With the taxpayer still reeling from the £170m+ bill that has fallen on them from the London Capital and Finance scandal, is it time to start issuing a “ScamSmart” leaflet to first-time investors who’ve just come into large lump sums?
During the last wave of “pension liberation” scams in the early 2010s, hundreds of millions of pounds were lost by investors who transferred their pensions to fraudsters who promised fabulous returns and “loopholes” that would allow the investor to release their money earlier and in larger quantities than the rules allowed.
Although pension fraud remains rife, the scale of the problem was dampened by in a number of ways:
- HMRC no longer allowing anyone to set up a pension scheme if they sent in two tokens from a breakfast cereal packet
- George Osborne’s “pension freedoms”, which dramatically reduced the appeal of “pension liberation”
- “ScamSmart” leaflets were issued to anyone who might be considering a transfer, with a distinctive scorpion cover and clear warnings about what a scam might look like.
If people making a decision on what to do with a large pension fund should be given a leaflet to try and stop them doing something really foolish with it, could the same be done for people who’ve received a large non-pension sum of money into their accounts?
A recurring theme in the fallout of London Capital and Finance was the stories of people who had received a large sum of money, larger than they had ever handled before in their life; typically inheritance, pension commencement lump sums, or downsizing proceeds, and invested the lot in LCF. Often having thought they had done the right thing by checking it was an FCA-regulated firm. It is easy to say they should have sought independent regulated financial advice, especially as they should have. But you don’t know what you don’t know.
It should not be too impractical to draw up rules for solicitors, banks and pension companies that state that if a client is to be paid a sum of money larger than £100,000, and that the company handling the money
- is not aware that the client intends to immediately use the money [e.g. buying another house with it]
- and does not have evidence on file that the money is a relatively modest part of the client’s free assets, say 25% or less
…then a one or two page leaflet should be issued before releasing the money warning them of how easy it is to lose a large sum of money as a first-time investor. The leaflet could run along the following lines:
- Don’t use social media or Google to look for investments.
- Consider talking to a regulated, independent financial adviser on how to use the money.
- A large sum of money kept in cash will lose value to inflation over time. Mainstream investments go up and down but should only lose money if they are cashed in during a fall, or not properly diversified, or use gearing.
- Don’t use social media or Google to look for investments.
- Be suspicious of any investment that promises returns that seem too good to be true. Beware any “cash” or “guaranteed” account that pays even slightly more than normal bank accounts. Beware any investment that is not diversified across the world’s major stockmarkets.
- Don’t use social media or Google to look for investments.
I’m normally the first person to scoff at anyone who suggests that the solution to a problem is to issue a leaflet and tick a box. But I’m not proposing a “ScamSmart” leaflet on the grounds that it will stop scams; just that it might stop a few investors losing their money.
It will also force us to confront the reality that someone who has just received a sum of money larger than they’ve ever handled before is being thrown into a pool of sharks blindfolded. The first step to solving a problem is to admit that we have a problem.
Crisis? What crisis?
Emphasising the need for solutions to the scam crisis that don’t involve Parliament, the Government recently rejected widespread calls to take action against promotion of investment scams by search engines and social media companies.
The Government’s “Online Harms Bill” was originally set to address racism, child abuse and romance scams.
An amendment by MP Stephen Timms was brought forward that would have brought investment scams within the scope of the Bill, including powers to fine Google and other search engines if they failed to tackle investment scams.
The amendment received a broad coalition of support including FCA head Nikhil Rathi, the CEO of advice and asset management giant Quilter, the Financial Services Compensation Scheme (FSCS), TV’s Martin Lewis and the Money and Mental Health Institute.
But despite positive noises being made by the Government, the Queen’s Speech made no mention of financial harm when introducing the bill.
£20 million of investors’ money (which has now become taxpayers’ money) was paid to Google for promoting London Capital and Finance, with another £6 million paid to other marketing platforms. As Google did nothing wrong by accepting money from LCF’s unregulated introducers, it is almost certain that money will ever be recovered by the general public, who were recently presented with the final bill for bailing out LCF almost in full.
The amount of money lost into scams would collapse dramatically overnight if search engines were subject to a fine (or, even better, held liable for investor losses) if they promoted any investment to UK investors that does not have authorisation from the Financial Conduct Authority.
Google would probably say that it is impractical, given the number of ads placed via its system, to vet every single one that mentions investment. However that is exactly what they said for years to justify why YouTube was filled with copyrighted material including virtually every popular film and TV show available to download in full (in 10 minute chunks). When the possibility of being held liable for copyrighted content become imminent, a technological solution was suddenly and magically found.
Given that banks can now be held liable for frauds in which they have done no more than send money to where their customer asked them to send it, it makes little sense to say we can’t expect Google to check whether someone advertising an investment scheme can actually do it legally – a burden no greater than expecting Google not to bring up an advert for your local drug dealer if you type in “cocaine”.
But that is by the by as the Government apparently sees no need. Scam epidemic? What epidemic?