ECC0028

Written evidence submitted by Quilter plc

Quilter is a leading wealth management business in the UK, helping to create prosperity for the generations of today and tomorrow. Quilter oversees £109.5 billion in customer investments (as at 30 September 2020), for more than 900,000 customers. Quilter’s offering includes: financial advice; investment platforms; multi-asset investment solutions and discretionary fund management. Clients can choose to use one or more of these services.

We are guided by five fundamental beliefs:

       The value of trusted face to face advice;

       That better choice doesn’t mean more choice;

       That expert investment solutions should be simply packaged;

       That award-winning service and measurable outcomes for customers should always offer good value; and

       That a company’s value goes beyond making a profit.

SUMMARY

       Quilter welcomes the Committee’s ongoing scrutiny of the scale and nature of consumer-facing economic crime, and wishes to bring to the Committee’s attention the growing threat of online investment scams. In particular, the online investment scams facilitated using a ‘clone’ of a financial services firm, and which often use an advert on a search engine. 

       Quilter’s analysis of the FCA’s warning list shows that so far in 2020, the FCA has issued 1,031 general scam warnings involving individual attempts to defraud consumers, 301% more than issued in 2015.

       In 2020, the FCA has issued 401 scam warnings which involve the ‘clone’ of a legitimate financial services firm. This is 34% more than in 2019, and 261% more than in 2015. Since 2015, 45% of all FCA warnings involved the ‘clone’ of a financial services firm.

       Quilter is aware of 13 attempts made by fraudsters to trick members of the public and our customers with an investment scam using our brand during the past 12 months. 80 individuals were affected, and sadly the scammers were successful in 18 of these cases, with individuals losing a total of £1,500,000.

       Quilter supports the FCA, the Investment Association, the ABI, PIMFA, UK Finance and many others in calling on the government to include financial scams within scope of forthcoming Online Harms legislation, due to be introduced to Parliament by the Home Office and DCMS early next year.

1. OVERVIEW OF INVESTMENT SCAMS

Emerging trends in consumer-facing economic crime:

Quilter welcomes the Committee’s ongoing scrutiny of the scale and nature of consumer-facing economic crime, and wishes to bring to the Committee’s attention the growing threat of online investment scams. In particular, the online investment scams facilitated using a ‘clone’ of a financial services firm, and which often use an advert on a search engine. 

Online investment scams are often of considerable value - generally over £50,000 in each individual case - and therefore have the potential for considerable financial harm and emotional detriment to the victim. Despite this, there is little action from the government to reduce the risk to retail investors, despite frequent warnings from the industry, the FCA and many others.

Typically, if someone searches for an investment opportunity online by searching key-word phrases such as ‘high return investments’ or ‘best rate ISA’ into a search engine, there are two scenarios that can occur, with both potentially leading to harm:

First, if an individual clicks on one of the adverts that appears, they will often be taken to an ‘investment’ comparison website. The site will often contain a disclaimer at the bottom of the webpage, which states that the content of the financial promotion is not authorised under the Financial Services and Markets Act 2000, but that if the individual wishes to participate in the promotion, they must declare themselves as ‘high-net worth’ or ‘sophisticated’ under Section 48 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.

After inputting their contact details, someone will get in touch offering an investment opportunity, which is generally high-risk and often has extremely high fees and charges attached. While there are many legitimate reasons for ‘high-net worth’ and ‘sophisticated’ individuals to be exempt from certain requirements around financial promotions, and while this is not against the law, we are concerned that consumers are not being made fully aware of the significance of certifying themselves as ‘high-net worth’ or ‘sophisticated’, or indeed are not being made aware at all that they are certifying themselves as ‘high-net worth’ or ‘sophisticated’ and this is causing harm to occur.

Second, should an individual click on one of the adverts that appears, they may be taken directly to a fake website advertising a non-existent investment product, or a range of investment products, using the ‘clone’ of a legitimate financial services firm. This is a clear scam, and the scammer will use the same logo as a reputable financial services firm, and may use genuine marketing materials from said firm.

Potential investments include non-existent bonds for household brand names, often with generous rates of return above 5%, but they can also be genuine commercial or government debt instruments, with genuine ISIN numbers, but which in reality are not available to retail investors.

After the individual has input their contact details into the website, they will be contacted by someone pertaining to be calling from the regulated firm featured on the fake website. We have even seen examples of individual financial advisers and investment managers from legitimate firms being impersonated by scammers, often through details obtained from the FCA register, including senior management functions entries.

The scammers will often emphasise that the investment opportunity is fully covered by the FCA and/or the FSCS and will often require a minimum investment of around £50,000, with a ‘bonus’ if they invest over a certain amount. Once the money is deposited into the fraudster’s account, it is quickly moved again into a number of other accounts to make it much harder to trace. The victim often does not even realise they have been scammed for many months, and it is only when they do not receive their first interest payment or return on their money that they become suspicious.

Once the scam is detected, the scammers will close the site down, but may then set up a new website using the name of a different provider, advertising a slightly different investment opportunity.

The FCA is largely powerless in this situation, and in fact the only way they can try to reduce the risk to internet users is to spend considerable sums on adverts themselves to warn consumers of the dangers of online investment propositions. It has been reported that the FCA spends on average £54,389 a month on such adverts[1], which provides even more revenue for the search engines on top of the revenue they receive from the scammers.

The scale of the issue: 

Quilter’s own analysis of the FCA’s warning list shows that so far in 2020[2], the FCA has issued 1,031 general scam warnings involving individual attempts to defraud consumers. This is already an 80% increase in the number of warnings issued in 2019, and a staggering 301% increase in the number of warnings issued in 2015.

Of these 1,031 scam warnings, 401 were scams involving a ‘clone’ of a legitimate financial services firm. This is 34% more than in 2019, and 261% more than in 2015. Since 2015, 45% of all FCA warnings involved the ‘clone’ of a financial services firm:

Source: Quilter’s own analysis of the FCA’s warning list

Quilter is aware of 13 attempts made by fraudsters to trick members of the public and our customers with an investment scam using our brand during the past 12 months.

From these, we are aware of 80 individuals who have been exposed to these scams and notified our business. Sadly, the scammers were successful in 18 of these cases, with individuals losing a total of £1,500,000.

The average amount of money lost in each individual case is therefore in excess of £50,000. This corresponds to the amount we often see as a minimum investment amount often listed by scammers.

As such, while it is difficult to quantify the exact amount of money we have saved for the remaining 62 individuals, this would suggest that we have saved over £2.5 million by quick identification, public communications and education.

From our experience, these particular scams not only result in significant financial harm, but also lead to considerable non-financial harms as they have a serious impact on victims’ mental health and wellbeing.

The response of financial institutions to economic crime as it affects consumers:

Quilter plc has devoted space on each website across the group to include a clear and visible warning alerting readers to the dangers of scams. We have also updated our website to include a new ‘stay safe’ webpage for customers and financial advisers, which includes advice on how to spot a scam, precautions to take to avoid them and top tips for staying safe from online scams.

We make this information available to our customers and members of the public to help educate against the dangers of scams. We propose that similar facilities are made available on other firms’ webpages, perhaps with the regulator or an industry body acting as the gateway to these pages.

We share intelligence with other firms informally - through discussions with industry colleagues - but also through more formal channels - including the Joint Money Laundering Intelligence Taskforce (JMLIT), the Investment Association, the ABI, TISA and the Pension Scams Industry Group (PSIG) - to share intelligence on emerging threats.

But there is only so much one firm and the sector can do in isolation, and more action is required to better protect consumers from scams.

2. RECOMMENDED ACTIONS

The need for accurate definitions:

Across industry, government and the regulators, there is still an inconsistent definition of what constitutes a scam, and what should be defined as a pension or investment scam, or something else entirely. As a consequence, quantifying the harm caused as a result of scammers is challenging and providing evidence to government on the scale of the threat is difficult.

Quilter believes that the government and regulators should work with industry to develop consistent definitions of various scam typologies, and work on improving the supply of reliable information on case volumes and monetary losses.

We believe that an agreed, consistent frame of reference for what constitutes a scam would enable the collection of data across the industry. This in turn will help to identify emerging trends and provide accurate data concerning the scale of the matter which could support communications and awareness campaigns.

Despite the Committee recommending in October 2019[3] that the FCA should publish data on economic crime within six months, the reporting of such crimes remains patchy, with a common definition still lacking.

The need for improved reporting and enforcement:

In order for the system of reporting suspected scams to be successful, the public and other stakeholders must have confidence that those reports will be followed up and appropriate action will be taken. Where enforcement rates are low, it not only implies that existing fraudulent activity may be going unpunished, but it also undermines the likelihood that the public will see value in reporting suspected scams.

The system of reporting and investigating scam reports is too fragmented across multiple agencies. This makes it significantly harder for consumers to know where to go to report a fraud, and gives the appearance that it is unlikely action will be taken, further reducing confidence.

We believe further steps should be taken to increase the rate of investigation and enforcement following reports of suspected fraud; and to raise awareness of criminal investigations and any resulting prosecutions.

We believe the government and regulators should review the system of reporting, investigating and remediating financial scams and should consider ways they could streamline responsibility into a single well-resourced agency. Consideration should also be given to providing firms with the ability to report scams and provide intelligence which links multiple cases, rather than the current restriction around the necessity for only the victim to report.

This review could also look at improving the transparency of Action Fraud’s process for assessing scam reports and determining whether to pass these reports on to the National Fraud Intelligence Bureau and subsequently to the police. This would make it easier for firms to know how and when to present a case to Action Fraud to ensure the greatest chance of investigation.

The need for a joined-up approach with the banking sector:

Banks, building societies and payment service providers are the gatekeepers for financial flows and so are well placed to identify and stop scam transactions.

There should be more meaningful action from the banking sector to prevent proceeds of scams being laundered through accounts they hold, and this could be supported by regulatory intervention.

We firmly agree with the Committee’s 2019 recommendation for a “mandatory 24-hour delay on all initial or first-time payments, during which time a consumer about to be defrauded could remove themselves from the high-pressure environment in which they are being manipulated”[4]. This would provide breathing space for individuals to further consider the investment proposition with a cool head after the decision around whether to invest or not has been settled.

Easily Identifiable warning signs for High Risk Investments:

We suggest lessons from other industries should be learnt, particularly  around the use of quality and safety marks that the public recognise and trust, and which helps them to make safe and informed decisions when faced with a potential investment opportunity. The tobacco industry is a particular example where regulation enforces the use of very graphic warnings on all packaging. High-risk investment products could be required to do the same, so that customers can quickly recognise the risks associated with the product they are thinking of investing into could result in them losing all their savings.

3. RECOMMENDED LEGISLATIVE CHANGE

Include financial scams within scope of new Online Harms legislation:

There is currently no legally enforceable system for compelling search engines and social media platforms to remove fake websites and fake adverts which use the ‘clone’ of a financial services firm. Furthermore, search engines and social media platforms do not have any legal responsibilities to ensure that their users are not exposed to content that could result in financial harm.

Quilter supports the FCA, the Investment Association, the ABI, PIMFA, UK Finance and many others in calling on the government to include financial scams within scope of forthcoming Online Harms legislation, due to be introduced to Parliament by the Home Office and DCMS early next year.

The new legal duty of care introduced by the legislation will ensure that search engines and social media platforms are, for the first time, given legal responsibility for preventing scams from appearing on their sites. If a scam advert does appear on their sites, the new duty should require them to react quickly by removing the adverts swiftly to avoid any further consumer harm.

We understand the reluctance from the government to include financial scams within this particular piece of legislation given the focus on tackling the most severe social harms, but urge them to bring forward similar legislation which introduces a similar provision to make search engines and technology companies legally responsible for designing and policing processes to prevent scam content from appearing on their sites, and to be diligent in removing fake websites and content then they are reported.

We believe the regulatory authorities need more powers to intervene at an early stage to prevent customer harm, such as being empowered to remove advertisements relating to unregulated products which are believed to be fraudulent or inaccurate.

Expand the scope of AML rules:

In addition to incorporating financial scams within scope of the Online Harms legislation, the government should consult on expanding the scope of anti-money laundering (AML) rules to include search engines providers and social media companies. This would mean that these online platforms are required to abide by ‘Know Your Customer’ (KYC) laws, as financial services firms do, which will reduce the ability of scammers using their sites.

Review the ‘high-net worth’ and ‘sophistication’ exemptions to the FPO:

As detailed in section one, certain organisations are deliberately and misleadingly using the ‘high-net worth’ and ‘sophistication’ exemption under Section 48 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 to exempt themselves from the financial promotions order and issue unapproved financial promotions on investment ‘comparison’ websites. Using this exemption means these organisations are able to avoid the FCA’s ban on speculative mini-bond marketing[5].

There are many legitimate uses of this exemption, but the government should review its use on websites and search engines adverts to ensure that it is being used legitimately, and consumers are fully aware of the significance of certifying themselves as ‘high-net worth’ or ‘sophisticated’, or indeed that they are even aware that they are certifying themselves as ‘high-net worth’ or ‘sophisticated’. As Nikhil Rathi, CEO of the FCA, said in his recent evidence to the Committee, “The use of that exemption, whether it is being used legitimately or whether it would be better to close it down and give us a much clearer bright line that we can work on with Google as to what can appear and what should not appear, is one of the things we have to get to the bottom of. We do not have the ability to change that rule.”[6]

November 2020

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