- Lawmakers have been slow to act, so investors must be on their toes
- Serious investors, as well as the unsuspecting, may be at risk
Pension scams have been making headlines with increasing regularity over the past half-decade, but for experienced investors the risk can still feel distant. For all the sympathy afforded to victims, there is a tendency to think ‘it wouldn’t happen to me’. That belies the fact that investment frauds are becoming increasingly sophisticated, and increasingly hard to spot.
The risks have risen over the past two years, during which time Britons have frequently been asked to stay at home. That has played into the hands of the criminals whose activity was already increasingly focused on online scams of various stripes.
Of the 875,622 scams reported during the year to March 2021, 80 per cent involved cyber crime, according to Action Fraud, the national fraud reporting centre.
This has compounded a problem that first flourished following the introduction of the ‘pension freedoms’ in 2015, which allowed those aged 55 and over to access their pension pots more or less as they wished, and invest as they saw fit.
For some, greater flexibility brought with it greater risks. Pension scams flourished as fraudsters sought to capitalise on the wave of money looking for a new home.
As a report published last March by MPs on the work and pensions committee pointed out: “People can now access a wider range of investments. As a result, people are also at risk of a wider range of scams and financial fraud.”
A number of measures to clamp down on pension scams have been launched by official bodies in recent years. But Britons are still vulnerable, not least because scammers often move on to new methods by the time such prohibitions come into force. So what can you do to avoid the risks?
What to watch for
The first three points of action on the Financial Conduct Authority’s (FCA) ‘how to avoid pension scams’ webpage set out the basics: reject unexpected offers, check who you’re dealing with, and don’t be rushed or pressured into making a decision.
Many scams can be identified using these simple steps. These days, however, fraudulent activity can look pretty similar to legitimate business.
In the early years of the pension freedoms, cold calling was a common avenue pursued by scammers. A ban on such calls, complete with the ability to fine cold callers up to £500,000, came into force in 2019. It wasn’t perfect – companies operating overseas can circumvent the ban and others may choose to ignore it completely. But it did reduce the risk of an unsolicited approach.
In response, fraudsters have adapted their tactics. Rather than being contacted out of the blue, nowadays savers are as likely to fall foul of a bogus comparison website. Search online, enter details, and an array of bad actors are then free to get in touch.
Those scammers may operate under a name that is very similar to that of a regulated business. This can catch out even investors who follow official advice and attempt to cross-reference company names with the legitimate businesses listed on the FCA Register.
These doppelgängers are known as ‘clone firms’, which mimic genuine companies using official-looking paperwork, real employee names, and even fake compliance teams in order to reassure would-be investors. Nor do they necessarily cajole their potential victims into making a decision. Many are prepared to bide their time until the money comes their way. Needless to say, this kind of behaviour can make it much harder to spot a potential fraud.
Similarly, while fraudulent investments often focus on flavour-of-the-month opportunities (think green energy or other sustainable investment niches), that’s not always the case. Scammers have been known to market the likes of fixed income funds, and not necessarily those promising too-good-to-be-true double-digit returns. In a bid to appear credible, fraudulent schemes have touted annual returns as low as 2 or 3 per cent in recent times.
Frauds are not flawless; even the most sophisticated set-up can see scammers slip at the last minute by asking would-be victims not to use certain banks to transfer money (typically those which have the best anti-fraud detection measures).
But it is not always this easy. Whether online or by phone, scams are often unnervingly convincing, so every offer you come across should be scrutinised.
The same applies to those who have already been defrauded. ‘Secondary scams’, offering to help investors reclaim their money via the courts or via the Financial Services Compensation Scheme (FSCS) – sometimes pretending to be from the FSCS itself – are a common follow-up activity.
In short, you should not be lulled into a false sense of security. It takes more than just common sense to spot a scam in 2022.
The policy response
Regulators have been keen to emphasise their own responses to the scam threat. Since November, pension managers have had to closely review every request to transfer money from their schemes. In certain circumstances, for instance if a member made a transfer request after being offered an incentive to do so, they have the power to block the move.
Tom Selby, head of retirement policy at AJ Bell, pointed out in November that some of the circumstances under which transfers can be halted are set out in “very broad terms”.
When someone wants to transfer money to an overseas investment, for instance, a pension provider could force them to seek further guidance before approving the request. If common sense is not used when interpreting these rules, Selby added, savers looking to take advantage of their pension freedoms could instead get stuck in “transfers gridlock”.
There have also been belated developments in relation to older types of scam. In November 2020, the High Court ruled that savers aged under 55 whose pension pots had been fraudulently ‘liberated’ from occupational pension schemes ahead of time would be eligible for compensation via the Fraud Compensation Fund, managed by the Pension Protection Fund (the UK’s statutory safety net for pensions).
Funds released via personal pension schemes, however, remain ineligible.
That is significant, given as much as 90 per cent of fraudulent activity focuses on personal schemes. Many fraudsters have long since moved on from liberation scams, in order to target the over-55s to whom the pension freedoms rules have applied since 2015. But here too it is independent savers who are most at risk.
As Selby says: “DIY investors will pick and choose how they’ll invest the money. If they [invest] it outside a tax wrapper the danger is they do it in something unregulated, or a sham scheme.”
The rise of clone firms makes it harder to confirm whether an investment is managed by a company authorised by the FCA. The consequences of failing to verify this fact is stiff. Those using unauthorised firms are not able to access the Financial Ombudsman Service (FOS), a complaints body, nor have recourse to the FSCS.
Even authorised firms may promote certain unregulated products, like forestry schemes or overseas property ventures, via an unregulated collective investment scheme, or Ucis.
These schemes should not be marketed to ordinary members of the public. Savers should be wary accordingly – particularly as FOS and FSCS protections do not always apply in these cases. Sticking to tried and tested investment platforms, and tried and tested types of investment, is a good first step.
For those who have been defrauded, regardless of the investment involved, the first ports of call should be the FCA’s reporting lines, Action Fraud, and the bank from which the money was transferred.
The most effective way for regulators to clamp down on all fraudulent activity would be to stop it happening in the first place. But that is easier said than done.
Containing the viral spread of fraudulent messages and ads on social media and search engines will be more difficult than stamping out the cold callers.
In a report published earlier this year, MPs even suggested regulators were “powerless” to hold online companies to account, pointing to evidence that Alphabet (US:GOOGL) owned Google had been taking payments for scam ads with impunity. Unable to force the tech giant to crack down on scammers, the FCA itself was paying Google to host adverts warning about fraud.
In response to mounting criticism, Google announced that from August it would no longer accept financial ads from companies not authorised by the FCA. On 14 December, MPs examining the scope of the government’s forthcoming online safety bill said this move had led to the number of scam adverts appearing on Google falling “considerably”, but noted other social media giants had yet to follow suit.
A day later, Twitter (US:TWTR), Microsoft (US:MSFT) and Facebook owner Meta Platforms (US:FB) said they would adopt the same policy, although they have yet to confirm when changes will be introduced.
The online safety bill, which the government says will make the UK “the safest place in the world to be online”, includes measures to tackle online racism, child abuse and certain types of fraud. But there is currently no provision that would force tech companies to prevent fraudulent investment ads – something campaigners and MPs have criticised as a glaring omission. Self-policing is unlikely to remove the threat entirely.
The government has said it is considering paid-for advertising as part of a separate online advertising initiative from the Department of Culture, Media and Sport. In the meantime, as politicians debate tougher legislation and the social media giants gradually get their houses in order, you must continue to look out for yourself.