Reported fraud cases related to financial investments jump 74% in a year to over 6,890

29 Apr 2019 | 09:00 am | 2 min. read

Growth in the unregulated 'shadow savings market' in the UK is helping drive an increase in financial investments fraud, says Pinsent Masons, the international law firm.

• Increase in reported cases reflects the growth of 'shadow savings market'

• Many reported frauds relate to cryptocurrency investments 

Growth in the unregulated 'shadow savings market' in the UK is helping drive an increase in financial investments fraud, says Pinsent Masons, the international law firm.

The latest data shows the number of reported fraud cases related to financial investments rose 74% to 6,890 last year (year-end 31 December), up from 3,950 in 2017.

Of the 6,890 cases last year, the most commonly reported cases were related to 'share and bond sales', which saw an increase to 860 last year, up from 200 in 2017, and ‘pyramid or Ponzi schemes', which saw an increase to 380, up from 50, over the same period.

The sharp rise in cases related to financial investments comes as retail investors look for higher yielding investments amidst historically low interest rates. This search for yield has left some private investors exposed to the sale of unregulated products and other fraudulent activity.

A feature of the unregulated 'shadow savings market' is aggressive advertising and marketing of investment products to inexperienced investors. This is being done in a variety of ways, including through price comparison sites and social media channels.

Data from the FCA shows that it had to intervene 225 times in 2018 to tell firms to withdraw or change misleading advertising.

A recent investment scandal resulted in over 11,500 retail investors losing up to £237m through the purchase of unregulated mini-bonds, some of which were claimed had ISA status. Mini-bonds are a high risk product used to fund loans to small and mid-sized businesses.

Alan Sheeley, Partner at Pinsent Masons, says: "Fraudsters are taking advantage of investors' need for income."

"Suppressed interest rates on mainstream savings products have driven retail investors towards higher yielding, more lightly regulated investments. Combined with the ease for companies of reaching the mass market through online advertising, this has added a new layer of risk for retail investors."

"The UK benefits from an open investment market but high incidences of reported fraud shows there are cracks in the structure."

Anecdotal research reveals that the most commonly reported fraud cases over the last few months have been related to cryptocurrency investment scams, ‘recovery’ fraud and share sales.

The rising price of Bitcoin and other cryptocurrencies in 2017 led to a surge in Initial Coin Offerings (ICOs) which enable retail investors to buy tokens that represent units of a future cryptocurrency. The complex nature of ICOs and the lack of regulation means retail investors can be at risk of fraud if they do not seek advice before investing.

Pinsent Masons says losses through financial investment fraud tend to involve relatively large sums and can be hugely damaging if retirement or life savings are wiped out.

Pinsent Masons says one option available to victims of fraud is to pursue losses through civil courts. The advantage of doing this is that in civil cases, individuals can ensure the primary focus of the investigation is on recovering any funds lost.

Alan Sheeley adds: "In civil fraud cases, courts have the power to issue freezing, search and seizure orders quickly, which can be vital in stopping fraudsters getting away with the proceeds of crime."

*Number of reported fraud cases to Action Fraud, 2019

**Her Majesty's Inspectorate of Constabulary and Fire & Rescue Services 2019 'Fraud: Time to Choose'

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