Investment scams – where IS a safe place to park YOUR money?

Posted on December 8, 2015 · Posted in Chris Mansfield - Blog

In the hunt for good returns for your cash, it can be tempting to take a look at some of the “High return” alternative investments out there. A natural and understandable activity for any investor. Whilst you’re involved in your due diligence process though, do please keep that well worn phrase in mind: “If it looks too good to be true – it probably is!”

And just to compliment that, I’d suggest that you also keep at the forefront of your mind: “If I don’t understand how they make such great returns – that could be because it’s a SCAM!”

Now, I have to qualify the above (and not for reasons of legality – but for reasons of transparency), by saying that obviously not ALL high return investments are scams – some of my clients have made investments that have achieved returns of over 10% per annum, which is a very strong return by anyone’s standards. And they’re delighted with their choice, and many come back to invest again.

But, who is alerting us to these potentially fraudulent investments?

The National Fraud Intelligence Bureau (the NFIB) are the lead national policing body in charge of looking for, and then acting against, fraud in the UK. They use millions of reports of fraud and cyber crime to identify offenders such as organised crime gangs, and both established and emerging crime types. An example of their work would be their current concern about the potential “scam” investments in parking locations close to major UK airports. What has become apparent is that Pension savers are being identified as targets for unscrupulous, and highly persuasive, sales teams, who are successfully exploiting the naivety of some UK savers and investors. The Fraud Bureau warning comes after the Department of Work and Pensions Select Committee warned of possible pension miss selling in the wake of the pension freedoms that liberalised how people can access their retirement money. In which context, the Head of Retirement Policy at Hargreaves Lansdown, Tom McPhail, said: “The Pension Freedoms have undoubtedly been a good thing, however the lure of large sums of newly accessible pension money is inevitably attracting unscrupulous fraudsters out to make a quick buck at someone else’s expense.”

Here’s how a fraudulent investment might start:

You receive a call, from someone who you’ve never heard of, never done business with, and who has not got your permission to phone you, and they offer you the opportunity to invest (in conjunction with the above NFIB warning, this could be into parking spaces for example), and assure you that it as a “sound pension investment”. They offer you both verbal and written promises of both a “guarantee”, and a “high rate of return”. They support their assertions with a “Buy-back” scheme, and encourage you to make your investment decision quickly in order to take the “best possible advantage of the market”.

Here’s why it could be a scam:

At no time will you be offered any guarantee of an onward sale (so there’s potentially NO capital growth, but potentially the chance to lose some, or all, of your capital), and The National Fraud Intelligence Bureau say that members of the public should be aware that, while some investors may receive an attractive initial dividend, there is absolutely no guarantee of long term future dividends, and furthermore, that any such investment could result in a long term financial loss.

And here’s what could REALLY be happening:

If the scheme that you’re being encouraged to invest in actually is a scam, then it’s likely that what’s really happening is that those initial attractive dividends that you receive, are NOT being paid out from an investment at all, they’re being paid out from your own capital and/or the deposits into the scheme made by other gullible investors. Which means you’ve invested in a “Ponzi” scheme. In essence, this is a fraudulent investment scheme in which the operator of the scheme pays returns to investors from the new capital paid into the scheme by other investors, and not from any profit generated by the operator.

Operators of Ponzi schemes typically attract new investors by offering them high returns, so whilst the operator is successful in attracting in that new capital, the scheme will endure. However, at some time, with an unavoidable mathematical inevitability, the entire scheme will collapse beneath the debt of the promised returns outweighing the incoming deposits.

And here’s how it could all end:

If the scheme that you’ve invested in IS a scam, then typically what will happen is that you may get some initial “dividends”, or you may get none at all, in either instance, you will find it increasingly difficult to contact the company with whom you’ve placed your money, until, inevitably, at some point your calls and correspondence will not be answered at all. So you’ve lost all the money you invested.

So – what can you do to protect yourself?

Firstly: be cynical, very cynical. The advice from consumer bodies is simple: never enter into any agreement with anyone who has cold called you, or has sent unsolicited mail. The National Fraud Intelligence Bureau advises consumers who are considering making an investment to seek independent advice from a person who is regulated by the Financial Conduct Authority, furthermore, they advise caution if the company offering the investment is not a registered estate agent.

And remember: if you hand over your money to a firm that is not covered by the Financial Ombudsman Service, or the Financial Services Compensation Scheme, you are not protected in the event of your investment going wrong.

In précis: don’t be steamrollered into making ANY investment until you’ve spoken with either somebody in a validated position of authority (like an IFA), or somebody who knows what they’re talking about and who you trust.

If you’d like to know more about what I’ve discovered about some Car Park schemes and other potential scams, just get in touch with me at c.mansfield@davenport-wealth.com, or call me direct on 07710 294 255.