Don’t rely on the FSA to protect you from scammers

How easily we are conned. Last week I was phoned by a successful friend in his mid-30s who runs his own business and is normally no fool. This time however, he had taken temporary leave of his senses. He wanted to know whether he should invest in a couple of currently obscure, but soon to be massive, oil exploration firms listed "off the main market" in the US.

He explained that he had been contacted by a broker, working for a firm with a "huge track record in specialist oil and gas exploration" who somehow knew that he already held shares in BP and Shell and might therefore like to "get in early" on the firms that could one day overtake them. These, he was told had doubled in six months and would double again. A long ramble followed about the investment opportunity of a lifetime, and ended with "These guys really know their stuff but I need to act quickly and send a £5,000 deposit - what do you think?". My reply disappointed him, but also saved him £5,000. Combine cash up-front with a brilliant opportunity - that every other broker has somehow missed - from an unknown mystery caller, and you have a scam.

Scammers are taking advantage of the difficult economic climate

This type of offer can seem hard to pass up when there are so few investment opportunities around. Cash accounts and bonds are dull and struggling to even match, let alone beat, inflation with the retail price index at 4.8% in June, a higher rate taxpayer needs to be offered 8% (4.8/0.6) just to stand still. Meanwhile, listed shares continue a relentless march into bear market territory with the FTSE now more than 20% below its peak last year. Then there's property, where Capital Economic's Roger Bootle reckons we are at the start of a 35% peak to trough drop.

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Even commodities are tipped to correct downwards after a recent surge lead by oil creeping close to $150 per barrel. With consumers at their most depressed since the last recession in the early 1990s according to recent polls, many may fall for slick patter and the promise of riches.

What's more, with many City folk now being given the boot Experian's last estimate for just London was 40,000 job losses over the next three years there are plenty of spare brokers and sales staff who might be tempted by a generous commission package to work for unauthorised scammers operating well outside Financial Services Authority rules.

The FSA steps up a gear in combating boiler room fraud

Fortunately, the FSA seem to have realised that more needs to be done to stop so-called "boiler room" share scams, which successfully con investors out of "shocking amounts" according to their own Jonathon Phelan. In fact, their figures suggest that the victims lose an average of £20,000 each but that disguises the fact that many lose much, much more £500,000 in one recent case. And like my friend, these victims are not daft according to the FSA's profile middle aged, pretty wealthy (before the scam anyway), likely to be living in the south of England and male. Women, it seems, are harder to sweet-talk. Having been duped, men naturally don't like admitting to it so the true level of total losses caused by scams is unknown, but could be a lot more than the FSA's last annual estimate of £200m.

The FSA have decided to combat boiler room fraud by teaming up with company registrars. That's because ownership of all UK shares has to be captured on a register one per company which creates the perfect source of information about potential targets for the scammers. The more information they have about you, the easier it is for them to pose as your "friend" later. A share register is a publicly accessible document, so it provides an easy source of names and contact details. Once scammers have these, you could be approached any number of ways. Perhaps a free tip sheet on a stock you already own, or an offer to swap your existing shares which have probably fallen in value lately - for what will turn out to be worthless ones in another firm. Or like my friend, the offer is for much sexier shares in a sector he already liked.

The FSA propose making contact details for potential targets harder to obtain from October, new Companies Act provisions will force buyers of shareholder lists to state the purpose of their purchase. Fine, but scammers will happily lie. More effective therefore is a proposal that listings should only contain details of institutional shareholdings not those of individual private investors. The FSA also want individual companies to send their shareholders regular scam warning leaflets. Trouble is, as the Guardian's Tony Levene points out, none of this will stop old shareholder lists from circulating, but at least their value will diminish over time. It also won't prevent the ultimate in cheeky fraud the "recovery room". This time the scammer offers to buy the worthless shares you bought first time round for a high price, but only if you send cash first to help to unlock the funds.

What you should do to avoid being duped

Don't just rely on the FSA. Check yourself at fsa.gov.uk/register/home.do whether a firm you have been contacted by is FSA authorised. If in doubt about any caller, put the phone down - remember that whilst offers that are too good to be true are very tempting, especially in a difficult economic climate, they should be treated with suspicion and ignored. For information about other common scams click here. You could also take Bill Kay's advice in the Sunday Times and rent a DVD of the Ben Affleck film "Boiler room".

This article is taken from Money Sense, the free weekly personal finance email service brought to you by MoneyWeek. Sign up to Money Sense here and make sure you get your copy every week.