Fighting for Justice

Pension scams and rip-offs have flourished since the government allowed people to access their pensions freely under pension freedom rules introduced in 2015. Under the rules anyone from the age of 55 can ask their pension scheme to release their funds subject to tax charges. To date £33bn has been withdrawn from pensions under the rules.

But while access to pensions was eased, consumer protections remained largely the same, leaving people vulnerable and exposed to scammers and other bad actors out to rip them off. These actors typically persuade them to invest their money into high risk unregulated investments, paying large sums of commission to the salesmen. By the time it transpires that the pension is lost, the rogues and their facilitators have often left the market, leaving consumers and the regulatory bodies to pick up the pieces.

In a hearing in March 2020 the head of the regulator, Andrew Bailey, told MPs he thought the pension freedoms had been introduced too quickly and the regulatory system has been in a 'catch up process' since.

High risk unregulated investments fall outside of the FCA's remit. But their providers can only gain access to a person's pension if they work with regulated financial advisers. This process culminates in a mis-sold investment or an outright scam, depending on the intention of the players involved. These constructs are difficult for the regulators to spot and often it is up to whistleblowers to expose them. By the time the rip-off is exposed the rogues have often disappeared.

Once the investment is complete investors are often re-targeted by regulated claims management companies, which offer help with arranging compensation payments from the FSCS. Whereas the claims process is free for people to use, these firms typically charge a hefty fee of 30% or more. The FCA last year stopped at least one such firm on suspicion that it was colluding with the original seller of the investment.

Pension scams are costing savers an estimated £4bn a year. Analysis from the regulator has found 22 years of pension savings could be gone in just 24 hours as savers are trigger happy when it comes to making decisions about pension offers, often after being cold-called.

The FCA warns investors are often lured in with promises of high investment returns but this is not always the case. Increasingly they are offered help with consolidating their pensions and the ability to pass the funds to their children after they die. The aim is to reassure people that they and their family will be ok if they make the investment. The rogues know how to exploit people's general lack of knowledge when it comes to pensions, as under pension freedom rules any pension can be passed to descendants upon death.

Once it becomes apparent that their pension is lost investors' lives take a dramatic turn. The regulated salespeople have often left the industry and the unregulated investment company keeps them at bay with promises of future returns that typically don't materialise. All the while victims are being charged fees for the UK-based pension product through which they invested, and which can't be cancelled as long as the investment is held within it, valueless or not.

Fighting for compensation can be a cumbersome process, often adding months, sometimes years, of uncertainty to people's lives. As many pension investors are targeted at age 55, when they gain access to their pension funds under pension freedom rules, by the time they realise their predicament they have approached pensionable age, leaving their retirement at the mercy of the rogues.

_{When the investment did not return dividends as promised three years later, the pair realised they had made a mistake. A separate financial adviser told them they had invested in a high risk unregulated investment.}

_{We were both shocked and felt sick. My husband was very worried about what he’d done with his pensions and often said he felt stupid and let me down and had possibly jeopardised the future we had planned together.}

_{Steve died suddenly in August 2017. While dealing with his death Elaine notified the offshore company that she wanted to sell her investment. She was given several assurances but to date has not seen the money returned. Elaine also pursued the regulatory channels, and after a year of chasing was awarded £50,000 in compensation by the FSCS in September 2018, leaving her with an overall loss of £40,000.}

_{I can't estimate the hours it's taken me and the worry as well. I can remember from June to September just being on the phone chasing the pension company, chasing the FSCS and chasing the management company to get information. When someone dies like Steve did it is a lot to get your head round and on top of that I had all of this to deal with. I'm fighting for the injustice. Steve died thinking he'd let us down and he hadn't, he'd been scammed.}

The safety net for consumers lies in the Financial Services Compensation Scheme, which pays out on claims against regulated firms and products that have failed. But it has a limit of £85,000 per investment claim (£50,000 before April 2019), so people who lost more than that still suffer an overall loss.

Since it began in 2001, the FSCS has helped more than 4 million people, paying out more than £26bn in compensation. But the system is buckling under its own weight. The free to use scheme is funded by the financial services industry under a 'good guys pay' principle. This means firms that are still operating are having to pay out to clients of those that have failed (or wilfully gone out of business).

The contentious funding issue has plagued the industry for years against a backdrop of rising pension claims. Some financial firms have seen the cost on them increase by 400% year-on-year. The issue reached boiling point in early 2020 when a concerted effort to lobby for a radical overhaul of the system began.

^{Phoenix - in ancient stories, an imaginary bird that set fire to itself every 500 years and was born again, rising from its ashes.}

Not all advisers that have mis-sold an investment disappear forever. A growing phenomenon in the financial services industry is a practice called 'phoenixing', whereby directors of advice firms concerned about looming complaints against them shut up shop and start a new firm, taking with them clients and the business's assets but not its debts. Any claims falling on the defunct firm are then rerouted to the FSCS.

In 2019 the regulators formed a taskforce to clamp down on adviser phoenixing. By the end of the year the FSCS had identified 136 potential cases that it passed on to the regulator. At least seven advisers had been blocked from reauthorising by January.

_{A successful business woman and former executive at a large high street retail chain Jackie is no stranger to finance. She was advised to transfer out of her pension during a time of extreme vulnerability and stress as her husband had entered the final stages of his life following prolonged illness. Jackie trusted her adviser, thinking she would be protected by the regulatory bodies if anything went wrong. She maintains she was never told the investment she had made was unregulated and high risk.}

_{When filing a claim for bad advice, Jackie realised she could not claim on the adviser's insurance as his firm was no longer in business. She was never told her adviser had started a new business until she read about it in a newspaper article. Shocked by the news she took it upon herself to find out what had happened and to seek justice.}

_{I spent probably three months solidly investigating and putting the whole story together. You really immerse yourself in it and you understand all the nuances and all the difficulties around it and then it completely consumes your life and you are a bit dysfunctional almost. It's a hugely time consuming exercise. I have a certain personality and resilience that makes it possible for me to do this but not everybody is like that. I think a lot of people just want it to go away and bury their heads, they feel ashamed, they don't understand it, they haven't got the time, they don't understand how it's been allowed to happen, how that person can get away with it.}

The regulators, government and police are seeking to clamp down on bad actors and outright scammers with a series of defence mechanisms.

In 2012 they set up taskforce Project Bloom to respond strategically to the rise of pension scams. This work led to a cold-calling ban on pensions, stricter HMRC checks on the registration of suspected scams, and interventions on pension schemes suspected of being used by scammers. The taskforce was instrumental in winding up a number of rogue companies through the courts and disqualifying directors connected to pension schemes, clawing back millions of pounds of pension money for hundreds of victims.

Recognising that consumer education is key to beating scams and rip-offs, in 2014 the FCA and the Pensions Regulator launched the 'ScamSmart' campaign, an information campaign across TV, radio and online. Last year the campaign claims to have educated 180,000 people about the signs of a scam.

To tackle bad actors within the regulated industry, such as phoenixes, a partnership between the FCA and other regulatory bodies was launched in 2019. The group seeks to spot rogues through data sharing and analytics and wants to use machine learning in future. The taskforce identified 136 potential phoenixes last year and so far at least seven advisers have been stopped from reauthorising.

The government and regulators have stepped up their game to crack down on scammers and others out to rip people off. But they rely on the regulated entities to play gatekeepers and the consumers themselves to safeguard their money.

Experience has shown by the time the regulators are in a position to act it's often too late.

By the time the sun rises the rogues have long gone.