To conclude our series for novice investors, the Financial Conduct Authority explore the latest developments in investment scams
The world’s ever-increasing connectivity brings with it many financial conveniences. But with this convenience comes risk and the unwary internet user can become a prime target for scammers, looking to get their hands on quick funds while never having to leave wherever they conduct their dubious work.
We’ve all seen the spam emails claiming to be from deposed foreign royalty looking to disperse their wealth in a hurry – and we’ve all wondered wryly who in their right mind could fall for such an obvious scam.
But the dangerous scams are the ones you don’t see coming, and anyone can fall victim to fraud without realising until it’s too late.
In its in-depth Financial Lives survey published last year, the Financial Conduct Authority (FCA) surveyed almost 13,000 people on the ins and outs of their financial situation. It included a large representative sample that were asked about their experience of attempted – and successful – fraud.
Nick Hewer discusses the scam tactics fraudsters may use
The FCA found that around one in 500 UK individuals ended up sending money to fraudsters. This works out at an estimated 250 people every day. Even though the vast majority of people that are contacted do not end up sending money, it only takes a few to make the fraudsters’ work pay.
This is especially the case for investment fraud, with Action Fraud reporting an average loss of £32,000. Recent pension freedoms and low interest rates offering poor returns on savings are providing further opportunities for fraudsters.
One of the most common methods used by investment fraudsters is to pressure potential investors to make a quick decision on a time-limited investment offer. But scammers are constantly evolving, so how do you stay one step ahead?
Emerging types of investment scam
As one type of investment scam becomes widely known it fades from vogue for fraudsters, but there are always new, complex-sounding investment products with which to dazzle and entice. These now include cryptocurrencies, binary options, and contracts for difference (CFDs). While these can be genuine, albeit risky forms of investment, they can sometimes be a scam.
Over the last year or so you would be hard-pressed to avoid hearing about the unprecedented heights reached by Bitcoin price – and the dozens of other cryptocurrencies that cropped up as a result.
However, not only is cryptocurrency a risky market, but direct investment in such currencies is unregulated in the UK, meaning you won’t have the protections afforded you by the Financial Services Compensation Scheme or Financial Ombudsman Service.
Binary options and contracts for difference
Binary options and contracts for difference are two other types of investment that are common vehicles for fraud. Binary options allow customers to bet on the expected price of a share, commodity, currency or index. Similar to binary options, CFDs let users bet on how much the price of an asset will rise or fall.
Sold as an investment on your behalf or as opportunities to buy and sell investments on a platform to generate returns, these scams will sometimes entice the user with tasty, higher-than-average initial returns, only to deny access if they try to withdraw their money. The fraudsters often promote themselves online and via social media channels, and use images of luxury items like expensive watches and cars, to tempt people to invest in their scams.
Binary options scams alone have been identified as one of the biggest frauds in the UK currently, with losses reported to Action Fraud totalling £32m in 2017.
Share and bond scams
Share and bond scams are closest to what you might expect when you think of an investment scam. You might be contacted out of the blue, maybe from a high-pressure call centre or ‘boiler room’. You’ll be offered the chance to buy shares or bonds in such a way that practically guarantees a huge return.
However, these will likely be tremendously overpriced, if they exist at all. You may also be asked to pay money upfront as a form of security. Share and bond scams are often carried out by clone firms (see below). The largest loss to a share scam recorded by police was £6 million.
A clone firm is a fraudulent company set up to look like a well-recognised financial services firm that is authorised by the FCA. The website will have a telephone number that does not belong to the genuine firm and instead puts you through to someone working for another operation altogether.
Remember, it’s not just your money that is valuable to fraudsters – it’s your information too. If you fill out a contact form on a clone firm website, for example, the fraudsters instantly have a log of your name, email address, telephone number and maybe more. This can be used to contact you in the future and can even be added to databases and sold on.
The FCA keeps a record of clone firms and publishes alerts when it has identified one, but it’s so easy to set up a website that it’s possible for clones to pop up as they’re shut down. It’s best to check the details about the firm provided on the FCA Register to ensure that you are dealing with the legitimate and authorised firm.
Scammers toil endlessly to refine their tactics, but there are some red flags that should alert you to the possibility that what you’re hearing is a potential scam.
Some of the methods scammers use include:
- Promising high returns for little risk
- Fake reviews and testimonials on their site to lend an air of authenticity;
- Pressure tactics, like telling a potential victim they must make a decision right away or lose
- the opportunity;
- Flattery, such as telling a potential victim they are a savvy investor
- Posing as a legitimate firm, perhaps saying its information on the FCA’s
- Register is incomplete and giving you different contact details;
- Fake non-disclosure clauses to scare victims out of telling others about their investments – for example asking someone they trust if it looks dubious
- Implying a lot of other people want in on the opportunity or have invested
What can you do?
Be extremely wary if you are contacted out of the blue – if you’re cold-called, simply hang up. Legitimate investment companies will almost never cold-call you. Only deal with financial services firms that are regulated by the FCA – you can use the Financial Services Register on the FCA website to check the status of a firm.
Always access the Register from the FCA website, rather than through links in emails or on the website of a firm offering you an investment. And double check the contact details that you have been givenare the same as on the FCA Register in case the firm has been cloned.
Visit fca.org.uk/scamsmart to find out more about how to protect yourself from investment scams. From there you can also check the FCA’s warning list to find out more about the risks associated with an investment and check a list of firms known to be operating without FCA authorisation.
Finally, strongly consider taking professional financial advice from an FCA-authorised financial adviser – not the stranger claiming to be an adviser on the other end of the phone. The Money Advice Service has a directory to help you find an adviser that’s suitable for you, and the FCA’s Register lists the details of all authorised firms. If you suspect an investment scam, please report it to the FCA by calling the consumer helpline on 0800 111 6768 or filling out its reporting form online.
If you think you have lost money to fraud, you should report it to Action Fraud on 0300 123 2040 or online via its website, actionfraud.police.uk. Telling your story will help the authorities catch the scammers and stop others from falling victim too.