Written evidence submitted by Financial Services Compensation Scheme


1.0 Overview of FSCS


1.1         The Financial Services Compensation Scheme (FSCS) is the UK wide compensation

scheme for customers of financial services firms that are unable to meet claims against them. It helps to provide confidence in the UK’s financial services industry by helping customers get back on track when authorised financial institutions go out of business. Last year FSCS paid compensation of £527 million benefiting several 100,000s of people.


1.2         FSCS welcomes the Treasury Select Committee’s call for evidence on Economic Crime.  FSCS works closely with HM Treasury to protect customers and promote financial stability. FSCS acknowledges the broad scope of the inquiry. Our response will focus on the economic crime element, and within that specifically around scams and fraud.


2.0              Introduction


2.1              FSCS is a public body set up by Parliament under the Financial Services and Markets Act 2000 (FSMA).


2.2              FSCS helps to promote public confidence in financial services, financial stability, and protects consumers by paying compensation. FSCS compensates customers where they normally would have a civil claim (e.g. negligence) against a firm, but the firm is no longer operating and is unable to pay claims against it. FSCS is operationally independent from, but accountable to, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). It is also independent of Government.


2.3               FSCS is funded by levies on authorised financial services firms and never charges individual consumers for the work it does. In all cases, making a claim for compensation directly to FSCS is a free service.


2.4               Our mission is to help get customers back on track after their authorised financial services firm has failed. We know many customers are under stress and may be vulnerable as they have lost hard-earned savings, and so our aim is to provide an outstanding customer experience.


3.0   FSCS and Economic Crime


3.1               Although FSCS is operationally independent of government and its regulators, FSCS believes it is important to work together with other organisations and to share our data and insights to contribute to the best customer experience and consumer protection. FSCS and the the Financial Ombudsman Service (FOS) share the commitment to work together and crack down on scams).  The FOS provides a dispute resolution service where a consumer has a complaint against a financial firm which is still operating and is able to meet claims against it.  FSCS also works closely with the Money and Pensions Service (MaPS) both bilaterally and through the regulatory family working group, which shares information and trends.


3.2              Scams are ever prevalent in the financial sector, with the two main areas being Investment and Pension scams.

3.3               Last year, the Financial Conduct Authority published data from Action Fraud, which revealed over £197 million of reported losses in 2018. Victims were scammed out of over £29,000 on average last year, as fraudsters employed increasingly sophisticated tactics to persuade victims to invest.

3.4               The most commonly reported scams involved investments in shares and bonds, forex and cryptocurrencies by firms that are not authorised by the FCA. Together they accounted for 85% of all suspected investment scams reported in 2018.

3.5               Unfortunately, FSCS regularly comes across a variety of scams. Sometimes, investors have entrusted their money to a fraudster, who is not regulated by the FCA and does not run an investment scheme at all. Once the money has been transferred to the fraudster, it is usually impossible to get it back. Our Rules (set by the FCA and PRA) do not allow us to pay out where the individual has not received advice or assistance from a regulated person, even if the fraudster pretended to be regulated, so the victims of these scams are often left financially devastated.

3.6              FSCS also sees scams in a broader sense where investors are led to believe that an investment opportunity is quite different to the reality. These scammers purposefully promote high-risk investments to customers for whom they are clearly not suitable. For example, overseas property, a hotel development or sustainable forestry. Many investors are attracted by the promise of high returns and a safe place for their pension to grow but are not warned of the high-risks involved in placing their entire pension in these types of investments. Investors are not warned that they could lose their entire life-savings. Some may even find that their money has not purchased what they believed they were buying, or that the scammer has taken the money instead of putting it in the business opportunity. It is not just that consumers may not understand the risk of the investment, they are also often deceived about the level of risk they are taking.

3.7              Case study: A customer in a European country (“Ms. A”) contacted us and explained she had lost tens of thousands of Euros in investments via a broker of dubious credentials (“Mr. B”). He had offered to try to recoup her losses via positions in a foreign exchange platform, again involving an investment of thousands of Euros. At the same time Ms. A was contacted by a man (“Mr. C”) using a fake FSCS identity and spoofed FSCS domain-name, offering FSCS's help to claim compensation for her loss, for a further payment of thousands of Euros. Evidence suggests that Mr B and Mr C are the same person or group of persons, in a web of invented identities spanning several countries.

Ms. A. was very upset and we dedicated many hours to supporting and guiding her. We advised her to cease all contact with the scammers and report the matter to her country’s regulator and her banks. We reported her case to the FCA, the National Cyber Security Centre (NCSC), and a webhost. We also reported the case to Action Fraud.

This case is a lesson in the sophistication of impersonation scam operations and the determination of organised criminal groups to exploit vulnerable consumers to the fullest extent.

4.0 How can people be better protected from scams?

4.1              FSCS has been working with the FCA, SFO, the Insolvency Service and other agencies to ensure scams do not affect FSCS customers or rely on the goodwill and name of FSCS.

4.2              The ever-increasing volume, sophistication and speed of scamming means that enhancements to existing strategies to combat scams, or the addition of new tactics, will be inadequate on their own to meet the challenge.

4.3              FSCS believes there needs to be further powers given to regulators to level the playing field against scammers. This was recently stated in the FSCS submission to the Online Harms Bill consultation, which the FCA also responded to separately.

4.4              Our understanding is, in at least some cases, enforcement powers in the UK against financial crime are weaker compared than in other markets such as the Security and Exchange Commission in the U.S. and CONSOB in Italy. FSCS believes the UK should aspire to be a world leader and model of best practice against scams, particularly considering the position of the City of London as one of the world’s leading financial centres.


5.0 FSCS aims for Online scams

5.1              As the Scheme has experienced, the FCA does not always have the ability to stop online financial harms at their source. For example, the FCA does not have extra powers over social media platforms or search engines that host harmful ads because those providers are not organisations regulated by the FCA. In the case of Google, the FCA has a high standard to prove to Google that an ad may be illegal. However, this is not a workable solution as scammers only repost the offending ad with minor variations. 


5.2              As such, the FCA has published over 1,000 warnings about unauthorised firms in 2020 to date, the vast majority regarding fake investment websites [1]


5.3              As mentioned above, the FCA and FSCS have both commented on the recent Online Harms Bill consultation, urging the government to include financial scams the Bill. Any extra powers given to the FCA or another agency is key in order for the industry to act swiftly.


5.4              FSCS suggests clarity is required on who is responsible for financial promotions. This can either be among the regulators such as the FCA and ASA or among advertising platforms themselves, such as Google Ads. As FSCS suggested in the consultation response, this may entail making internet service providers legally responsible for the losses of consumers who fall victim to scams advertised on their platforms. The regulator established by the Bill should work with FSCS and FCA against scams and poor online practices.

6.0 FSCS views on disincentives

6.1              As FSCS has witness, there are low rates of successful prosecutions of fraud. This must be addressed by introducing more and stronger disincentives against financial crime. From the FSCS Scams and Fraud Working Group, scams in many cases are run by organised crime groups. These are therefore not isolated from other serious crimes such as illegal drugs, human trafficking, money laundering and terrorist financing.


6.2              Research suggests 95% of fraud cases reported to Action Fraud went unsolved. Which? states;


Comparing our research with other crime statistics shows that police solve significantly less fraud cases than any other crime group. Alarmingly this comes as fraud offences continue to rise. UK residents are now more likely to be victims of fraud and cybercrime than any type of offence, according to the ONS. Fraud and cybercrime offences are now ten times more common than burglary.”[2]


6.3              As such, this has serious implications for the UK FS market. As previously stated, UK regulators and law enforcements bodies should be given the same level of in order to take the same robust approach to financial crime as the US Securities and Exchange Commission, amongst others.


6.4              In order to achieve this, a step-change in attitude within government and the regulatory family to an aggressive zero-tolerance law enforcement posture should be encouraged.


7.0 FSCS recommendations to tackle further scams

7.1              In this section, FSCS will explore what may be able to be done to tackle further scams, protect consumers and reduce the levy. This is in part due to our prevent strategy and some of these suggestions may improve better outcomes for both customers and the levy payer.  

7.2              The regulatory family needs to protect consumers from harm by closing loopholes which can expose them to unregulated risky products and services.  The most prime examples of these are the recent failures of London Capital & Finance (LCF) and Bassett & Gold.


7.3              In relation to promotions, FSCS suggests new government Regulations requiring authorised firms to obtain specific FCA consent before approving the financial promotions of unauthorised firms. Although the FCA has already committed to banning marketing of speculative mini-bonds, this could go further.


7.4              Internet service providers, search engines and social media platforms are, in practice, subject to the same requirements as traditional publishers of financial promotions. As such, FSCS recommends that these online providers would need to take steps to ensure that any financial promotions which they host or publish have been approved by a regulator. 


Better financial reporting and verification of promotional claims


7.5              Lastly, there have been some significant financial scandals of recent years have involved a lack of sufficiently close scrutiny of company accounts. This includes the recent Wirecard failure or the Worldcom scandal.



8.0  Conclusion


8.1    FSCS welcomes the Treasury Select Committee’s call for evidence on Economic Crime and have listed a series of recommendations on how the government may be best placed to tackle some of these issues.


8.2    FSCS would be happy to give oral evidence to the Committee if the Chair and Members wish to invite the Scheme.


December 2020



[1] FTAdviser, 3rd Nov 2020

[2] Which?, 24 Sep. 2018