VICTIMS of the UK’s fastest growing investment scam are being left heavily out of pocket as fraudsters shift their attention from land banking and “boiler room” schemes.
Investors have been warned to be vigilant about dodgy carbon credit investments after a massive rise in the number of regulatory investigations against firms in the sector.
Police recently arrested several people linked to carbon credit trading firms, while the City watchdog this week issued the latest in a series of warnings over the investments after reporting “deep misgivings” about the way in which carbon credits are sold.
Carbon credits are effectively certificates or permits companies can buy to offset carbon dioxide emissions and ensure they don’t exceed carbon targets. Each credit bestows on the bearer the right to emit one tonne of carbon dioxide.
The original idea was to enable organisations to offset excess production of carbon dioxide by purchasing credits which then go on to fund green projects such as forestry or renewable energy.
However the market has been targeted by fraudsters that often have links to boiler room and land banking schemes.
Tens of thousands of people were conned into investing in worthless or overpriced carbon credits by the firms at the centre of the recent arrests.
Matthew Bradford, detective inspector for the City of London Police, said: “Carbon credits are the latest in a growing list of products marketed by fraudsters as a sure-fire way to make maximum profits with minimal risks.”
The market itself is perfectly legit and can have its advantages for high-risk investors, with a number of reputable firms in the sector. However, it has also emerged as an easy target for mis-selling, with unscrupulous firms targeting often vulnerable investors with seemingly above-board offers that are ultimately too good to be true.
The certificates bought from dodgy salesmen tend to be impossible to trade or even non-existent. Alternatively, the offers can be in the form of “opportunities” to invest in green projects where carbon credits are generated as a return on the investment, according to the Financial Services Authority (FSA). The regulator has begun almost 80 enquiries into carbon credit firms this year and published a list of more than two dozen unauthorised firms believed to be operating carbon credit scams. It claims the average victim loses around £10,000.
It has focused on two types of carbon credits – certified emission reductions (CERs) and voluntary emission reductions (VERs). The latter are becoming particularly prominent in fraudulent offers and are harder to trade.
Jonathan Phelan, head of unauthorised business at the FSA, said: “We continue to have deep misgivings about carbon credits and have yet to see any convincing evidence that investors can make money from investing in them.
“We are very interested to hear from anybody that has invested in carbon credits to understand how the market is working for them, how they were sold the investment, and whether or not it has actually made them any money.”
The scams trade on their status as an “edgy” next-big-thing investment, with investors shown glossy presentations referring to government green developments and industry carbon offsetting targets.
“Climate change and global greenhouse gas emissions are now centre stage so it’s no surprise that some investors have been tempted into schemes which claim to be able to help address the issue,” said Barry O’Neill, investment director at Carbon Financial Partners, a financial planner.
“Carbon Credits have been around for a few years now, but trading in them was never designed to be the domain of the private investor, so the FSA is right to voice its concerns about recent examples of high pressure sales tactics being used to sell these certificates to inexperienced investors.”
Profits can be made in trading carbon credit certificates, but in a small, immature market much depends on the liquidity (being able to sell them on).
Many of the certificates sold by fraudulent firms can be traded only on unregulated markets with low liquidity.
“If it sounds too good to be true, it probably is,” said Tom Munro, director of IFA Tom Munro Solutions.
“It’s an old cliché, but never more relevant when someone calls out of the blue with details of the “next big thing” often using harassment, high pressure sales tactics and long and persistent phone calls to get people to invest.”
Cold-calling is the usual tactic, which in itself should set alarm bells ringing, as authorised financial services firms are highly unlikely to contact investors out of the blue in this way. Even if they are bona fide carbon credit investments, their complexity makes it imperative to seek advice from an independent financial adviser with knowledge on the carbon credit sector, he said.
“By acting alone, the vast majority of investors do not possess the skill and experience required to fully understand how the sector works, as well as the risks involved.
“And if they do take advice from the issuer of the investments direct, who are usually based overseas and not regulated in the UK, things inevitably do go wrong,” said Munro.The FSA’s repeated warnings over carbon credit firms reflect the fact that there’s not much it can do when investors have fallen for the scams.
Credit trading is not a regulated activity unless it is being promoted as part of a regulated investment, such as a collective investment scheme or futures contract.
Investors who buy investments from firms that aren’t FSA-authorised don’t have recourse to either the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS), in the event of things taking a wrong turn.
Some fraudulent firms try to get around this by claiming they are Sipp-approved, referring to self-invested pension plans, and that they are “settled” through an FSA-regulated custodian in the UK, but this is deliberately misleading.
“This is something entirely different to being compensated if things go wrong,” said Munro. “Investors will not have access to the FOS or the FSCS.”
All this is not to say that carbon credit investing doesn’t have its place. However it is only suitable to those with a high appetite for risk and preferably with some experience of, or knowledge in, the sector.
Munro added: “If you are interested in carbon-related investments, you are probably better off gaining exposure to the sector via an investment trust, unit trust or exchange-traded vehicle which invests in clean energy. There are plenty to choose from, but investments of this type should never account for more than 3 to 5 per cent of your portfolio.”