Saving clients from scams
27 September 2020
What should financial advice firms do if they suspect an investment a client wishes to invest in may be a scam? Steve Bailey, director ATEB Consulting, provides a view using a case study example.
Scams are a scourge of the modern age. Of course, scammers and scams have probably existed for as long as homo sapiens. But scams do seem to be increasingly prevalent in the digital world, perhaps not a great surprise given that modern technology makes everything quicker and easier.
Scammers can contact potential victims through mass emails and telephone calls at a rate that would have been impossible a couple of decades or so ago.
Financial firms can be unwittingly involved in the process. Over the past few years, Banks have had to change and strengthen their processes to minimise the risk of Bank customers being scammed, including requiring multiple layers of customer confirmation of bank transfers and identifying transfer destination accounts clearly.
Adviser firms may also need to consider the part they can play in scams being committed against clients. We are not referring here to obvious involvement, for example where some adviser firms have knowingly facilitated pension transfers to investments in unregulated and often ultimately worthless investments. It is the less obvious situation where firms are asked by clients to arrange withdrawals from their investments that appear to have no valid purpose and might be a scam.
As an example
We recently had a call from a firm who had arranged a substantial withdrawal, around £20,000, at a client’s request. The client was reluctant to state what the withdrawal was for but eventually let slip that he wanted it to make an investment into ‘art’. That was as much detail as the client was prepared to provide because he had been advised by the unknown third party involved in the ‘art investment’ not to tell anyone about it. Moreover, the withdrawal had to be made urgently as there was a deadline for the ‘investment’. At the time, the firm was naturally suspicious but, as the client had firmly rejected providing further information and reminded the firm that it was his money and he could do what he liked with it, they arranged the withdrawal.
The call to ATEB came when the client contacted the firm again, a matter of days after the first ‘deadline’, to request a further withdrawal of an even larger sum, £80,000, for a further art investment. The firm was even more suspicious now. Further, they were concerned that the client was now at risk of serious detriment since this new withdrawal would, if actioned, leave the client with very little of his pension fund remaining, with no obvious means of sustaining his ongoing income requirement.
Despite several attempts to persuade the client to share more information, he continued to refuse and was adamant that he wanted to make the further withdrawal.
What guidance could we give?
ATEB’s guidance to the firm was as follows.
Care needs to be taken not to inadvertently tip off. Immediately refusing to implement the withdrawal could potentially have that effect but this is likely to be the ultimate response to the client.
We suggested the following steps, again following discussion with the FCA.
First response to the client: The first letter should state that the request for encashment requires the firm to make a personal recommendation how that encashment should be done, which funds sold and so on and that the firm is obliged under FCA regulations to only make a personal recommendation where it has sufficient information to make a recommendation. Request further information on the art investment, what is it, who provides it, who his contact is and contact details and how he became aware of the investment. On receipt of that information the firm will be in a position to proceed with a recommendation.
We anticipated two possible responses from the client:
a) he provides further information – adequate or not, and from that the firm would assess whether it was genuine or a scam but based on the unsuitability of that course of action for the client any subsequent ‘recommendation’ would be ‘don’t do it’ for all the reasons stated to the client in relation to the first withdrawal.
b) the client refuses to provide further information in which case the subsequent recommendation would still be don’t do it as per a) with the addition of the client failing to provide sufficient information as previously stated.
Following the above steps, it seemed there could be three possible outcomes:
There was also the possibility of a client complaint arising. The FCA’s view was:
What happened next?
It would be terrific if we could end this article with a ‘happy ever after’ ending. Regrettably we can’t.
The client did go direct to the provider and instruct the withdrawal, which was actioned. The client terminated his relationship with the firm and so we are not able to say whether the further ‘art investment’ was made, or to be certain whether these investments were genuine or scams.
The sort of situation described here could happen to any firm. Even if there is no hint of a scam, what do you do when an obviously vulnerable client makes excessive withdrawals that you know are going to have an adverse impact on sustainability of income. After all, it is the client’s money.
Where, as in this case, there are reasonable indications of a scam on top of a vulnerable client scenario, it is even more difficult.
Despite the apparent lack of a ‘good’ outcome in this case, we would still provide the same guidance to any firm faced with a similar situation.
The questions firms should ask themselves are …
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