The rise of financial scams during the covid-19 pandemic

Answer

What is happening?

The issue of financial scams has risen in severity since the onset of the covid-19 pandemic. As of July 2020, Action Fraud had received 13,820 reports of coronavirus-related phishing scams, while Barclays Bank announced a 66% increase in reported scams in the first half of 2020 compared to the last half of 2019. This article looks at what this means in practice, some potential causes behind the statistics, and the wider commercial implications of this trend.

What are financial scams?

Scams can come in many forms, but are often targeted at consumers in an attempt to steal their money. These consumer-focused scams include, but are not limited to, the following.

Phishing scams

These will be familiar to many – this is where an email or other communication purports to be from an official source such as a bank, and prompts the reader to enter sensitive information after following a link. This information can then be used to access funds in the individual’s bank account.

Pension liberation scams

This is typically where individuals are encouraged to transfer their pension savings to a pensions liberation scheme that promises to release money before the age of 55, when the normal early access conditions (like ill-health or terminal illness) are not met. This can result in the individual losing their pension savings and having to pay a hefty tax bill to HMRC for withdrawing their pension savings before age 55.

Investment and Ponzi scams

Similarly, individuals might receive an unsolicited offer (perhaps by phone, text, or email) to invest money in a scheme with unusually high returns. In some cases, individuals are pressurised into acting quickly to transfer their money into these schemes. Also, some schemes, known as ‘Ponzi’ schemes, add an air of authenticity by using the capital paid in from new investors to pay the promised high returns to original investors. However, there is often no genuine underlying investment scheme, leaving investors’ money to be taken by scammers.

What are the causes?

There are several factors which could be contributing to the increasing number of scams taking place.

Firstly, the technology-intensive environment resulting from the covid-19 crisis, though advantageous in many respects, offers fertile ground for fraudsters running scams over email, phone, or (more recently) social media. Additionally, many of these types of scams can be quite sophisticated and spotting them is not always straightforward for the consumer.

Secondly, particularly in relation to scams which encourage the user to transfer their money to a new investment scheme, many consumers will be on the lookout for investment products which generate a high return. This is partly due to the low interest rate environment. The current Bank of England base rate is a mere 0.1% - this is the rate at which the Bank of England will lend money to commercial banks, and it influences the amounts those banks pay out to savers. For context, the base rate fluctuated around 5% in the year immediately preceding the 2008 financial crisis, and sometimes reached double-digit figures during the late ’80s and early ’90s.

Similarly, many individuals may currently be under financial strain due to the current economic environment. The unemployment rate in the final quarter of 2020 was 5.1%, the highest it had been in nearly five years. As such, promises of seemingly cheap products or high investment returns are, particularly at the moment, alluring to many.

What are the commercial implications?

Regulators have been focusing on this issue for several years and are continuing to do so.

For instance, the Financial Conduct Authority (FCA) has been running its consumer-facing ScamSmart campaign since 2014 to raise public awareness of scams. In September 2020, the FCA led a call for input on the consumer investment market, with one of its core questions focusing on how people can be better protected from scams. The FCA states that the issues in the call for input will be of interest to a variety of parties, including financial advisers, sole advisers, investment managers, asset managers, wealth managers, insurers and appointed representatives.

Similarly, scam prevention has been a priority for the Pensions Regulator for a number of years. In November 2020, it launched a new campaign encouraging participants in the pensions industry to adopt its pledge to combat pension scams. This involves committing to (among other things): taking appropriate due diligence measures by carrying out checks on pension transfers and documenting transfer procedures, regularly warning pension scheme members about pension scams, and reporting any scam concerns to the authorities.

Conclusion

As mentioned, covid-19 has to some extent exposed and exacerbated consumers’ vulnerabilities against scams. Tackling scams is high on the agenda for regulators and, given that many commercial lawyers act for clients who are regulated by these bodies, it is important for lawyers to be aware – and maintain continued awareness – of these developments.

Zhuan Faraj is a first-year trainee solicitor at Burges Salmon. Her current seat is in the pensions department.