Updated 04 May 2021
The recent failure of a scheme that promised 11% annual returns has left investors with devastating losses, in some cases wiping out whole pension pots. Nick Green warns savers not to let greed cloud their judgement.
A firm that leased cars to low-income workers while offering huge returns to investors collapsed earlier this year with debts of over £34 million. It took with it many people’s life savings – and providing yet another warning against unregulated and over-hyped investment ‘opportunities’.
Buy 2 Let Cars, run by Raedex Consortium, wooed potential investors with an especially powerful lure: the chance to earn market-busting interest while helping an apparently good cause. The company supposedly generated income by renting out new cars to essential workers and those with poor credit. At the same time it offered remarkable returns to those who invested in it: 11% per annum. It sounded too good to be true, and it was.
Consumer campaigner Mark Taber observed, ‘The business model didn’t seem to make sense. The numbers didn’t add up. It looked like the company was reliant on new investments to pay out to old investors.’ This is a classic feature of a Ponzi scheme (similar to a pyramid scheme), in which returns are only sustainable as long as new investors keep joining. Such schemes inevitably collapse in the end, because of course there is never enough money to pay out to everyone.
Mark tried to alert the FCA back in 2019, but the Raedex Consortium continued to trade with Buy 2 Let Cars and to bring new investors on board. Less than a month before the FCA finally stopped the company trading, one investor, Ian Gonzalez, paid in £42,000 to bring his total investment to £314,000 over seven years. He now fears he has lost it all. Another investor, Paul (not his real name) paid in £28,000 just before the collapse, having overall invested close to a million pounds including his mother’s pension.
A month before the collapse of Buy 2 Let Cars, Mirror journalist Andrew Penman grilled its director Reginald Larry-Cole on the source of its incredible investment returns. He asked the obvious question: how could a company trading in the sub-prime sector generate this level of performance – especially when it was so deeply in debt? No answer was offered, but he at least did ask. Unfortunately for them, the many investors in Buy 2 Let Cars did not.
It’s easy with hindsight to see that the Raedex Consortium’s investment model was preposterous. It’s also easy for people to say that of course they would never fall for anything like that. And yet, people do fall for scams like these and will continue to do so. Why?
Understanding this is vital for people who want to protect themselves from investment and pension fraud. The victims in this case may have been naïve, but they saw themselves as seasoned, confident investors. They were well-off, even affluent, with ‘Paul’ owning a number of properties, and so had every reason to suppose that they could manage their own financial affairs. They had also seen generous returns from their investments: Ian had been receiving a steady £30,000 a year from his capital, for seven years. All this fed into their image of themselves as expert investors – the proof was in their bank accounts. So it was hardly surprising that they continued to show faith in their investment company right up to the moment it collapsed.
Research has found that high rewards, or even just the prospect of them, can be enough to cloud people’s good judgement. A 2016 study by Citizens Advice presented members of the public with three different adverts for investing a pension pot. Only one was legitimate, and just 12% of participants chose it. The remaining 88% went for either of two fraudulent offers. A likely reason for this was that the genuine advert could offer only 5% returns and charged £1,000 for advice, while the fake adverts were offering 10% and 15% returns respectively, along with free advice.
The conclusion? People ended up clicking on the adverts based solely on the face value of what was being offered. Only rarely did they stop to consider whether it might not be true. It isn’t just that people are too trusting. Paradoxically, they tend to become more trusting based on the size of the rewards being offered. The more outlandish the offer, the more likely it appears that people will fall for it, because all they can see are the potential rewards. And this effect is magnified if, like Ian and Paul, they have already appeared to receive some of those rewards.
Action Fraud recorded a 28% increase in reports of investment fraud between September 2019 and September 2020, with losses totalling around £650 million. The obvious conclusion is that the pandemic has been a big factor in this rise, though the reasons why may be less straightforward. Pauline Smith, head of Action Fraud, said, ‘The coronavirus outbreak sadly led to many people losing their job or having to manage with a lower income than they were used to. It has also caused a shake up in the economy in general … All of these factors provide criminals with the opportunity to attract more people with their fraudulent investment schemes.’
Another explanation may be that the pandemic has prompted many to take early retirement, and to access their pension pots sooner than expected – perhaps in a hurry. Feeling under time pressure may had led some retirees to take less care than normal, or to discard carefully made retirement plans in favour of more impulsive action.
Action Fraud reports two particular cases from the Mansfield area, one in which a man in his 80s invested £5,000 of his pension with a company that then stopped corresponding with him, and another in which a man in his 70s lost more than £27,000 to a company claiming to trade in Bitcoin. In the latter example, the man continued to invest even after losing his initial capital. This is a prime example of another hazard to be wary of: just as gains can make a person more eager to invest, so (paradoxically) can losses, because the investor is anxious to ‘win back’ what they have lost. It is, in short, the gambler’s dilemma.
All of these tragic stories boil down to one basic point: people allowing their judgement to be clouded by self-interest. People believe things because they want to believe them. The prospect of a 10% or 15% return is so tempting that their critical faculties switch off. Likewise, the idea that one can ‘beat the market’ or achieve some exclusive reward denied to ordinary people is itself a tantalising reward. Fraudsters know this, and they know the serotonin buzz that people get from feeling they are about to make a killing. They exploit all these factors to lure in their victims and persuade them to part with vast sums of money.
This ‘greed clouding judgement’ phenomenon is itself a form of investment bias. One person making decisions by themselves is not unbiased, because they are swayed by their own motives and desires, as well as by the limits of their own knowledge and experience. That’s why, whenever you see an investment opportunity that looks good, you should first ask an independent financial adviser about it. They will give you a truly unbiased perspective, and so should enable you to find genuinely good investments.
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