Gareth Shaw: Finance fraudsters exploit gap in the rules

Scam traders tend to be based outside the UK yet claim to have some kind of verifiable presence here which can be at prestigious City of London addresses. Tantalising investment opportunities that look too good to be true often are. Picture: Getty Images)

But amid the requests to apply our sausage-testing criteria to cat food (short of volunteers, unsurprisingly) and demands that we campaign against publicans who don’t serve a full pint, there’s one type of call we guaranteed to receive every week – another person falling victim to a heartbreaking scam that’s rid them of thousands of pounds of their savings.

A few years ago it was land banking. Then it was carbon credit trading. For a short while, many people were getting caught out by wine investment scams. Financial crime is a many-headed beast – when one type of scam seems to die away, another horrendous one takes it place.

And at the centre of these scams, there’s always one common thread – a silver-tongue conman who has tricked these good people out of their money.

The latest to ensnare a new round of victims is ‘binary options’ trading. The City of London Police has reportedly dealt with more than 1,800 cases of binary options scams, with almost £37 million stolen from consumers.

Indeed, Which? has been contacted by more than 50 members in the past 12 months who have fallen victim to this scam. The worst was someone who was talked into investing hundreds of thousands of pounds from his business, hoping to reinvest the profits he made, before discovering he’d never get his money back.

So, how does this scam work? Buying a binary option is a way on betting on the movement of a stock market, exchange rate or another financial instrument. You wager on whether a market above or below a particular level at some point in future, be it in a few minutes or weeks. But there are only two possible outcomes – you either win or lose.

This is a high-risk way to invest your money – but it is legitimate. All of the people we’ve spoken, however, have invested off the back of a cold call from a fraudster, offering huge returns to convince people to invest.

They lie about the performance of that initial investment, and when the investor tries to get their money out, they’re sometimes told they can’t access it unless they make another, say, 20 trades.

Of course, the inevitable happens. Investors are reeled in, thinking they are on winning streak; they’re subsequently told their investment has gone sour by their “broker”, or further requests to access their money are completely ignored. Different scam, same old classic tactics.

Worryingly, the City of London Police has warned that this not the kind of scam that only affects older, perhaps vulnerable, people – the people who have an active landline in their homes who could be susceptible to a cold call.

In fact, this is a scam increasingly affecting the “Instagram generation” – in a 2016 report, the City of London Police found that one in ten victims in binary options scams were aged under 20. It said that “the prominent use of social media, to both entice victims and communicate with them, has enabled the fraudsters to target a whole new subsection of society”.

Fraudsters were creating fake social media profiles, posting photos of themselves living the high life, driving luxury cars and wearing the kinds of jewellery almost exclusively adorned by footballers, rappers and Mr T. And how were they able to acquire such trappings? They’re binary options traders, of course.

These “traders” tracked down potential investors by messaging them, inviting them to invest, claiming “to be able to turn small investments of £100 to £200 into £1,000 or £2,000 for a cut of the profits – normally ten per cent to 20 per cent.”

And as soon as victims become suspicious and try to get their money back, they’re blocked on social media. The City of London Police says that no money lost this way has ever been recovered.

So, why isn’t the Financial Conduct Authority – the watchdog that regulates investing – doing anything about this growing scam? Well, these fraudsters are exploiting a gap in the rules which means they aren’t accountable to either the gambling or financial authorities.

In the UK, binary options are treated as bets. But companies are only accountable to the Gambling Commission if they actually have a physical presence in the UK. Firms from outside of the UK can offer these services, so long as they are overseen by their home regulator.

The UK regulator says that scam traders “tend to be based outside the UK yet often [claim] to have some kind of presence here, often at prestigious City of London addresses”.

It’s so worried about the rise in these scams, it’s looking at taking over the regulation of binary options trading to better protect consumers.

It goes without saying that a call out of the blue offering a tantalising investment opportunity should always be ignored – reputable, regulated companies do not sell investments this way.

But the way these kinds of firms can operate without any UK regulatory oversight is potentially causing consumers considerable harm.

Which? has been urging the government to set an ambitious agenda to tackle financial fraud in this parliament. While we always want to hear from consumers, fewer calls about the latest scams would be greatly welcomed.

Gareth Shaw is head of Which? Money Online