Consumer investments data review April - September 2021

We seek to prevent harm by ensuring that all regulated firms and individuals meet our minimum standards. We will refuse to authorise a firm if it does not satisfy us that it meets, and will continue to meet, these standards.

Addressing risk of harm at the authorisation stage prevents firms that do not meet our minimum standards from entering the regulatory perimeter. It can also be a more cost-effective approach, because it is generally more efficient to prevent dishonest firms and individuals entering the perimeter than using supervision and enforcement tools once they are authorised or registered.

While we support firms to help them make the changes necessary for authorisation, this is not an open-ended process. We must decide whether a firm should be authorised within statutory deadlines. Our experience shows us that some firms are not ready to meet our minimum standards for authorisation. In these circumstances, we will recommend the refusal of a firm’s or individual’s application or a firm will withdraw rather than face a refusal case. Withdrawals could be a result of a firm-led decision (eg they change their mind); or FCA-led (eg a firm decides not to continue with the application following our engagement and scrutiny of the application that sets out our areas of concern). Submissions of extremely poor quality are rejected on the basis they do not amount to an ‘application’– this happens prior to scrutiny.

Between 1 April 2021 and 30 September 2021, we received 2,588 authorisation applications from firms and individuals in the consumer investments market. In the same period, we assessed 2,427 applications in this market. Of these assessed cases, 2,259 were approved, 140 were withdrawn, and 28 were rejected (generally due to missing or incorrect information submitted). No applications were refused.

As with our previous review, withdrawals were higher for new firms entering the market. We assessed 135 new authorisation applications from firms; 28 of these were withdrawn and 4 were rejected. Three quarters of these withdrawals were FCA-Led. This represents almost 1 in 6 applications.

We give greater scrutiny and resources to firms and business models that pose the greatest risk of harm to consumers. This includes preventing individuals responsible for unsuitable advice from avoiding the consequences of their actions by moving to or setting up new firms – a practice known as phoenixing.

In some instances, individuals have set up and sought authorisation for a new firm before their existing firm starts to receive complaints about poor past advice – a practice known as lifeboating.

Over the 6-month period, we prevented 9 advice firms from gaining authorisation where phoenixing or lifeboating was suspected. In all those cases, the firms withdrew their application when we raised our concerns with them rather than be taken through the refusal process.

We are concerned that attempts to lifeboat are continuing despite strong messages that this is unacceptable. We are currently developing measures to deter this practice and ensure that our approach is sufficiently robust when we identify it.

We supervise firms and individuals controlling firms by monitoring the way they conduct business. We use judgement to supervise against a framework of principles and rules that represent minimum standards of conduct.

On 30 September 2021, we supervised 6,518 firms within the 6 portfolios this update focuses on. Firms in these portfolios acted as principals for 8,360 unique registered appointed representatives.

Data for cases involving potential scams has been extracted by identifying cases relating to Consumer Investments where the supervisor dealing with the case has included the term scam in their description of the case.  These cases have then been reviewed to exclude those which do not relate to a potential investment scam (eg other types of scams). 

767 supervisory cases were opened involving higher risk investments or potential investment scams between 1 April 2021 and 30 September 2021. This includes pension scams, which we look at in more detail below. This compares with 1,025 for the previous 12-month period.

During this period, 654 cases were closed. Of these 65% were closed in supervision following review, 11% were closed where the case has been combined with another case covering the same issues   and 24% were closed following regulatory action.

Regulatory action includes firm visits or communications, mandating action to senior management or making use of our Financial Services and Markets Act 2000 (FSMA) powers (including variations of permissions and undertaking enforcement action).

Pension scams

When a consumer falls victim to a pension scam or money from their pension ends up in investments that are not appropriate for them, their losses can be devastating. Our specialist supervision team focuses on cases where we suspect potential pensions harms. This includes scams involving pension liberation and pension transfers or where we suspect unsuitable advice has led to a consumer ending up in investments that are clearly not suitable for them.

89cases were opened by this specialist team in April 2021 – September 2021. These are split as follows:

• 36 cases opened on the basis of information we received, for example from consumers or other areas of the FCA. This is a 61% decrease when compared with the previous 6 months (92).
   
• 53 cases opened on the basis of data analysis relating to suitability of pension transfer advice and potential scams.

Our work in this period resulted in 14 firms varying their permissions so they can no longer undertake the activities that caused consumers harm, we secured asset restriction Voluntary Application for Imposition of Requirement (VREQs) from 9 firms and 1 firm was referred to Enforcement.

Cases resulting from whistleblowing intelligence are excluded from these numbers (and from the cryptoasset cases below).

Cryptoasset Supervision team

The Cryptoasset Supervision team is responsible for supervising cryptoasset firms’ compliance with the Money Laundering Regulations (MLRs). The team is responsible for identifying, managing and mitigating risks of potential harm arising in active and registered firms. This includes rapidly intervening where firms are at risk of being used as conduits for illegal activity, or where firms pose harm to consumers or market integrity, for example operating without registration, perpetuating scams, fraud or high-risk activities.

From 1 April to 30 September 2021, this team opened over 300 cases relating to potential unregistered cryptoasset businesses, many of which are likely to be involved in scams. During the same period, we added 172 firms to our public facing Unregistered Cryptoasset Businesses List and made 10 referrals to the Advertising Standards Authority (ASA) for their consideration.

Financial promotions

We have limited powers over many issuers of high-risk investments where they are not carrying out a regulated activity. This means that we cannot generally impose requirements on the issuers of high-risk investments themselves if these issuers are unauthorised and not subject to our rules. However, if these investments are marketed then it is likely that marketing will have to meet the requirements of the Financial Promotions regime.

We recently published our Consultation Paper on strengthening our financial promotion rules for high-risk investments, including cryptoassets. This aims to ensure our financial promotions regime is robust and remains fit for purpose in a changing environment where promotions are distributed to a mass audience at increasing speed via online platforms and through social media. We aim to strengthen the consumer journey into high-risk investments and clarify the roles and responsibilities of authorised firms approving the financial promotions of unauthorised firms.

Firms do not have to comply with our financial promotion rules if the communication falls within an exemption in the Financial Promotion Order (2005). Some commonly used exemptions are for high net worth and sophisticated investors. As discussed in our 2020/21 Perimeter Report, we believe the exemptions are a significant vulnerability in the financial promotions regime. We believe there need to be significant changes to address the harms we see, particularly in reforming the relevant thresholds and the ability for consumers to self-certify. We welcome the Government’s recent consultation on reforming these exemptions and believe this is an important step forward in making the regime fit for purpose.

We have worked closely with online platforms to ensure they do more to deliver on their public commitments to stop the harm from online advertising. While we have seen a significant reduction in non-compliant paid for advertisements by unauthorised entities on Google since our engagement and the implementation of their new financial services advertisement policy, we are continuing engagement with other social media platforms and continuing to monitor the online market carefully and update our Warning List as appropriate.

We have also created a new Financial Promotions and Enforcement Taskforce, combining parts of our Supervision and Enforcement divisions. The Taskforce is delivering a new cross-FCA strategy to tackle breaches of the rules governing financial promotions, issues that straddle the perimeter and online harms. It is already using data more effectively, applying new technology and advanced detective techniques to identify potential consumer harm more quickly and accurately. We also publish regular data on our work to tackle financial promotions across all sectors.

We believe that the protection of consumers from illegal online scams would be strengthened through clear legal obligations on platform operators within the Government’s Online Safety Bill (OSB). We therefore welcomed the recent confirmation by Government that fraudulent content will be treated as ‘priority illegal content’ under the Bill, which will ensure that platforms have a proactive obligation to tackle it.  For the Bill to succeed in reducing fraud, we also hope that paid for advertising can be brought in scope of the Bill and platforms given a duty to prevent fraudulent ads appearing online.

We decide whether to take enforcement action based on whether we believe there has been serious misconduct. We consider factors such as the severity of the harm arising from the suspected misconduct, whether the suspected misconduct has wider implications, the extent to which it may have involved lack of fitness and the public interest in investigating the matter.

Enforcement action may include publishing consumer alerts, taking steps to remove websites, taking civil court action to stop activity and freeze assets, insolvency proceedings, regulatory action against authorised firms or individuals and, in the most serious cases, criminal prosecution.

In many of our cases, harm has already been caused, but our intervention can prevent it from getting worse. The outcomes of investigations also have a preventative effect through credible deterrence.

The extent to which our remit and powers are engaged will vary depending on the circumstances. The protagonists in most scams are outside our regulatory jurisdiction and, in many cases, another law enforcement agency is better placed and resourced to tackle fraud. We work closely with other agencies, including police forces and the Serious Fraud Office, to maximise our impact. We also routinely share information and intelligence with our partners in the National Economic Crime Centre (NECC), the multi-agency body that coordinates the response to economic crime.

Working in partnership with these organisations we focus our work on the areas where our powers and remit mean we can have the most impact, including:

• keeping fraudsters out of financial services at the gateway
• stopping the firms we regulate from facilitating fraud
• detecting and pursuing fraudsters who are FCA-supervised
• detecting and pursuing improperly unauthorised / unapproved fraudsters and issuing public alerts through our warning list
• informing and empowering the public to protect themselves through our educational campaigns and publication of our warning list

Unauthorised business

We take enforcement action against firms and individuals that are not authorised or exempt under FSMA but who carry on regulated activities in breach of the legislation and/or who disregard restrictions on financial promotions. Many firms and individuals acting in breach of FSMA and carrying on unauthorised activity are likely to be scam firms and involved in some element of investment fraud.

Such activity may include targeting UK consumers via unauthorised financial promotions and offering investments in unauthorised collective investment schemes, unauthorised deposit taking schemes, unauthorised investment advice and management, pension liberation fraud and/or pension scams.

Between 1 April 2021 and 30 September 2021, we received over 16,300 reports of potential unauthorised activity. These reports are made up of referrals from our Consumer Helpline and other areas of the FCA, other agencies such as the police and other regulators, both domestically and abroad. In the previous 12-month period we received over 30,000 reports.

Table 1: Unauthorised business activities summary April – September 2021

Of the approximately 16,300 reports sent to us about potential unauthorised business activity, a large proportion related to either matters we were already aware of or unregulated activities and/or concerns about authorised firms. Matters we were already aware of include either live cases or investigations, or entities that we have already taken action against (eg by issuing an alert or looking into it as an enquiry). Reports on authorised firms are passed to our Supervision teams to investigate.

The remaining reports were logged for intelligence purposes or opened as enquiries to look into further. Enquiries are cases which do not use formal powers, and which are part of our triaging process. They include disruption activity such as issuing consumer alerts and taking steps to remove websites, as well as engaging with unauthorised firms to resolve a breach, such as restructure or repayment of monies.

In our last review we said that we had increased the number of alerts issued about unauthorised firms and individuals. From April 2020 to March 2021 we issued 1,317 alerts (compared with 742 between April 2019 and March 2020); we maintained this level of disruptive activity between April and September 2021, when we issued 735 alerts. This includes cases involving breaches of the financial promotions regime. Around 25% of the alerts were about clone firms, where fraudsters pretend to be authorised firms. Save in exceptional cases, we also take steps to try to suspend any linked websites and/or social media.

The most serious cases will then become investigations using our formal powers. We have 50 live investigations involving unauthorised business, most of which also involve scams. For our investigations which involve scams, we aim to take robust criminal action, especially when we have evidence that UK individuals are involved in perpetrating the crime.

We have several ongoing criminal investigations. These include:

• the sale and management of worthless investments by multiple boiler room operations linked to transnational criminal organisations
• the promotion of dubious online trading platforms via social media
• the provision of advice and management of investments into online trading platforms
• the operation of unauthorised collective investment schemes and boiler rooms
• the promotion of investments to consumers for investment into high-risk products

We are also preparing for several trials, both criminal and civil, that will take place in the next 15 months.

Our enforcement work led to custodial sentences for 3 unauthorised individuals and some actions following on from previous restitution orders. This included orders being upheld by the Court of Appeal and bankruptcy orders against 3 individuals. Table 2 summarises these actions.

Table 2: Actions and public outcomes for investigations from April – September 2021 for unauthorised firms and individuals

Scams and higher risk investments where regulated firms and individuals are involved

We have 35 live investigations or proceedings relating to the conduct of regulated firms and individuals where consumers have invested in potential scams or higher risk investments. These are ‘parent’ investigations which often involve multiple subjects (firms and individuals), and so the total number of firms and individuals under investigation is significantly higher. In most of these cases, we have liaised with law enforcement and/or other agencies such as HM Revenue & Customs (HMRC) and the Insolvency Service.

Firms and individuals must always meet certain minimum standards to continue to be authorised by us. We act against firms and individuals that do not meet such criteria. For example, we will seek to ban individuals convicted of criminal offences involving fraud, dishonesty and selling investments scams.

We finalised enforcement action against 1 individual from April 2021 to September 2021 in relation to honesty and integrity.

Table 3: Actions and public outcomes for investigations from April – September 2021 for regulated firms and individuals

We can also intervene by imposing requirements on firms or varying their permissions, either with their voluntary agreement (known as a VREQ or a VVOP) or on our own initiative (known as an OIREQ or an OIVOP), to restrict their activities to contain harm. Typical requirements include stopping firms from promoting and selling certain products, from providing certain services or restricting use of their assets, for example, to meet redress liabilities.

In the 6-month period between 1 April 2021 and 30 September 2021, we persuaded 27 firms to provide VREQs and we imposed OIREQs on 10 firms (this is compared with 21 VREQs and 9 OIREQs for the previous 12 months, between 1 April 2020 and 31 March 2021).

We know we can’t stop every scam from happening, but we want to shrink the audience that scammers can target and help support the Government’s priority to make the UK a more unattractive place to commit financial crime. One of the ways we do this is through our ScamSmart campaign, which aims to empower consumers with the knowledge and tools to help prevent them falling victim to scams. The campaign focuses on 2 core objectives – raising consumer awareness of the key warning signs associated with a scam and driving use of our Warning List tool.

Over 1 million people have visited our ScamSmart website since its launch in 2014, and more than 20,000 have seen our warnings about specific, unauthorised firms. Since the campaign started, our tracking research indicates at-risk consumers are now more likely to consider the risk of scams when investing, more likely to be aware of the warning signs of a scam, and more likely to check with us before investing.

Figure 2 shows in the 6 months from April 2021 to September 2021 almost 67,000 people visited our ScamSmart website, compared with 58,000 for the previous 6 months and nearly 67,000 from April 2020 to September 2020.  Around 13,000 people visited our investment and scam checker page and there were nearly 13,000 searches for a firm on the Warning List. Nearly 2,500 users went on to check the Financial Services Register. On-site feedback showed 73% of users found our website helpful, with some consumers indicating they had avoided a scam thanks to the website.

As well as capturing data on website usage, we are also able to track which investment and pension products consumers are checking on the ScamSmart Warning List tool, and how consumers heard about these products. This shows which investment and pension products are being promoted to consumers, and by which channels.

Cryptocurrency is the most checked investment opportunity on the FCA Warning List Tool, representing 34% (4,320) of the total number of checks. Between April and September 2021, checks on cryptocurrency increased by 49% on the previous 6-month period (from 2,903). Checks on pension transfers increased by the same amount, from 1,075 to 1,603.

Figure 3 shows that cryptocurrency, pension transfers, bonds and foreign exchange (FX) are the top 4 investments and pensions products/services reported to ScamSmart over the 6-month period.

Figure 4 shows that ScamSmart users report online channels as the most common method of hearing about potential scams (29%), with adverts on social media (19%) and recommendations from a friend (18%) the next 2 most common methods.

We launched our InvestSmart campaign in October 2021, which targets consumers who are new to investing, and aims to provide them with information to make better-informed investment decisions. We advertised on online video, digital display, social media and paid search (PPC), and ran PR and partnerships activations, alongside working with influencers. To the end of November 2021, the TikTok videos posted by our influencers had over 70,000 views and 5,000 likes, while over 20,000 people had visited the InvestSmart website.

From 1 April to 30 September 2021, we received almost 52,000 enquiries from consumers (an average of over 8,600 per month). We monitor the subject or product type that consumers enquire about, with 10% relating to investment products and a further 6% related to pensions or retirement products. 

In our Consumer investments data review April 2020 - March 2021, we reported that enquiries to the FCA about potential scams increased sharply since mid-2020. In the current 6-month period, enquiries have generally remained at the same high level. Between 1 April and 30 September, we received just over 16,400 scam-related enquiries (32% of total enquiries). While this is slightly lower than the nearly 16,900 we received in the previous 6 months, it is 33% higher than the 12,355 received between April and September 2020.

For every consumer enquiry we receive we capture the organisation name, product, issue and a description of the query in our case management system. Regular reports on this data help us to monitor themes and spot emerging issues.

Throughout this section the total number of enquiries about potential scams contains instances where one consumer has contacted us more than once about the same potential scam, for example, to provide further information. Due to the way our data is recorded, the data on the subsets of investment scams and specific types of scams do not include these subsequent enquiries. 

Of the scam enquiries we received between April and September 2021, 3,006 related to cryptocurrencies. This is compared with 2,645 over the previous 6-month period (a 14% increase).  

When a consumer contacts us, where we can resolve the enquiry immediately, we do so. However, we often guide the consumer to contact the firm or other organisations as appropriate to progress their enquiry. In addition, we will often investigate enquiries further if we suspect misconduct, with 25% of enquiries received referred to our supervisory or enforcement teams for action.

As well as trying to help consumers who call us, we monitor the information we receive from them as this is a valuable source of intelligence. Along with other sources, we use it to inform our action against fraudulent and unauthorised activities, and collaboration with other anti-fraud agencies.

We collect data from firms to enable us to monitor the number of complaints they receive, how this changes over time and which products or services people have complained about the most. We use it to help assess how well firms are treating their customers, to guide our supervision of firms and markets, and to highlight potential concerns with products.

Firms must report all the complaints they receive and how many accounts or plans they have in force. In the first half of 2021, firms reported almost 75,000 investment complaints for 58.8m client accounts and over 73,000 decumulation and pension complaints against 43.5m plans in force.

This equates to around 1.3 complaints per 1,000 products in investments and 1.7 complaints per 1,000 products for decumulation and pensions. These cover all complaints, not just those relating to higher risk investments or scams. The level of complaints received about pensions and investments products is comparatively low – in the same period firms reported 8.6 complaints per 1,000 home finance products for example.

While pensions and investments products tend to receive lower volumes of complaints, decumulation and pension complaints are upheld at the highest rate of all product groups (67% for H1 2021). The rate for investment products was 48%. The average redress paid per complaint for investment and decumulation and pension complaints was also higher than other product groups, with the exception of Payment Protection Insurance (PPI). Nearly £21m of redress was paid for investment complaints (£542 per upheld complaint) and £34.3m of redress was paid for decumulation and pension complaints (£692 per upheld complaint).

Most complained about products

While the most complained about products in pensions and investments are those that tend to be held by more consumers (such as workplace and non-workplace pensions, and investment ISAs), when adjusting for the number of products in the market, higher risk investment products tend to appear at the top of the list, with significantly higher numbers of complaints per 1,000 products. Sortable complaints data by product is published every 6 months, and includes complaints contextualised by products in the market for firms that report more than 500 complaints in that half-year.