As it becomes evident that uninitiated investors are becoming the prey of deceptive brokers, calls have been made for the FSA to sharpen their teeth
New evidence unearthed by the FSA has revealed several ‘suckers lists,’ containing the contact details of 76,732 people that fraudsters believe are easy targets. Yet some dubious financial vehicles are not even classed as illegal by regulators.
The FSA has just launched ‘Operation Bexley’ to offer advice and assistance to those in danger of being targeted. It explains, “These lists – which scammers call ‘suckers lists’ – are like a fraudster’s phone book and are often traded between firms trying to con people out of their money.” Most are high net-worth individuals who have made large investments elsewhere, on average around £20 000, but are not sophisticated portfolio managers. The financial regulators have installed a helpline, and initiated an email campaign to warn those in danger of being sold illegal investment services, leading some to question their efforts.
‘Boiler-room’ investment schemes, so-called because they used to list a boiler-room in the City of London as their registered address, masquerade as stockbrokers to sell victims shares that are either nonexistent, or marketed at vastly inflated prices. Previously in order to sell shares in the UK it was necessary to have a domestically registered address. Now the boiler-rooms are listed offshore, in unregulated regions such as Barcelona. Skilled at passing themselves off as stockbrokers, they will often present punters with real market research and question them about their preferences regarding risk exposure.
Another established tradition that UK regulators have failed to scrub out is the Ponzi scheme. Jonathan Phelan, the FSA’s Head of Unauthorised Business, admits: “These schemes can often run for months or even years before the FSA hears about them.”
Phelan continues: “In the past couple of years we’ve closed down five scams which together have taken over £200m.” The FSA reports that some investors can get upset when regulators try and close a Ponzi scheme, because they are still receiving payouts on their investment. If they could see the actual balance sheets of the company they would understand how little of their initial deposit is left. Unfortunately the FSA is disproportionately reliant on customer complaints for information.
Chris Hamilton, speaking on behalf of the FSA, described the somewhat limited methods regulators have at their disposal: “We have a whistleblowing hotline on our website where people can contact us. We do our own analysis, and often financial institutions will report to us when they spot suspiciously large sums of money going into an unauthorised account.”
Hamilton claimed, “Since the financial crisis there has been a significant increase in scams. Traditional means of investment do not have the same returns they had pre-crisis.” However, his colleague Tony Parker had a slightly different take on the situation.
“The number of people reporting is going up. But what is changing in a positive way is the number of people that are actually investing.” Parker cited statistics on the incidence of boiler-room fraud from 2010 to 2011. Two years ago, 4,500 people reported being contacted by boiler-room schemes, and 831 admitted they had invested. In 2010, 5,400 reports were made, but when questioned only 770 had surrendered their money and bank details.
The FSA believes this represents a success, but they are unable to provide comparative statistics on the incidence of different kinds of fraud over the past few years. Estimated statistics for the total sums lost in fraudulent schemes in 2012 are intimidating.
Boiler-room schemes are believed to have taken £200m, land-banking schemes from £200-250m, and Ponzi schemes around £150m. Yet punishment meted out to organizations, guilty of malicious or deceptive trading practice, are not as severe as in the US, where company CEOS are subject to imprisonment.
Spokesmen for the regulators refused to comment on the reasons behind a government plan to divide the FSA into two separate bodies: the Prudential Regulation Authority, which will suggest preventive and remedial measures against systemic risk; and the Financial Conduct Authority, which will regulate financial crime and misconduct. The changes are due to come into effect in early 2013, if and when parliament approves the Financial Services Bill.
Financial Secretary to the Treasury Mark Hoban said in a statement: “This Government has taken the necessary action to tackle the difficult and dangerous legacy left behind by the financial crisis, including a tripartite structure not fit for purpose. We’ve listened to the views of stakeholders following an unprecedented period of consultation, and are determined to strengthen the financial system in a way that safeguards financial stability and protects consumers.”