The worryingly high incidence of investment fraud has led lawmakers, courts and the Financial Conduct Authority FCA to raise widespread concerns about the powers, priorities and performance of the regulator in prevention and law enforcement. In a recent speech Mark Steward, FCA executive director of enforcement and market oversight, drew a distinction between online and offline fraud. He cited Operation Tidworth as an example of an investment fraud perpetrated by the use of cold-calling potential victims rather than advertising the investment offer on the internet.
With regards to the use of social media platforms for disseminating false representations about investment opportunities, he said firms such as Google may not have been aware that the law concerning financial promotions had changed in January 2021, following Brexit. Concerns have also been expressed by Nikhil Rathi, the FCA chief executive, about the limited provisions concerning fraudulent financial promotions contained in the Online Safety Bill.
The FCA has recently issued a call out to the victims of Operation Tidworth, which was the FCA's largest fraud case. Some of the offences with which individuals, such as Michael Nascimento, were charged included offences under the Fraud Act 2006. Operation Tidworth can be linked back — through connections between various participants — to earlier frauds such as Operation Steamroller (discussed here). In his speech Steward said Operation Tidworth had led to six defendants being jailed for a total of 28 years.
A distinguishing feature of those types of cases, however, was that the fraud was often detected after it had occurred, sometimes before losses had begun to crystallise or at the point where those losses were first apparent, which was often long after the misrepresentations had been made, he said.
Such frauds have featured in many FCA criminal prosecutions including Operation Alfreton. Other law enforcement agencies and prosecutors have, on some occasions, prosecuted the same fraudsters as have been charged by the FCA, but for different frauds. Nascimento, for example, was also investigated by the City of London Police for mis-selling carbon credits to 130 victims.
Nascimento was sentenced to two years for each of three counts of money laundering to run concurrently. In addition, as a result of the Tidworth offences investigated by the FCA, he also received a consecutive sentence of 11 years. He, along with others (discussed here), appealed his conviction.
FCA prosecutes fraud as a private prosecutor
In his evidence to the Treasury Committee inquiry on economic crime Steward said the Financial Services and Markets Act 2000 (FSMA) did not contain any provision that gave the FCA a function in relation to fraud, and that the offences the regulator was authorised to prosecute did not include any offences under the Fraud Act 2006. The FCA does not have explicit statutory investigatory powers, such as those in Section 168 of FSMA, or prosecutory powers, such as those in ss 401 and 402 of FSMA, with regard to Fraud Act offences.
Notwithstanding that position, the Supreme Court in R v Rollins held that those provisions were non-exhaustive, as recognised in EG 12.1.1 of the FCA Enforcement Guide. This provides that the FCA has powers under ss 401 and 402 of FSMA to prosecute a range of criminal offences in England, Wales and Northern Ireland but that it may also prosecute criminal offences where to do so would be consistent with meeting any of its statutory objectives.
The FCA's statutory objectives include — under s 1(D) of FSMA — protecting and enhancing the integrity of the UK financial system including — in sub-s 1(D)(2)(b) — that it is not being used for a purpose connected with financial crime. The FCA has also recognised that fraud has an impact on its consumer protection objectives.
During its investigations the FCA sometimes does find evidence which justifies a prosecution, not only for the offences listed in FSMA but also for those under, for example, the Fraud Act. Charges of such offences will, however, be prosecuted by the FCA as a private prosecutor, and not as an authorised prosecutorial authority.
Such fraud cases are, however, often preceded by breaches of the financial promotions rules, which can constitute specific criminal offences that the FCA is authorised to prosecute. Steward said in his evidence to the Work and Pensions Select Committee inquiry into protecting pension savers, however, that there had been a very large number of prosecutions involving scams and unauthorised business where the charge that had been laid had been a fraud charge rather than a charge under FMSA where the instigation of the scam was, in fact, a misleading financial promotion of some kind.
Boiler room offences, such as those related to Operation Tidworth, are outside the FCA's regulatory perimeter in terms of both the entities and the "investment opportunities" used to perpetrate the frauds. Andrew Bailey, the former chief executive of the FCA, told the Treasury Committee inquiry into the FCA's Regulation of London Capital & Finance (LC&F) that the FCA could not prioritise everything that was within its perimeter and had to make prioritisation decisions. LC&F was an authorised entity using unregulated investments and so was within the perimeter to that extent. Boiler room frauds, are, therefore, even less of a priority that those committed by authorised firms such as LC&F.
Pre- and post- internet financial promotions and fraud
In his recent speech on fraud, Steward said that for many years the FCA had tackled investment scams by looking to see if it could quickly identify and freeze scammed funds, using either proceeds of crime legislation or freezing injunctions. The assumption was that once a warning had been issued, evidence and money would disappear which might protect new victims, but only at the expense of existing victims. This was because a warning would prejudice potential restitution and successful prosecutions.
He also said that the distinguishing feature of online scams was a marketing pitch to the victim which was public, searchable and available to everyone. This meant that the FCA could detect scams at the same time as the scammers were luring their victims. The worry that a precipitate warning might cause evidence and money to go missing was less of a concern if the regulator could develop a dragnet to capture suspicious advertisements on the same day or within 24 hours after they first appeared. The FCA had ratcheted up its proactive monitoring of the internet and had moved from responses within days to being able to issue warnings 24 hours afterwards, which was now happening in most cases, Steward said.
The FCA Warning List was updated on a daily basis and the regulator would continue to urge consumers to avoid dealing with firms on the list, he said.
In his evidence to the Treasury Committee inquiry into economic crime, Steward said there was an FSMA provision that meant particular financial promotions could be communicated only by a person who was authorised by the FCA, or the communication was required to be approved by a person authorised by the FCA. He pointed out that the 1,200 warnings the regulator had issued the previous year based on Google searches had not been for advertisements that had been issued or approved by any FCA-authorised firm.
That, he said, was something Google could have recognised at the gateway, before allowing those advertisements to appear on its searches. Google had not, however, had any mechanism for identifying what was, and was not, a financial promotion that required such treatment.
The EEA financial promotions exception
Steward went on to comment on what he called an exception to the rule in the UK that had disapplied the financial promotions regime for online advertising sourced from a European Economic Area (EEA) state which had applied until December 31, 2020. He said that since the UK had left the EU, that exception no longer applied and so the rule under FSMA that required financial promotions to be issued or approved by an FCA-authorised firm now did apply to EEA-based social media companies, as it did to all media companies and anyone who was communicating a financial promotion. If the social media firms failed to comply, the FCA would have to take legal action against them, he said.
The provision that has removed the exemption is reg 169 of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019/632. This removed the exemption in art 20B of the Financial Promotion Order, which exempted incoming electronic commerce communications — defined as electronic commerce communications made from an establishment in an EEA state other than the UK — from the provisions of the order.
This had been enacted to implement the Electronic Commerce Directive, which placed regulatory responsibility on the home state. This provision removed the need for an internet communicator to comply with two sets of regulations for internet advertisements from both host and home states.
Online fraud and the Online Safety Bill
The Treasury Committee, in its Report on the Financial Conduct Authority's Regulation of LC&F, said Rathi had informed it that the FCA had recommended investment fraud be included in the Online Safety Bill, which currently only includes user-generated fraud. Rathi had also told the committee that the FCA did not think the other solution being mooted in terms of the online advertising programme really matched the urgency of the problem with which they were dealing.
Rathi told the committee that the FCA had to negotiate voluntarily with every single online platform to see how far it could get them to move, change their policies and help. In a written parliamentary answer, Caroline Dinenage, minister of state at the Department for Digital, Culture, Media and Sport, said the bill could have an impact on some financial scams, such as fraudulent user-generated posts on social media, and on dating app scams or "romance fraud".
In his evidence to the Treasury Committee on the work of the regulator, Rathi reiterated that the FCA would like user-generated content to be subject to the Online Safety Bill, and wanted the provision to be extended to cover online advertising.
Further information on compliance matters can be found https://podcasts.apple.com/gb/podcast/compliance-clarified-podcast-by-thomson-reuters-regulatory/id1548510826 here.