The Financial Conduct Authority has been forced to bolster its approach to online fraud as criminals increase ways to scam innocent victims.
In a bid to increase its crackdown speed, the UK regulator is aiming to shut down fraudulent investment advertisements just 24 hours after they appear online.
Traditionally, scams were driven by boiler rooms which used cold-calling tactics to target their victims. But with the rise of social media the pool has widened greatly and quickly allowing fraudsters to escape the regulator’s net.
This is largely because social media is unregulated and does not fall within the scope of the Financial Services and Markets Act 2000 (FSMA). While section 21 prohibits the communication or invitation to engage in investments activities, “electronic communication” is not part of the Act, the FCA said.
As a result, the watchdog was only able to stop scams once identified by freezing the stolen assets under the Proceeds of Crime legislation or through injunctions.
Act within 24 hours
Mark Steward, executive director of enforcement and market oversight at the FCA, said: “The distinguishing feature of online scams is quite different to the old paradigm. In the case of an online scam, the marketing pitch to the victim is public, searchable and available to everyone.
“This presents a unique opportunity because it means, for the first time, we can detect scams at the same time as the scammers are luring their victims. Our worry about a precipitate warning causing evidence and money to go missing is less of a concern if we can develop a dragnet to capture suspicious ads on the same day or within 24 hours after they first appear.
“And so, alongside our ongoing reactive work, we have ratcheted up our proactive monitoring of the internet with a dragnet approach with the express aim to capture suspicious advertising on the same day or 24 hours after it first appears.
“We have also accelerated our assessment and processing of the daily haul and we have moved from responses within days to being able to issue warnings on the same day, 24 hours after, which is now happening in most cases.”
Case study
The watchdog provided the example of a website called “best2invest.co.uk” established on 22 February 2021 promoting high interest rate bonds and promising returns of up to 9.5% per annum.
The website paid a social media firm £96 ($136, €112) for the advertisement to appear on search results for consumers using entries including “secure investments” and “Isa best buys”. The ad, however, made it clear best2invest was not regulated by the FCA.
It did not provide much information on the actual products but redirected investors to an online form where they were invited to provide personal details to be contacted and talk about the investment propositions.
The watchdog detected the website on the same day, and it was added on its warning list on 25 February. The regulator also took steps to take the site down, despite not having the power to do so.
Steward explained that the FCA has an arrangement with the UK domain registrar Nominet where it can ask for a site with a UK domain to be taken down. The website is then removed, and users are redirected to an FCA warning page.
This, however, is not possible for sites that do not use a UK domain, which is true for most scams.
Luckily, the “best2invest” case was not a scam, it was instead a “spoof of a scam” Steward said, as it was an experiment made by UK news outlet Mail Online.
But, the website generated more then 3,500 views in the days it was active and around half of those resulted in consumers providing their personal details to be contacted.
Legislation
The UK government has also taken steps to tackle the surge in online financial harm.
On 12 May 2021, it published the draft Online Safety Bill which aims to clamp down on online scams generated by social media users, including romance fraud.
The bill will also make tech companies legally liable and accountable for harm happening on social media.
But the FCA’s Steward joined the industry criticism of the draft legislation by admitting that “there is a question of whether the proposed bill goes far enough”, as fraud via advertising, emails or cloned website were not included.
“Scams and frauds are an economic scourge, they are a threat to the legitimate financial services industry because their existence undermines the societal trust that is necessary for markets to work well,” he added.
“The FCA has a substantial role to play here, and we are upping our game. We need all of you to do so as well if there is to be a truly effective force field in place.”
