Charles Randell, Chair of the UK's Financial Conduct Authority ('FCA') recently considered the current system to combat investment fraud, which he noted now represented a "serious epidemic".

"Skimmers and "Scammers"

Placing his observations in context, Mr Randell observed that investment fraud is part of a spectrum of unacceptable behaviour, from the manufacture or promotion of poor value products to outright criminal fraud and noted that

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.

The role of the FCA in tackling Investment Fraud

Commenting on the role of the FCA, Mr Randell explained that its strategy for tackling investment fraud has three main parts.

  • focussing on the firms the FCA authorises and in particular on their regulated activities. Supervising what they do and taking enforcement action in cases of serious misconduct;
  • alerting consumers to the risks of scams - e.g. FCA's "ScamSmart" public awareness campaign aims to give people simple tips to help reduce the risk of being scammed and publishes a warning list of suspected or known scammers; and
  • taking action to shut down unauthorised investment business when possible.

Room for improvement in the investment fraud policy framework

However, the FCA noted that in all these areas its power can be limited. Fraudulent activity is often undertaken by offshore actors or in areas falling outside the scope of regulated activities. Considering how the system might be changed to make things better Mr Randell posed three questions to consider around the current policy framework.

1. Could policymakers do more to embed thinking about the risk of skimming and scamming into savings and investment policies as they are made?

By way of example, Mr Randell noted that measures to reduce risks emerging from recent pensions transfer freedom legislation introduced in 2014 has been largely reactive, responding to fraud and scams as they emerged. Despite the policy implementation in 2015, the the ban on cold calling, became effective at only at the beginning of 2019 and the ban on contingent charging for pension transfer advice will come into force from next year. Mr Randell commented:

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.

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

Noting that not all investment products are regulated, and that skimmers and scammers often operate in the grey areas around the boundary of regulation and protection, Mr Randell observed that for most people only a limited range of simple and protected investment products will typically be suitable and yet too many people are currently pressured into investing in unprotected, illiquid high cost and high risk investments. Mr Randall commented that regulation should be designed to guide ordinary investors, less able to bear risk to better savings choices, through policies such as investment pathways, and perhaps by further reducing the 'bewildering array of products' that can be presented to them.

Current areas of focus on this topic are:

  • unsuitable investments being accepted into self-invested pension plans and ISAs
  • appropriate disclosure and marketing requirements for more risky products
  • the financial promotions regime, described as "ripe for re-examination.

3. How can we make the corporate enablers play their part?

Commenting on this topic Mr Randell turned his attention to internet service providers, search engines and social media firms who, by allowing personal data to be stolen or promote advertisements for scams on the internet facilitate or even profit from financial crimes, noting that

Quite frankly, they don't always play their part in remedying the harm they create.....

As a minimum, he observed, the FCA expected prompt action to remove content at the request of regulators and to use their "extraordinary resources" to work with law enforcement and regulators to develop algorithms and machine learning tools to identify potentially fraudulent content.

A call to arms

Mr Randell's speech was very much a call to arms for policy makers, regulators and internet platforms and gives a clear insight into the FCAs thinking in this area. Click here for link to the speech