Financial institutions should evaluate whether the technology, controls and processes they have in place are sufficient to address the risk that their customers fall victim to investment scams run by unregulated businesses, legal experts have warned.
David Hamilton and Hinesh Shah of Pinsent Masons, the law firm behind Out-Law, were commenting after Mark Steward, executive director of enforcement and market oversight at the UK’s Financial Conduct Authority (FCA), warned that the regulator would clamp down on firms that “assist” unregulated businesses “marketing bogus investment activity”.
It will be interesting to see whether the evolution in the threat landscape and the government’s renewed attempts to tackle online fraud through the Online Safety Bill will also prompt a review of the FCA’s powers to bring bad actors to book
Last year, the FCA issued 1,204 specific warnings concerning investment scams – double the number it issued in 2019 – and already this year it has issued 632 specific warnings. Steward described this increase in the volume of investment scams as “a scourge”. He said an online investment scam is “cheap and easy to manufacture” and that scammers are targeting victims “in the same way legitimate advertisers find customers”.
“In some cases, there is no investment proposition, suggesting such sites exist to harvest personal information from financially vulnerable consumers, in all likelihood for sale to other scammers, potentially for use in push payment frauds,” Steward said.
Steward said that although there are gaps in the FCA’s powers that inhibit its ability to tackle online investment scammers, the regulator has nevertheless “ratcheted up” its proactive monitoring for investment scams online and sped up the time it takes to issue warnings.
The FCA maintains and updates a warning list daily, and Steward said that regulated firms that deal with businesses referenced on that list risk regulatory action being taken against them.
“The warning list should be an essential component of existing systems and controls inhibiting financial crime, creating more intrusive due diligence when such firms are seeking to set up or require professional advice or assistance, or seek banking or payment services here in the UK or seek to inveigle themselves into the hearts and minds of IFAs with promises of high commissions,” Steward said. “We need a force field against unauthorised businesses marketing bogus investment activity. And those regulated firms who let down their guard, especially in assisting firms on our warning list, may well face action from us for doing so as well.”
Hinesh Shah
Partner, Forensic Accountant
The focus on financial crime technology, controls, and processes remains of paramount importance
Steward said that the FCA is also continuing to exercise its powers to “pursue offenders”. He said the regulator currently has 50 ongoing investigations in relation to unauthorised activity involving 183 suspects. He said many of those cases “have an overseas jurisdictional challenge”, but that the FCA is using its powers “to seek restitutionary outcomes as well as to bring criminal prosecutions where we can”.
Hinesh Shah, a financial crime investigator at Pinsent Masons, said Steward’s comments highlight the “assertive message” the regulator is issuing in relation to the action it expects of regulated firms in tackling investment scams and fraud.
“The FCA will continue to use its powers to pursue fraudsters – despite the significant time and costs involved – but they will also be expecting regulated financial institutions to play their part in the detection and prevention of investment fraud,” Shah said. “The focus on financial crime technology, controls, and processes remains of paramount importance and firms who do not have adequate measures in place should expect to come into the FCA’s firing line.”
David Hamilton, who specialises in financial regulation and enforcement at Pinsent Masons, said that scammers have sought to exploit changes in customer behaviour resulting from the impact of Covid-19.
“The Covid-19 pandemic has seen a dramatic increase in the number of people conducting their financial affairs online; and criminals have evolved their approach to suit, setting up online investment frauds that prey on consumers’ insecurities about their financial wellbeing by promising too-good-to-be-true returns,” Hamilton said.
“The threat that these frauds pose to consumers, especially those whose circumstances make them vulnerable, has been high on the FCA’s agenda for some time. The FCA earlier this year issued finalised guidance for regulated firms on the fair treatment of vulnerable customers, requiring firms to take appropriate steps to protect their customers’ interests, particularly where they have fallen victim to fraud,” he said.
Hamilton added: “Steward’s speech underscores the FCA’s determination to defend consumers, including taking a more proactive approach to monitoring the internet for online scams, notifying consumers and regulated firms of dodgy operators via its warning list, taking enforcement action against regulated firms found to have assisted such operators, and engaging with social media firms in respect of financial promotions publicised on their sites. The FCA is also clearly committed to enforcing relevant regulatory perimeters, with 50 investigations involving unauthorised activity currently in progress.”
However, Hamilton thought it was clear from Steward’s comments that there are limitations to what the FCA can do itself under the existing legislative and regulatory framework to address fraudulent activity.
Hamilton said: “Although the FCA has extensive powers to enforce against false or misleading statements in relation to certain investments, it has no general statutory power or authority to prosecute fraud. Moreover, the FCA can only operate within its various regulatory perimeters and determining what is within or outside those perimeters can indeed be a tortuous analysis.”
“As the FCA has previously indicated, these limitations do not necessarily sit well with the public’s expectation that it will intervene in scams no matter what the underlying investment. The statutory constraints are also thrown into particularly stark relief when, as Steward points out, less than 1% of police resources are currently devoted to fraud. It will be interesting to see whether the evolution in the threat landscape and the government’s renewed attempts to tackle online fraud through the Online Safety Bill will also prompt a review of the FCA’s powers to bring bad actors to book,” he said.
In his speech, Steward highlighted UK legislation relevant to social media companies that support financial promotions. He said section 21 of the Financial Services and Markets Act 2000 “prohibits the communication of invitations or inducements to engage in investment activity by persons other than those issued or approved by FCA authorised firms”. Steward highlighted that an exemption to section 21, which previously derived from EU legislation and applied to electronic communications made from an establishment in a country within the European Economic Area, no longer applies following Brexit. He also said that the FCA is engaging with social media firms on complying with section 21.
Steward welcomed plans for a new Online Safety Bill which the UK government set out earlier this month, which he said would, if passed in its current form, “provide, for the first time, a regulatory framework tackling user generated online scams”. However, he said it remains unclear “whether the proposed bill goes far enough”.
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