Consumer investments data review 2020

We seek to prevent harm by ensuring that all regulated firms and individuals meet our minimum standards. We will refuse to authorise a firm if it does not satisfy us that it meets, and will continue to meet, these standards.

Addressing risk of harm at the authorisation stage prevents firms that do not meet our minimum standards from entering the regulatory perimeter. It can also be a more cost-effective approach, because it is generally more efficient to prevent firms and individuals entering the perimeter than using supervision and enforcement tools once they are authorised.

While we support firms to help them make the changes necessary for authorisation, this is not an open-ended process. We must decide whether a firm should be authorised within statutory deadlines. Our experience shows us that some firms are not ready to meet our minimum standards for authorisation. In these circumstances, we will recommend the refusal of a firm’s or individual’s application or a firm will withdraw rather than face a refusal case. Withdrawals could be a result of a firm-led decision (eg they change their mind); or FCA-led (eg a firm decides not to continue with the application following our engagement and scrutiny of the application that sets out our areas of concern). Submissions of extremely poor quality are rejected on the basis they do not amount to an ‘application’ – this happens prior to scrutiny.

Between 1 January 2020 and 31 October 2020, 4,187 firms and individuals applied for authorisation in the consumer investments market. In the same period, 372 firm and individual applications were withdrawn, refused or rejected.

We will revoke authorisation if a firm no longer meets our minimum standards. There are various circumstances that could lead to the cancellation of a firm’s authorisation. For example, a firm that can no longer fulfil its basic regulatory obligations, such as paying fees or submitting returns. Between 1 January and 31 October, 131 firms had their authorisation revoked across all FCA regulated firms because of breaches of Threshold Conditions.

We give greater scrutiny and resources to firms and business models that pose the greatest risk of harm to consumers. This includes preventing individuals responsible for unsuitable advice from avoiding the consequences of their actions by moving to or setting up new firms – a practice known as phoenixing. In some instances, individuals have set up and sought authorisation for a new firm before their existing firm starts to receive complaints about poor past advice – a practice known as lifeboating. In the past year, we have prevented 12 advice firms from gaining authorisation where phoenixing was suspected. In all those cases, the firm withdrew their application when we raised our concerns with them rather than be taken through the refusal process. In 2 other cases where we suspected phoenixing, conditions were placed on the approval of the firms to ensure that the new firm could not be used to facilitate the avoidance of liabilities.

Our phoenixing measures extend to financial advice firms seeking to cancel their authorisation. We carry out robust checks to establish whether a firm’s exit is motivated by a desire to avoid liabilities and, where we have concerns, we take appropriate action. This may include a recommendation to refuse the application for cancellation. In all cases we log intelligence to ensure that future applications are picked up if the firm or the individuals behind it re-apply for authorisation. We also pay close attention to candidates put forward by financial advice firms for approval as holders of senior management or controlled functions. We seek to identify those with a history of giving unsuitable advice themselves - or of having allowed others to give poor advice on their watch - particularly for defined benefit (DB) pension transfers.

We supervise firms and individuals controlling firms by monitoring the way they conduct business. We use judgement to supervise against a framework of principles and rules that represent minimum standards of conduct.

We supervise nearly 6,500 firms within the 6 portfolios this update focuses on. These firms act as principals[4] for nearly 8,500 unique registered appointed representatives.

Our data strategy[5] aims to harness the power of data and advanced analytics to enhance our ability to supervise this market. We are developing tools such as web-scraping to spot web adverts from fraudulent operations and network analytics to identify companies that may be connected to fraudulent activities. We are also exploring the use of predictive, machine learning tools which use our data to spot risky firms sooner.

Data for cases involving potential scams has been extracted by identifying cases relating to Consumer Investments where the supervisor dealing with the case has included the term scam in their description of the case.  These cases have then been reviewed to exclude those which do not relate to a potential investment scam (e.g. other types of scams). 

Chart tips: hover over data series to view the data values and filter the data categories by clicking on the legend.

During this period, 864 cases were closed. Of these 60% were closed in supervision following investigation, 20% were closed where the case has been combined with another case covering the same issues  and 20% were closed following regulatory action. Regulatory action includes firm visits or communications, mandating action to senior management or making use of our Financial Services and Markets Act 2000 (FSMA) powers (including variations of permissions and undertaking enforcement action).

Pension scams

When a consumer falls victim to a pension scam or money from their pension ends up in investments that are not appropriate for them, their losses can be devastating. We have a specialist supervision team that focuses on cases where we suspect potential pensions harms. This includes scams involving pension liberation and pension transfers or where we suspect unsuitable advice has led to a consumer ending up in investments that are clearly not suitable for them.

Among the 852 cases, 129 were opened by this specialist team, a 18% increase on the number of cases opened in the same period in 2019 (Jan – Oct 109 cases). These cases have already resulted in 10 firms varying their permissions so they can no longer undertake the activities that caused consumers harm, with a further 2 cases being referred to enforcement.

Cases resulting from whistleblowing intelligence are excluded from these numbers.  

Financial promotions

Online platforms, such as search engines and social media platforms, play an increasingly significant role in communicating financial promotions to consumers. Consumers are more readily exposed to scams and promotions for high-risk investments which, directly or indirectly, lead consumers onto paths resulting in harm. These financial promotions are an important focus of our supervisory activities.

The financial promotion restriction, which is contained in legislation (section 21 of FSMA), among other things restricts the ability of unauthorised persons to promote financial services activities and products (including investments) unless the financial promotion is approved by an authorised person. However, exemptions from this restriction exist for promotions to ‘high net worth’ (wealthier) and ‘sophisticated’ (more experienced) investors.

Since we introduced the Temporary Product Intervention (TPI)[6] on the marketing of speculative illiquid securities to retail investors at the beginning of 2020, firms have increasingly used these exemptions. Before the TPI was introduced, approximately 20% of the websites we reviewed had been approved by an authorised person, however, between January and August 2020 this only applied to 3% of the websites we reviewed. Since August 2020 this figure has dropped to almost 0%.

Most websites we look at fail to meet the relevant requirements for the exemptions to apply. These failings mean there is a risk that retail investors may access inappropriate higher risk and potentially scam investments.

We think online platform operators, like Google, should bear clear legal liability for the financial promotions advertised on their platforms. We are currently considering with the Treasury the application of the financial promotions regime to these platform operators and whether we need any new powers over them. This work is relevant not just to the promotion of higher risk investments but to our work to address online harms – including scams – more generally.

Where we identify issues with financial promotions these are handled as supervisory cases, where a regulated firm or individual is involved, or as unauthorised business, where this is not the case.

We decide whether to take enforcement action based on whether we believe there has been serious misconduct. We consider factors such as the severity of the harm arising from the suspected misconduct, whether the suspected misconduct has wider implications, the extent to which it may have involved lack of fitness and the public interest in investigating the matter. This action includes issuing warning notices, publishing consumer alerts, taking down websites, taking civil court action to stop activity and freeze assets, insolvency proceedings and, for the most serious cases, criminal prosecution.

In many of our cases, harm has already been caused, but our intervention can prevent it from getting worse. The outcomes of investigations also have a preventative effect through credible deterrence.

The extent to which our remit and powers are engaged will vary depending on the circumstances. The protagonists in most scams are outside our regulatory jurisdiction and, in many cases, another law enforcement agency is better placed and resourced to tackle fraud. So we work closely with other agencies to maximise our impact. We routinely share information and intelligence with our partners in the National Economic Crime Centre (NECC), the multi-agency body that coordinates the response to economic crime. The NECC and its partners have identified investment fraud as a priority area, and will be coordinating a multi-agency programme against this threat in early 2021.

Unauthorised business

We take enforcement action against firms and individuals that are not authorised or exempt under FSMA but who carry on regulated activities in breach of the legislation and/or who disregard restrictions on financial promotions. Many firms and individuals acting in breach of FSMA and carrying on unauthorised activity are likely to be scam firms and involved in some element of investment fraud.

Such activity may include targeting UK consumers via unauthorised financial promotions and offering investments in unauthorised collective investment schemes, unauthorised deposit taking schemes, unauthorised investment advice and management, pension liberation fraud and/or pension scams.

Between 1 January to 31 October 2020, we have received over 24,000 reports of potential unauthorised activity. These reports are made up of referrals from our Consumer Helpline, other agencies such as the Police and other regulators both domestically and abroad. In 2019 we received 20,300 reports, so we have seen a sharp increase in reports in 2020.

If the firms and/or individuals reported to us fall within our remit then we investigate and act on as many as we can. In total, our work on scams has resulted in approximately £14.32 million being awarded under restitution orders, over £6.9m worth of funds being frozen and over £5.9m being secured for investors for redistribution between 1 January and 31 October 2020. Table 1 summarises our activities.

Table 1: Unauthorised business activities summary January – October 2020

Reports of unauthorised activity 24,366 47

We review and assess every report of unauthorised activity. Of the 24,000 reports sent to us about potential unauthorised business activity, a large proportion of these related to either matters that we were already aware or unregulated activities and/or concerns about authorised firms. For matters that we were already aware of, these would include either live cases or investigations, or entities that we have already taken action against (e.g. by way of issuing an alert or looking into as an enquiry). Reports on authorised firms are passed to our supervision team.

The remaining reports were logged for intelligence purposes or opened as enquiries to look into further. Enquiries are cases which do not use formal powers, and which are part of our triaging process. Enquiries include disruption activity such as issuing consumer warnings and taking steps to remove websites, as well as engagement with unauthorised firms to resolve a breach, such as restructure or repayment of monies. 

We have increased the number of alerts issued about unauthorised firms and individuals. In 2019, we issued 578 alerts against unauthorised firms or individuals. Many of these involved breaches of the financial promotion restriction online. In 2020 to end October we have issued 1,053 alerts, 401 of these were about ‘clone’ firms where fraudsters pretend to be authorised firms. For every alert we issue, we also take steps to try to suspend any linked websites and/or social media.  

The most serious cases will then become investigations using our formal powers. We had 47 live investigations at 31 October 2020 involving unauthorised business, the majority of which also involve scams. For our investigations which involve scams, we aim to take robust criminal action, especially when we have evidence that UK individuals are involved in perpetrating the crime. We have a number of ongoing criminal investigations that we expect to bring charges on in 2021. These range from:

1. the sale and management of worthless investments by multiple boiler room operations linked to transnational criminal organisations
2. the promotion of dubious online trading platforms via social media
3. the provision of advice and management of investments into online trading platforms
4. the operation of unauthorised collective investment schemes and boiler rooms
5. the promotion of investments to consumers for investment into high risk products

We have achieved many public outcomes from our investigations against unauthorised firms and individuals. Table 2 summarises these for 2019 and 2020:

Table 2: Actions and public outcomes for investigations in 2019 and 2020 for unauthorised firms and individuals

Scams and higher risk investments where regulated firms and individuals are involved

We have approximately 30 live investigations or proceedings relating to the conduct of regulated firms and individuals where consumers have invested in potential scams or higher risk investments. These are ‘parent’ investigations which often involve multiple subjects (firms and individuals), and so the total number of firms and individuals under investigation is significantly higher. In most of these cases, we have liaised with law enforcement and/or other agencies such as HM Revenue & Customs (HMRC) and the Insolvency Service.

Firms and individuals must always meet certain minimum standards to continue to be authorised by us. We act against firms and individuals that do not meet such criteria. For example, we will seek to ban individuals convicted of criminal offences involving fraud, dishonesty and selling investments scams.

We have finalised enforcement action against 1 firm and 5 individuals in 2020. In 2019, we finalised action against 4 individuals. We also decided to act against a further 5 individuals and 3 firms. However, in 5 of those cases our decision has been referred to the Upper Tribunal, which will determine the appropriate action.  During 2019 to 2020, we fined, or decided to fine the subjects of our investigations more than £80m. These actions related to higher risk investments are summarised below:

Table 3: Actions and public outcomes for investigations in 2019 and 2020 for regulated firms and individuals

Our interventions can also play an important preventative role. So far in 2020, Enforcement and Supervision departments have worked together to persuade 12 firms to agree voluntarily through the imposition of requirements (known as VREQ) to restrict their activities in relation to the promotion and distribution of mini-bonds, CFDs and other non-standard investments.

We know we cannot stop every scam from happening, but we want to do everything we can to shrink the audience that scammers can target and help support the government’s priority to make the UK a more unattractive place to commit financial crime. One of the ways we do this is through our ScamSmart[37] campaign. The campaign aims to empower consumers with the knowledge and tools to help prevent them falling victim to scams. The campaign focuses on two core objectives – raising consumer awareness of the key warning signs associated with a scam and driving use of our Warning List tool.

Over 1 million people have visited our ScamSmart website since its launch in 2014, and more than 20,000 have seen our warnings about specific, unauthorised firms. Since the campaign started, our tracking research indicates at-risk consumers are now more likely to consider the risk of scams when investing, are more likely to be aware of the warning signs of a scam, and more likely to check with us before investing.

From January 2020 to March 2020, our investment scams campaign resulted in searches for ScamSmart increasing 64% vs. 2019. Between July and September 2020, we also ran a pensions scams campaign. Entitled ‘Don’t transfer deadline day’ it focused on the parallels between a key warning sign of a pension scam and the football transfer deadline. This activity secured over 300 pieces of media coverage, including 33 national print and online pieces and 35 broadcast interviews including BBC Radio 4’s Today Programme and LBC.

Building on ScamSmart, we recently confirmed that we will start a new consumer harm campaign to warn people of the dangers of scams and higher risk investments and to help them make better investment decisions. To inform our approach, we ran a digital campaign to warn consumers about the risks of higher return investments by intervening with our messages when people were looking for investments online. The campaign drove 41,900 people to our website, and delivered 2.2m Google adverts (Pay Per Click impressions) and 67,472 Twitter adverts (twitter ad impressions).

Over the 10 months to 31 October 2020, we received nearly 90,000 enquiries from consumers (an average of 9,000 per month). We monitor the subject or product type that consumers enquire about, with 9.5% relating to investment products and 5.5% related to pensions or retirement products.

We also saw a 58% increase in enquiries about FCA impersonation scams (where fraudsters contact people claiming to be the FCA), a 69% increase in cryptocurrency scams and a 20% increase in recovery room scams (where fraudsters approach investors who have been scammed or had failed investments, offering to help them get their money back for an upfront fee).

When a consumer contacts us, where we can resolve the enquiry immediately, we do so. However, we often guide the consumer to contact the firm or other organisations as appropriate to progress their enquiry. In addition, we will often investigate enquiries further if we suspect misconduct, with 20% of enquiries received referred to our supervisory or enforcement teams for action.

As well as trying to help consumers who call us, we monitor the information we receive from them as this is a valuable source of intelligence. Along with other sources, we use it to inform our action against fraudulent and unauthorised activities including our ScamSmart campaign, supervisory and enforcement action, and collaboration with other anti-fraud agencies.

We collect complaints data from firms to enable us to monitor the number of complaints that firms receive, how this changes over time and which products or services people have complained about the most.

We use the data to help assess how well firms are treating their customers and how their performance changes over time. We also use the data to guide our work in supervising firms and markets, and to highlight potential concerns with products. For example, we might use complaints data to help inform new thematic supervision projects examining a specific sectoral issue or as a prompt for supervision action against a specific firm.

Firms must report all the complaints they receive. Those with over 500 complaints opened in a 6-month period must also report how many accounts or plans they have in force. In the year from 2019 H2 to 2020 H1, firms reported 131,471 investment complaints for 49m client accounts and 114,062 decumulation & pension complaints against 41m plans in force. 

This equates to around 2.7 complaints per 1,000 products in investments and 2.8 complaints per 1,000 products for decumulation & pensions. These cover all complaints, not just complaints relating to higher risk investments or scams. The level of complaints received about pensions and investments products is comparatively low – in the same period firms reported 4.8 complaints per 1,000 banking and credit card products for example.

While pensions and investments products tend to receive lower volumes of complaints, when consumers do complain firms tend to uphold those complaints at higher rates and pay out higher levels of redress – 61.1% of investment complaints in H2 2019 and H1 2020 were upheld, and £56.7m of redress was paid (£826 per upheld complaint), while 46.4% of decumulation & pensions complaints were upheld and £70.1m redress was paid (£1,145 per upheld complaint).

Most complained about products