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Investment scams: a consumer's guide on how to spot and avoid them

Updated 11 October 2021

5min read

Kate Morgan
Staff Writer

Every year, investment scams cost victims a lot of money. As people increasingly manage their financial affairs online, scammers are becoming more sophisticated in the methods they use. This is making it harder to identify warning signs and red flags. And although having an expert and independent financial adviser is an important part of your defence against scammers, they will not always be able to help. Honing your scam-detecting skills is going to be your best bet, and here’s how to do it. 

Most of us will have received a phishing email asking us to transfer money to an offshore account, in return for a stake in a huge and probably made-up fortune. Fewer of us will have come into contact with someone looking to make them the victim of an investment scam, but that doesn’t mean it’s rare. At all. In fact, every year thousands of people get caught out.  

Although investment scams have long been a risk, the internet and digital technologies are crucial factors in exposing more people to them. More and more of us are beginning to manage our financial affairs entirely online, including our investments. And as scammers utilise new technologies to create ever more sophisticated cons, they are becoming harder and harder to identify.  

Harder, but not impossible. Here is the essential information you need to become an expert scam-spotter.  

What are investment scams?  

There are a wide variety of forms that an investment scam can take, but they all share one essential feature: they all claim to offer very high levels of return for very little comparative risk. They take advantage of a very specific desire among people interested in investing, because they claim to remove the uncertainty commonly associated with investing.  

Most investment scams involve one or more of the following three elements:  

  • Promoting an investment opportunity that does not actually exist – the scammer then keeps the money  

  • Promoting an investment opportunity that does exist – the scammer takes your money rather than investing it  

  • The scammer pretends to represent a legitimate investment group  

So, for example, a scammer may try and play on the increasing popularity and relative lack of knowledge among investors about cryptocurrencies. They may look to offer people early access to non-existent new coins.  

Spotting the signs of an investment scam  

Investing is an important way of making your money work a bit harder, but there are always risks. The reason why investment scams often appear so attractive is because they take an activity that always has a degree of uncertainty and complexity attached to it, and promise a simple, guaranteed outcome. The old adage ‘if it sounds too good to be true, it probably is’ really does apply to investment scams.  

There are some important warning signs to look out for:  

The guarantee of high returns  

One of the general rules of investment is that it is incredibly rare to find an opportunity that offers high returns for low risk. Usually the opposite is true, and low-risk investments tend to involve steadier and slower-paced returns. This is why scammers will often look to exploit a relative lack of knowledge about new technologies (such as the cryptocurrency example above) to try and convince investors that the scam is a one-in-a-million investment opportunity.  

Unsolicited contact  

Legitimate investment firms don’t cold call people out of the blue to offer them investment opportunities. So being contacted unexpectedly is perhaps the biggest red flag to be aware of. A particularly malevolent example has been the growth in pension scams in the wake of the pension freedoms introduced in 2015. Scammers contact pensioners offering them a sure-fire way to make their retirement savings go much further, before pocketing the money.  

High-pressure sales tactics  

Common tactics include promoting that the proposed investment opportunity is an exclusive or time-limited offer. This is a ruse to try and make it seem as if you need to make your decision quickly, because people may be more willing to take a risk on an impulse. Another common approach is to offer bonuses or one-off discounts and call you repeatedly.  

The company is not FCA-registered  

Your first port of call for any investment opportunity is to head over to the Financial Conduct Authority’s (FCA) website, and see if the company is listed as a registered provider or whether they are included on the site’s Warning List. If the FCA doesn’t recognise the company it’s best to stay away.  

Another important consideration is whether the firm in question is covered by the Financial Services Compensation Scheme or Financial Ombudsman Service. These schemes will protect you from incurring a full financial loss if a company is unable to honour their obligations. While a firm may be authorised by the FCA, it doesn’t automatically mean you will be covered by these schemes if you choose to invest.  

What to do if you think you’ve been scammed?  

The increasing sophistication of investment scams means that even if you look out for all the signs listed above, you may still end up being caught out. If this does happen there are steps you can take, but it is essential that you act quickly.  

If you have been targeted by a suspected scam, but have not passed over any money, you can report the company to Action Fraud. If you have handed over some money, trying to get it back will depend on the method you used to pay:  

Debit card or Credit card  

You should ask your bank to get the money back by using the chargeback scheme. There are no guarantees you will be able to get the funds back though. 

Under section 75 of the Consumer Credit Act you can try to use a chargeback if you paid for goods or services that either never actually existed, or if the seller disappears without providing them. Credit cards offer consumers the greatest protection, due to the credit card company being considered jointly liable for any breach of contract or misrepresentation.  

Bank transfer  

You should contact your bank immediately to see what they are able to do. If possible they will try and recover your money for you, although again there is no guarantee that they will be able to.  

Cash  

There are very little options for getting your money back if you paid for the investments in cash (although the firm’s willingness to accept cash should be a warning sign).  

Investment scams are not going anywhere, but that doesn’t mean that consumers can’t get better at spotting them. As long as people want to beat the system by trying to find a low-risk, high-return investment strategy, there will be scammers willing to try and exploit them. Empowered and switched-on consumers will always be the best defence against investment scams.  

To protect yourself against scams, it’s always best to seek the advice of an expert adviser before investing your money. Devoting just a little bit of time and money into getting trustworthy, expert advice could save you in the long run. You can find a financial adviser in your area with Unbiased.  

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.