing pressure due to the Covid-19 pandemic.
That’s important, because scammers like to prey on us when we’re feeling vulnerable. When the economy is going through a tough time, and when people are fearful about their jobs, their homes, the stock market, that’s when scammers up their activity levels. Scammers are more active during these tough times because they know you’re distracted.
So, during this ten-month period in 2020, the FCA stopped applications for authorisation from 343 financial firms.
They stopped these authorisation applications where they identified the potential for consumer harm. The stopped authorisation applications represented almost one in 10 of the applications received by the FCA in this period.
That’s a great start. Without authorisation, businesses don’t have perceived credibility with consumers.
You’re less likely to trust an unregulated business than a regulated business. And that’s why I wasn’t happy to see the FCA registering crypto asset firms for the purpose of preventing money laundering.
Yes, it’s a good thing to prevent money laundering, which is sadly a feature of the crypto asset sector, but slapping the label ‘registered with the FCA’ on a crypto asset firm gives it an air of credibility, when it’s not authorised for things like suitability or capital adequacy. So, you need to look beyond that FCA logo, I’m sorry to say.
In addition, the FCA opened more than 1,500 supervisory cases which involved financial scams or high-risk investments.
That’s good news, but that’s a lot of supervisory cases. And it goes to show just how prevalent the amount of scamming and high risk investing is out there right now.
That prevalence of dodgy dealings is backed up with this next stat; during the first ten months of 2020, the FCA received more than 24,000 reports of unauthorised investment activity. It published more than 1,000 consumer alerts, which represented an 82% increase compared to the same period a year earlier.
As I mentioned at the top, tough economic conditions are ripe for scammers, who prey on uncertainty and fear.
I’m not surprised at all to see an 82% rise in consumer alerts. The big question is, are consumers aware of these consumer alerts? Are you proactively checking them before parting with your cash?
In respect of the action taken against firms found to have caused consumer harm, the FCA pursued 47 enforcement investigations against unauthorised businesses last year.
47 enforcement investigations out of more than 24,000 reports of unauthorised investment activity, that doesn’t feel like enough to me.
The FCA secured nearly £6 million to be returned to investors, as well as obtaining court orders to secure a further £14 million for investors, which the FCA will now be taking steps to recover from firms.
Always good to hear about the FCA recovering money on behalf of investors, but again, it feels like small fry.
One of my regular criticisms of financial services regulation is the lack of real consequences when the regulator fails to act, decisively enough or quickly enough. And that’s because consumers ultimately, in most cases, can fall back on the Financial Services Compensation Scheme, which is funded by regulated firms like mine.
When the FCA are effectively spending other people’s money to compensate investors in failed firms, where’s the incentive to do better?
The FCA also issued fines of more than £80 million to regulated firms and individuals, during 2019 and 2020.
What happens to these regulatory fines? Well, since April 2021, the fines have gone to HM Treasury. Some of that money is then donated to military charities.
I think military charities are always deserving of support, but this mechanism of paying regulatory fines to the Treasury who then donate some of it to charity is plain nuts. Keep in mind that these fines are ultimately paid by the consumers of financial services, through the fees and charges they pay.
Instead of donating the fees to charity, the money should go towards funding the Financial Services Compensation Scheme or reducing the regulatory levy charged to all regulated firms.
The FCA then turns to its actions in respect of defined benefit pension transfers, the suitability of which has been a particular regulatory focus in recent years, the FCA reported that 130 firms stopped providing advice in 2020, as a result of action taken by the regulator.
The proportion of pension scheme members who are recommended to transfer from their defined benefit pension to a private pension arrangement fell from an average of 69% in October 2018 to 57% in March 2020.
That’s progress, for sure. But it still means nearly six in 10 people who speak to an adviser about their defined benefit pension are advised to move it to a private pension arrangement.
The FCA is calling on regulated financial services businesses to ‘use it or lose it’ when it comes to their regulatory permissions, as a way to reduce the risk of harm to consumers.
This call to use it or lose it comes because a business model may evolve over time, so regulatory permissions may no longer be required. The FCA says that outdated or incorrect permissions might be a false impression to consumers about the level of protection offered, or indeed give credibility to unregulated activities.
Commenting on the release of the report, Sheldon Mills, Executive Director, Consumers and Competition said:
“The UK has one of the world’s leading financial services industries, offering consumers access to a wide range of investment products. In some areas however, the consumer investment market is not working as well as it should and too often consumers are offered unsuitable products or advice.
“Protecting consumers and ensuring they have confidence in the suitability of advice they receive is a key priority for the FCA and today’s report highlights some of the work we are undertaking to achieve this.
“Incorrect or out of date permissions increase the risk of harm to consumers as they can mislead consumers about the level of protection offered or give credibility to unregulated activities. This is why we’re today calling on firms to review their permissions and ensure they reflect current business models.
“We will take action where we consider out of date permissions may cause harm to consumers. The message is clear, use it or lose it.”
One more finding from the report before I move onto the six red flags to look out for, that indicate you’re being scammed. And that’s the news that the FCA is getting tougher on suspicions of phoenixing.
I’ll explain what that means, because it’s a bit of financial services jargon.
Essentially, phoenixing happens when a firm or adviser is naughty, gets run of out town by the regulator or his peers, and then tries to set up a new business, with a fresh authorisation and a clean slate.
In the past, this has been far too easy. We’ve seen numerous examples of firms dumping their liabilities onto the Financial Services Compensation Scheme, and then starting afresh. In some instances, the individual advisers from a disgraced firm set up their own business, with a fresh authorisation.
But it looks like the FCA is finally, far too late by the way, getting wise to this practice. In the first 10 months of 2020, they stopped 12 firms from getting authorisation, because of this suspicion of phoenixing.
In addition to the report, the FCA has launched the next phase of its ScamSmart Investment campaign.
The campaign is designed to warn consumers about the increased threat of clone investment fraud. It shares some of the key warning signs and directs investors to the FCA’s warning list of firms to avoid. Investors should also check the FCA register of authorised firms, to check a business is genuinely authorised by the regulator.
The FCA shared on their ScamSmart pages (again, link in the description) six warning signs, six red flags to look out for. See any of these, and there’s a good chance that someone is scamming you.
Number one is unexpected contact – Traditionally scammers cold-call but contact can also come from online sources e.g. email or social media, post, word of mouth or even in person at a seminar or exhibition. Please also keep in mind that any cold calls related to pensions are illegal. If someone is cold calling you about your pension, they are breaking the law and they are a scammer. It’s as simple as that.
Number two, time pressure – They might offer you a bonus or discount if you invest before a set date or say the opportunity is only available for a short period. Time pressure is a psychological trick designed to rush you into making a bad decision. Given more time, you would probably engage your brain and realise you were being scammed, but the ticking clock aspect of a scam is designed to stop your rational thinking from taking place.
Number three, social proof – Scammers may share fake reviews and claim other clients have invested or want in on the deal. I see this more or less every time I post a video about investing on YouTube. A scammer pops up in the comments, usually with details of their WhatsApp trading signals service, and then several more comments are added underneath, from more fake YouTube accounts, lending credibility to the scam. Don’t believe everything you read online. Abraham Lincoln said that.
Number four, unrealistic returns – Fraudsters often promise tempting returns that sound too good to be true, such as much better interest rates than elsewhere. However, scammers may also offer realistic returns in order to seem more legitimate. There’s an unbreakable link between risk and return. If you want sky-high returns, you need to take sky-high risks for a chance to achieve them. In other words, you could lose all of your money. We saw the FCA last week remind crypto asset investors, including Bitcoin speculators, that they could lose all of their money. It’s the risk and reward link at work.
Number five, false authority – Using convincing literature and websites, claiming to be regulated, speaking with authority on investment products. Since the world has moved online, we see less now in the way of glossy brochures or flashy offices. But we do see very convincing looking websites or fake lifestyles on social media. Again, take it all with a pinch of salt. These scammers are simply trying to build a sense of credibility and make their offer seem convincing. It takes minutes to knock up a convincing looking investment website. It takes seconds to stand in front of a supercar and record a social media post.
And then number six, flattery – Building a friendship with you to lull you into a false sense of security. This is another trick from the psychology of influence and persuasion. There’s a great book on this by Professor Robert Cialdini, it’s called Influence, and it details the psychology of persuasion, these little tricks that convince us to do something. When you’re aware of them, they are easy to spot. But if you’re not, then they are incredibly convincing and scammers use them effectively to steal your money.
Six red flags there to watch out for. Please, please do be careful.
Scams are on the rise, especially online scams and those using social media as a platform. Do your homework before investing money, check carefully that the individual and business you’re dealing with is legitimate.