Government must protect the public from financial crime wave

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
The Del Boys of the past have now been replaced by digital conmen who are running riot. Photo: Andy Butterton/PA via Getty Images

As Boris Johnson pledges to put 20,000 more police on Britain’s streets, the country is facing a crime wave that more Bobbies on the beat are unlikely to solve.

The UK is in the midst of a “very serious epidemic” of financial crime, Financial Conduct Authority (FCA) chair Charles Randell warned on Thursday.

An estimated 3.8 million people were hit by scams or fraudulent investments last year. The average fraud costs a person £30,000, meaning as much as £114bn may be being skimmed from the public’s savings.

Unscrupulous individuals have been trying to dupe people out of their cash for as long as money has existed, but a combination of factors has pushed the problem to “epidemic” levels.

The internet has made marketing cheap and global. Low interest rates have left people hunting for yield. And, crucially, reforms to pension freedoms introduced in Britain in 2015 mean many savers are doing this hunting themselves, rather than outsourcing it to professionals.

This cocktail has given rise to a host of digital Del Boys who con the public out of their savings with reassurances that high-risk, unregulated investments are “asset-backed” or “secure”.

The highest profile problems have been in the mini-bond sector, where savers buy high-interest, illiquid bonds often unaware that the companies issuing them are at risk of blowing up and leaving investors with nothing.

London Capital & Finance raised over £200m selling mini-bonds before going bust at the start of the year. Investors now face an agonising battle to recover anything.

READ MORE: Government 'unsympathetic' to major bust bond scheme investors

The Serious Fraud Office is now investigating and arrests have been made. The Treasury has also launched an independent inquiry, which will look at whether reform is needed to protect investors from similar blowups.

It is the right step but not enough. Action is needed now. Inquiries can drag on for months and years, and in the meantime the public will continue to suffer.

Yahoo Finance UK has reported that Brits are still being targeted with adverts for mini-bonds when they search terms as anodyne as “savings”. BondReview.co.uk, a blog that follows the space, estimates that £1bn has been lost through mini-bond collapses this year alone. This is just one form of financial crime. Other products Randell warned about include forex and cryptocurrency investment scams.

The Treasury is not short on suggestions of what to do. Dr Saboor Mir, a retired eye surgeon who lost £50,000 investing in mini-bonds, told Yahoo Finance UK he wants all investment products to be registered by the FCA.

READ MORE: Retired doctor who lost £50,000 on risky bonds calls for rule change

This may prove unworkable. Randell pointed out shares and bonds are unregulated, so this type of reform would warrant far-reaching changes.

However, Randell put forward a relatively straight forward proposal: give the FCA more control over financial adverts.

“The financial promotions regime is ripe for re-examination,” he said.

“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.”

Regulating investment ads is a necessary first step. But it is clear more wholesale changes are needed to eliminate grey areas and give the FCA power to act when it spots wrongdoing.

READ MORE: Savers targeted with ads on Google for 'bonds' that put all their money at risk

Unfortunately, the government shows little signs that rule changes are a priority. Between Brexit and this week’s spending review, the Treasury is stretched to the limit and the government doesn’t have the numbers to get any legislation passed.

This is no excuse. Reform of this nature should be a non-partisan issue and real harm is being done so long as inaction continues.

“Fraud can destroy not just the victim’s savings but also their mental and physical wellbeing,” Randell said. “The devastating impact of these crimes hits not only the victims but also their families.”

The government must reform the rules now. The public deserves no less.

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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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