The fight against skimmers and scammers: the FCA on Fraud

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On 04 September Charles Randell, Chairman of the Financial Conduct Authority (FCA), gave a speech on the fight against investment fraud at the 37th Cambridge International Symposium on Economic Crime.

The key point from this speech is that financial crime, especially fraud against individuals, has reached epidemic proportions, with one of the most damaging financial crimes being investment fraud, where people are defrauded their savings. Investment fraud is only one part of the spectrum of unacceptable behaviours. That spectrum starts with investment firms manufacturing or promoting poor value products to investors, for example with a negative impact on consumer’s retirement outcomes.

The Crime Survey for England and Wales for 2018/19 put the total volume of fraud affecting individuals at 3.8 million cases, around one third of the total volume of 11.2 million crimes. Fraud is significantly under-reported and under-recorded with fewer than 1 in 6 incidents of fraud are reported to either the police or Action Fraud. The scale of loss to the private sector every year is estimated at over £140 billion. Reports of investment scams have increased in recent years, mainly caused by pensions freedoms and the growth of online promotion of tempting schemes.

The volume of fraud has consequences which go well beyond the financial losses involved. Fraud can destroy not just the victim’s savings but also their mental and physical wellbeing, and the impact of these crimes hits not only the victims but also their families.

Many victims are pension scheme members who have been persuaded to make poor decisions when exercising their choice under the pension freedom policy to transfer out of a defined benefit scheme. According to Chairman Randell, in last four years, the Financial Services Compensation Scheme has paid out over £580 million in compensation related to bad advice to transfer money from occupational pension schemes to invest in risky and illiquid, often unregulated assets. 

Whilst on the public side there are several organisations which are charged with responsibilities of fighting financial crime, on the private side companies such as telecommunications and internet companies, have not yet adequately recognised their responsibilities in this fight. In fact, the FCA cannot prosecute all investment activity which is fraudulently promoted on the internet. The scale of the challenge calls for concerted action from all the parties involved, putting together resources and expertise to maximise impact. Chairman Randell explained that many financial scams, particularly those on the internet involve products which the FCA does not regulate. However, even if the FCA had the powers to do so, it could not take on the investigation and prosecution of all investment activity which is fraudulently promoted.

Chairman Randell acknowledged that the FCA must be fully responsible for its performance and for making the changes needed. He also said that the FCA is committed to tackling fraud and ready to use all the tools it has against it, including criminal prosecutions where appropriate, and to use them quickly and robustly. The strategy for tackling investment fraud involves:

  • Focus on authorised firms and their regulated activities
  • Alert to consumers about the risks of scams, such as the ScamSmart campaign
  • Actions against unauthorised investment business (if in the UK)
  • Addressing the confusion about which financial products are regulated and which are not, such as retail mini-bonds
  • Reviewing the financial promotions regime, keeping in mind that approving financial promotions is not a regulated activity although only FCA authorised firms may do it

There are several changes to legislation that the FCA could push for, such as increasing restrictions on the sale of high-cost, risky and illiquid investments, or ending tax relief on high risk unregulated investments held in pensions. Making the approval of financial promotions a regulated activity per se, which requires a specific FCA permission, could be also a solution but in our view would likely be cumbersome. Simply increasing budgets for prosecution of offender is likely not to have an notable impact on the damage done by investment fraud.

This speech follows an intense period of criticism against the FCA for its actions in dealing with a number of high profile investment frauds, including London Capital and Finance (LCF) which pushed unregulated mini-bonds on retail investors. LCF became a FCA regulated firm in June 2016. The FCA was criticised for not acting earlier and doing more when the FCA’s enforcement department was made aware of the risks at LCF as early as November 2015.The FCA did not stop LCF promoting the bonds until December 2018. In May 2019, the HM Treasury launched an independent investigation into the circumstances surrounding the collapse of LCF and the FCA’s supervision of the firm. The results of that investigation may not be known before Q2 2020 and it will be interesting to see which lessons the FCA might learn from the investigation.

In the meantime, firms should perform a review of their internal financial promotions approval process, to ensure they meet the requirements and can demonstrate compliance with the FinProm and Product Governance rules.

Should you require any assistance with your financial promotion internal arrangements, including a review of your policies and procedures, or with the provision of training to relevant stakeholders, please do not hesitate to contact us.