The fight against skimmers and scammers

Speaker: Charles Randell, Chair
Event: The 37th Cambridge International Symposium on Economic Crime
Delivered: 4 September 2019
Note: this is the speech as drafted and may differ from the delivered version

Highlights:

• FCA committed to success of Economic Crime Plan alongside public and private sector partners to beat investment fraud
• Fraud prevention needs to be embedded in development of new savings and investment policies
• Vital to reduce confusion around what is and isn’t regulated and protected by the FSCS to promote responsible saving
• Call for non-financial firms that enable fraud to step up their contribution to the fight against it

Financial crime, specifically fraud against individuals, has reached epidemic proportions. One of the most damaging financial crimes is investment fraud, where people are scammed out of their savings. This evening I want to pose some questions about the system for combatting investment fraud, from the point of view of the Financial Conduct Authority, one of the many bodies with a role within this system.

Two important points to start with.

First, I’m going to be talking about the system: the wider system of legislation and regulation, the authorities, and the resources addressing investment fraud. Within this system, the FCA must be as good as it can be in tackling investment fraud, in pursuit of its statutory objectives of protecting consumers and promoting market integrity. Just how good we can be inevitably depends on the system we operate within. But whatever the system, we must be fully accountable for our performance and responsible for learning the lessons we need to learn and making the changes we need to make. So we’re investing further in intelligence and data analytics, increasing the number of people tackling investment fraud and continuing to raise public awareness of scams.

Secondly, when I speak about investment fraud I’m talking about one part of a spectrum of unacceptable behaviours. That spectrum starts with financial firms which manufacture or promote poor value products to consumers. Poor value products, particularly those with high costs, have a huge impact on people’s retirement outcomes. Some firms promote these products through incompetence, some through greed. The moral difference between unscrupulous and exploitative financial firms and financial criminals – between the skimmers and scammers – is, in my opinion, only one of degree. The FCA must be ready to use all the tools it has against both, including criminal prosecutions where appropriate, and to use them quickly and robustly.

How much financial crime is there?

We can’t say exactly how much financial crime there is, but it’s a very serious epidemic. The Crime Survey for England and Wales for 2018/19 puts the total volume of fraud affecting individuals at 3.8 million cases, around one third of the total volume of 11.2 million crimes. The figures for financial crimes against businesses are on top of that.

Office of National Statistics research concludes that fraud is very significantly under-reported and under-recorded. Fewer than one in six incidents of fraud are reported to either the police or Action Fraud. The scale of loss to the private sector from fraud every year is estimated at over £140 billion.

So fraud is a huge problem. It’s the most common crime in the country. And this 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. The devastating impact of these crimes hits not only the victims but also their families.

In 2017/18, the number of cases of fraud reported to the police resulting in a criminal charge or summons was as low as 3%. And these cases take longer to prosecute than most other offences - about 10 times longer than theft cases.

So while it’s important to deter fraud through prosecutions, it’s very difficult and time consuming. That makes it even more important to prevent fraud wherever possible.

Who is responsible for tackling financial crime?

There’s some good news here. The Economic Crime Plan published earlier this year and creation of the National Economic Crime Centre demonstrate a determination at the political level to coordinate strategy across the many bodies with responsibilities for financial crime, including the Home Office, Serious Fraud Office, 45 police forces, Action Fraud and the National Crime Agency. The Plan rightly calls for better sharing and use of information and greater capabilities to disrupt financial crime in both the public authorities and the private sector.

Only with adequate resourcing and action across all the police forces and other bodies responsible for the detection, investigation and prosecution of financial crime will the Economic Crime Plan succeed. A 2017 National Audit Office report into Online Fraud concluded that fraud was not a priority for a number of police forces, who continue to focus on more traditional forms of crime. The Inspectorate of Constabulary produced a report earlier this year which reinforces these findings. It concluded that most victims of fraud are not receiving the level of service from the police they deserve, and that we need a national policing fraud strategy to remedy the inconsistent and often inefficient way in which fraud is dealt with by the different police forces.

And private sector organisations need to play a bigger part. The National Audit Office found that there was a focus on the banking sector in tackling online fraud but that other companies, including telecommunications and internet companies, had not yet adequately recognised their responsibilities in this fight.

What is the role of the FCA?

The FCA has specific responsibilities for authorising and supervising financial firms carrying on regulated activities. There are around 60,000 of these firms, ranging from the largest banking group to the smallest high street mortgage broker, insurance broker or independent financial adviser.

The Financial Services and Markets Act 2000 gives us power to prosecute a number of criminal offences. These include carrying on unauthorised business and issuing unapproved financial promotions, as well as misleading statements and market manipulation in relation to certain investments. And we can also bring private prosecutions for other offences including fraud. In addition to our criminal prosecution powers, we have a range of civil powers, including power to impose penalties for market abuse or breach of our rules, and power to prohibit individuals from working in positions of influence in the regulated financial sector.

Every day we see a huge range of financial scams being promoted on the internet, very often from outside the UK. Many of these scams involve financial products which we don’t regulate under the Financial Services and Markets Act 2000. For example, we don’t regulate the issue of retail minibonds. We don’t regulate car parking spaces, hotel rooms, student accommodation, storage pods, forestry, land in the Cape Verde islands or any of the other get-rich-quick schemes which you will come across if you do a Google search for ‘high return investments’. But the boundary between what we do regulate and what we don’t is highly complex and difficult for the public to understand.

Even if we had the powers to do so, the FCA couldn’t take on the investigation and prosecution of all investment activity which is fraudulently promoted on the internet. We certainly can’t step in to deal with all financial crime which other agencies across the country don’t pursue. The scale of the challenge calls for concerted action from everyone involved, pooling our resources and expertise to maximise impact.

So our strategy for tackling investment fraud has three main parts.

First, we focus on the firms we authorise and in particular on their regulated activities. We supervise what they do and we take enforcement action in cases of serious misconduct.

Secondly, we alert consumers to the risks of scams - which in most cases involve people we don’t authorise or involve unregulated investments. We’ve been running our ScamSmart public awareness campaign since October 2014, giving people simple tips to help reduce the risk of being scammed and publishing a warning list of suspected or known scammers. Since we launched the campaign, over 1.2m people have visited the ScamSmart website and more than 20,000 have been warned about an unauthorised firm after using our warning list tool. With an average loss to investment fraud of around £30,000, it means we have potentially stopped hundreds of millions of pounds from falling into the wrong hands.

Thirdly, we take action to shut down unauthorised investment business when we can, although in many cases the perpetrators are overseas. Last year we published over 500 consumer alerts about unauthorised firms, and we currently have over 40 live enforcement investigations in this area[1].

What can be done to make things better?

Given the size of the financial crime problem, how can the system be changed to make things better? I would suggest three questions we need to discuss about the policy framework.

Should policymakers integrate plans to combat scamming and skimming in all new savings and investment policies?

First of all, we need to discuss whether policymakers do enough to embed thinking about the risk of skimming and scamming into the savings and investment policies they make.

We need to discuss whether policymakers do enough to embed thinking about the risk of skimming and scamming into the savings and investment policies they make

For example, a number of the victims of skimming and scamming are pension scheme members who have been persuaded to make poor decisions when exercising their new-found freedoms to transfer out of a defined benefit scheme. Exercising this freedom is unlikely to be in the interests of the majority of pension scheme members. We don’t know exactly how many people have been scammed into transferring their pension pots to fraudsters, or skimmed by bad advice to switch to inappropriate high risk or poor value investments, but it’s clear that it could be a large number. And we’ve identified that over 5 million pension savers are at risk[2] of falling for the tactics used by scammers.

I don’t express a view on the wisdom of the pension freedom policy as such. But the House of Commons Work & Pensions Committee has asked challenging questions about the execution of this policy. It was implemented in 2015, relatively soon after it was announced in 2014, but responses to the risk of skimming and scamming are continuing to be developed.  For example, a ban on cold calling became effective at the beginning of 2019 and the FCA proposes to ban contingent charging for pension transfer advice from next year.

All policymakers, including the FCA, need to learn lessons for the future from this experience. One of which is that a very major change of policy like this needs a substantial period of planning and testing so that all the necessary safeguards against skimming and scamming are integrated before it is launched.

And although reports of pension scams are now decreasing, reports of other investment scams – such as crypto and forex investment scams[3] - are rapidly increasing. Similarly, what more can be done to reduce the risk that retail investors are skimmed or scammed by people offering high risk unregulated financial investments?

We have a system which allows, and sometimes now demands, that individuals take potentially very difficult and risky decisions about their savings

We have a system which allows, and sometimes now demands, that individuals take potentially very difficult and risky decisions about their savings. Of course, whether you believe in individual responsibility and freedom of choice, or more intrusive regulation to protect consumers, is to some extent a political question, so government policies in this area are subject to political change. As a regulator, we must deliver the best protection for consumers that we can, in the light of choices made by politicians. But even when we are at our very best, more individual responsibility and freedom of choice are likely to mean more risk to consumers.

Nevertheless, the FCA is taking action against the sale of specific types of high risk investment to retail investors. Such as our proposed changes for peer-to-peer lending[4]. Or our ban on high risk bets on investments[5]. Or our ban on bets on cryptocurrencies[6]. We are increasing our activities to disrupt harmful minibond issuance, although because the activity is not currently regulated and much of the issuance is conducted by firms we don’t authorise, there is a limit to what we can do in this space.

We are also intensifying our strategic coordination with the bodies to which we have the closest statutory connections: the Financial Ombudsman Service, the Financial Services Compensation Scheme and the Money and Pensions Service. This collaboration builds on the model of strategic coordination which we have developed with the Pensions Regulator to identify scheme members most at risk from pension transfer scams and help them to make better decisions. One aspect of strategy we must continue to focus on is ensuring that consumers have a much better understanding of risky investments and are better equipped to spot scams – as reflected in the pensions scams campaign we have been running jointly with the Pensions Regulator, also under the ScamSmart banner.

How can we reduce the risk of confusion about what’s regulated and protected and what isn’t?

Secondly, it’s clear that there’s too much confusion about which financial products are regulated and which aren’t.

The confusion about the FCA’s own regulatory boundary is multiplied by confusion about other overlapping boundaries: for example, what’s accepted or not accepted into an ISA, an Innovative Finance ISA or a Self-Invested Personal Pension plan and what’s protected and not protected by the Financial Services Compensation Scheme.

As the Treasury Select Committee has highlighted, skimmers and scammers often operate in the grey areas around the boundary of regulation and protection.

In a recent speech Mark Neale, the former CEO of the FSCS, pointed out that in the last four years, the FSCS has paid out over £580m in compensation related to bad advice to transfer money from occupational pension schemes to invest in risky and illiquid, often unregulated assets. He ascribes this to ‘a market characterised by a bewildering array of products, by complexity – some deliberate – and by profound information asymmetry.’

Something’s not right here. We need to consider whether these issues are best addressed by further restrictions on the sale of high cost, risky and illiquid investments, by changing the scope of FSCS coverage, or both.

Recently it’s been reported that some public figures have called for a straight ban on the sale of unregulated investments by FCA authorised firms.  An apparently simple and obvious step.

But on closer examination, it’s not quite so simple. Because the FCA doesn’t, for example, regulate the issue of shares or bonds. So it would be necessary to decide whether FCA authorised firms could continue to recommend that people buy shares and bonds directly, the two main components of a traditional investment portfolio.

Of course I agree that we need to stop FCA authorised firms from advising consumers to buy unsuitable investments. But the complexities of this simple proposal demonstrate that changes in this area need careful thought.

Even so, complexity isn’t a good reason for avoiding fundamental questions about the current system. We know that many people’s best investment strategy is likely to be paying down debt and, if there is money left over, investing for the long term in a low cost, well diversified portfolio of high quality liquid assets; but too many people are currently pressured into investing in illiquid high cost and high risk investments. So we need to ensure that regulation guides them to better savings choices, through policies such as investment pathways[7], and perhaps by further reducing the ‘bewildering array of products’ that can be presented to them.

We have also seen a range of unsuitable investments being accepted into self-invested pension plans. We’ve made it clear that the providers of SIPP wrappers need to exercise due diligence on the investments accepted into the plans. But I believe it’s right to question why the taxpayer should foot part of the bill for these investments through pension tax relief. This is intended to reduce the burden on future generations of caring for current savers, but it may mean that current savers can be persuaded to invest in high risk unregulated investments – investments which have little or no place in responsible retirement planning for the vast majority of savers.

Savers can be persuaded to invest in high risk unregulated investments – investments which have little or no place in responsible retirement planning for the vast majority of savers

And we’ve also seen very risky and sometimes fraudulent investments being accepted into Innovative Finance ISAs.

People are confused when one part of the state encourages an investment, while another public authority says it’s highly risky.

So I’m glad that as part of the reviews commissioned in the wake of the failure of London Capital & Finance, the Innovative Finance ISA policy is being reviewed. But it’s important to ensure that any reviews in this area – including the Treasury’s own review of minibond policy – take a broad view, to prevent the skimmers and scammers from resurfacing in some other part of the landscape.

In addition, the financial promotions regime is ripe for re-examination. Approving financial promotions is not a regulated activity although only FCA authorised firms may do it. But they don’t have to have any special qualifications or permissions. They don’t have to report to the FCA on the promotions they approve. The rubric which appears on financial promotions – such as ‘capital at risk’ – doesn’t help investors distinguish between a low cost, lower risk diversified listed equity fund and a high cost, much higher risk minibond. It’s yet another area which deepens confusion about the scope of regulation.

A well-functioning financial promotions regime would label a high-risk unquoted and unregulated investment as exactly that, and say clearly that it’s not the right investment for all of your life savings. And phrases like ‘secured’ or ‘asset-backed’ could be banned; they are often highly misleading since the so-called security or asset-backing can be worthless.

But unless the issue or approval of financial promotions is made a regulated activity, with only appropriately qualified and governed authorised firms permitted to do this, with clear standards for issue or approval of the promotion, and with adequate reporting to and supervision by the FCA, I’m not confident that the financial promotions regime can provide much better protection than it does at present – which is not enough.

How can we make the corporate enablers play their part?

Major companies can effectively enable a huge amount of fraud. The companies which allow people’s personal data to be stolen. The companies which promote advertisements for scams on the internet and thereby profit from these crimes. Quite frankly, they don’t always play their part in remedying the harm they create.

Financial firms quite reasonably question why they have to pick up the bill for fraud in the system, when so much of it would not be possible without data breaches and other actions by firms outside the financial sector. A common payment scam will often capitalise on a data breach – say at an airline or hotel chain – which enables the scammers to obtain personal data. They then exploit poor security in an email provider to hack into email accounts and send out fake invoices. So why should it be financial firms which pick up the tab for the whole of the payment fraud which results?

And should the internet service providers, search engines and social media firms be expected to do more to spot and block suspected scammers from using their services? I welcome the decision by Facebook to contribute to the Citizens Advice Scams Action service and to create a scams ad reporting tool, as part of the settlement of litigation against them by Martin Lewis. I hope that Facebook will continue to invest in further anti-scam protections.

And I hope that other internet giants will follow suit. For example, Google searches of ‘high return investments’ continue to reveal numerous very doubtful offers high up the search rankings. We know from the London Capital & Finance case that a large proportion – over £20 million – of clients’ payments to the firm were spent on Google advertising to attract more customers.

The internet giants may argue that it’s too difficult for them to do more, that there are legal complications, or that the internet is too dynamic, changing too rapidly, and that they can’t be obliged to monitor it continually.

Those are fair points. I wouldn’t support imposing unreasonable expectations on the big tech companies but as a minimum I would expect them to take down suspected fraudulent content immediately when requested to do so by the authorities, and ensure that their terms and conditions give them the right to do so. And I would expect them to use their extraordinary resources to work with law enforcement and regulators to develop algorithms and machine learning tools to identify potentially fraudulent content.

I don’t believe that these measures would prejudice freedom of speech. Or that dissent and democracy in our society will be any weaker if we throw some well-aimed grit into the cogs of the online scammers.

The Government’s recent White Paper rightly raises the need for more action to prevent a range of online harms, but doesn’t cover online financial scams which are so devastating. With nearly four million reported cases of fraud a year, and an explosion in online scams, should policy on online harms go wider?

Conclusion

Fraud is a devastating crime which has reached epidemic proportions. The FCA is committed to making all the changes necessary so that it can be as good as it can be in contributing to the fight against the scammers. And we continue to work on improving transparency and consumer understanding of risks and the impact of costs, to drive down the harm caused by the skimmers.

Fraud is a devastating crime which has reached epidemic proportions. The FCA is committed to making all the changes necessary so that it can be as good as it can be in contributing to the fight against the scammers.

We can and must get better. But we will be more effective if the system is more coherent. With financial crime assessments and careful execution plans built upfront into new policies which may change investor behaviour. With the reduction of confusion about which investments are appropriate for most individual investors, and better information to help them make good choices. And with internet giants stepping up to the responsibilities which go with their huge power.

There will always be skimmers and scammers who are attracted to the financial sector, but we must all work together to make their lives as difficult as possible.