# Unregulated Investment Schemes Remain a Threat to Investors Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-09-15 Category: INVESTING Category URL: https://financedigest.com/category/investing Meta Title: Unregulated Investment Risks in the UK Meta Description: Discover the pitfalls of high-risk, unlisted investments in the UK, with the potential for scams and misleading claims affecting millions of pension savers. URL: https://financedigest.com/unregulated-investment-schemes-remain-a-threat-to-investorshtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/businessman-below-storm-rain-with-umbrella-risk-and-crisis-concept-sbi-301985398-1736837875013-compressed.jpg) By **Rob Goodhew**, Director, Restructuring Advisory, **Ben Boorer**, Associate Managing Director, Business Intelligence and Investigations (BII) and **Patrick Crumplin**, Director, Expert Services at Kroll ![Rob Goodhew, Director, Restructuring Advisory](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/rob-goodhew-director-restructuring-advisory-450x672-1736837874989-compressed.jpg) Rob Goodhew, Director, Restructuring Advisory Unregulated investments, many of which are high-risk, not only in the sense of the asset class but also potentially in terms of the underlying assets, and some of which are just outright scams, have become a major problem in the UK. Since the introduction of pension freedoms in April 2015, the UK has seen a growth in unregulated, unlisted, high-yield [investments being marketed](https://www.financedigest.com/compelling-tips-to-make-profitable-investments-in-the-stock-market.html "Compelling Tips to Make Profitable Investments in the Stock Market") and sold to members of the public, often as low-risk opportunities. While such investments might seem low-risk at first glance, not least because of the security and assurances set out in the promotional materials, claims of such high returns in an era of low interest [rates should raise](https://www.financedigest.com/boe-raises-rates-again-as-investors-look-towards-end-of-hikes.html "BoE raises rates again as investors look towards end of hikes") alarm bells. Research highlighted by the FCA in 2019 indicated that 42% of pension savers, equivalent to over five million people, could be at [risk of falling](https://www.financedigest.com/euro-zone-bond-yields-fall-as-ecb-policymaker-flags-recession-risk-gilts-eyed.html "Euro zone bond yields fall as ECB policymaker flags recession risk, gilts eyed") victim to one or more of the common tactics used by pension scammers. Illustratively, if each of those potential [investors had £50,000 to invest](https://www.financedigest.com/why-are-investors-checking-out-of-uk-buy-to-let-and-checking-in-to-hotel-investment.html "WHY ARE INVESTORS CHECKING OUT OF UK BUY-TO-LET AND CHECKING IN TO HOTEL INVESTMENT?"), the potential prize for those promoting and running such schemes would be a staggering £250 billion (bn). It’s not surprising that scheme operators, whether scammers or not, might want to access that kind of money. Classifying such investment schemes is not straightforward, but there are certain features that characterize the problem. There are many types of underlying businesses, schemes and assets on offer such as property development, foreign exchange, cryptocurrencies, agriculture and forestry, [precious metals](https://www.financedigest.com/u-s-money-reserve-reviews-real-talk-about-diversifying-with-precious-metals.html "U.S. Money Reserve Reviews: Real Talk About Diversifying With Precious Metals") and even sports betting. In terms of property development, there has been a proliferation of unregulated investment schemes marketed as [unitized](https://www.financedigest.com/manchester-united-tanks-on-report-glazers-may-avoid-sale-with-new-investment.html "Manchester United tanks on report Glazers may avoid sale with new investment") property-backed investments, such as parking spaces in a carpark, storage units, or rooms in hotels, student accommodation and care homes. Typically, [investors are offered high-yield bonds](https://www.financedigest.com/investors-seek-higher-returns-as-catastrophe-bond-issuance-slows-during-q2-according-to-aon-study.html "INVESTORS SEEK HIGHER RETURNS AS CATASTROPHE BOND ISSUANCE SLOWS DURING Q2, ACCORDING TO AON STUDY") or loan notes with a range of maturities, often over a longer term, meaning that capital could be tied up for some time. Advertised returns are regularly up to 10% or more and some schemes include an attractive buyback clause. ![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/ben-boorer-associate-managing-director-business-intelligence-and-investigations-bii-1736837874944-compressed.jpg) Ben Boorer, Associate Managing Director, Business Intelligence and Investigations (BII) [Given](https://www.financedigest.com/influx-of-one-time-investors-swapping-stocks-for-bricks-and-mortar-reports-agency.html "Influx of ‘one-time’ investors swapping stocks for bricks and mortar reports agency") the underlying income-generating “bricks and mortar” assets, it’s easy to see why such opportunities might be attractive. It’s a logical proposition that appears safe, but the reality may be quite different. If the advertised returns weren’t challenging enough in the current low-interest environment, commissions of up to 20% or more that are usually paid to sales agents or “introducers,” together with sometimes equally high management fees or other payments to the scheme operators, can be crippling, potentially causing a systemic flaw in the [investment model](https://www.financedigest.com/nissan-renault-to-invest-600-million-to-make-6-new-models-in-india.html "Nissan, Renault to invest 0 million to make 6 new models in India"). After [operating costs](https://www.financedigest.com/can-cfos-balance-the-books-with-rising-operating-costs.html "Can CFOs balance the books with rising operating costs?") have been paid and possibly other debt serviced, the underlying business should have a strong performance to be able to repay the original capital invested—and all of this assumes that the scheme runs perfectly and is not just being a scam from the outset. While some unregulated investment schemes might be well-intentioned initially—potentially adding to the attractiveness of the scheme at the time of promotion—they may go on to [face](https://www.financedigest.com/analysis-rocket-startups-face-adapt-or-die-moment-amid-investment-drought.html "Analysis-Rocket startups face adapt-or-die moment amid investment drought") challenges with their investments and their operations. This can result in issues snowballing over [time to the point where the situation](https://www.financedigest.com/the-pensions-deficit-abyss-the-time-to-review-your-situation-is-now.html "The pensions deficit abyss – the time to review your situation is now") is irrecoverable. It may be the case that investors find out about such issues too late after attempts have already been made to recover the situation; by that time, [investments might have become](https://www.financedigest.com/volkswagen-to-invest-in-mines-in-bid-to-become-global-battery-supplier.html "Volkswagen to invest in mines in bid to become global battery supplier") compromised, with value lost. Of course, it’s important to have a good understanding of the investment opportunity beyond the glossy brochures, websites and [sales talk](https://www.financedigest.com/airbus-in-talks-on-sales-of-a350-freighter-exec.html "Airbus in talks on sales of A350 freighter -exec") from the beginning. [Investment propositions can appear immensely attractive](https://www.financedigest.com/uk-becoming-less-attractive-for-investment-manufacturers-warn-2.html "UK becoming less attractive for investment, manufacturers warn") and credible, but it is vital that investors have a proper understanding of the true nature of the underlying business, any discretion the management might exercise to use capital, the legal structure, the nature of the financial instrument being offered, the involvement of introducers/agents and their fees and regulated parties, security over underlying assets, the trading history of the management team, and the rights of the investor. ![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/patrick-crumplin-director-expert-services-at-kroll-1736837874958-compressed.jpg) Patrick Crumplin, Director, Expert Services at Kroll Most of the drivers that contribute to the sale of high-risk, unregulated investments have existed for some time now. - People are free to [invest their funds](https://www.financedigest.com/plastic-antibody-developer-strengthens-board-following-further-investment-from-mercia-fund-management.html "“Plastic antibody” developer strengthens board following further investment from Mercia Fund Management") as they wish. The risk is to savings in whatever form, but pension freedoms have significantly [increased the amount of funds available which has attracted the attention of investment](https://www.financedigest.com/investments-in-the-caribbean-increasing-due-to-cbi-demand.html "Investments in the Caribbean Increasing Due To CBI Demand") scheme promoters seeking capital. - There is no requirement to take [advice when drawing down a pension or investing](https://www.financedigest.com/investment-advice-moving-towards-a-new-model.html "Investment advice – moving towards a new model"), and research suggests that most people don’t take advice when accessing their pension funds. - The low [interest rate](https://www.financedigest.com/interest-rate-and-recession-fears-knock-stocks-and-oil.html "Interest rate and recession fears knock stocks and oil") environment remains. - Regulations permit the marketing of such [investments to certain types of investor](https://www.financedigest.com/investment-inspection-trips-bring-liverpool-to-life-for-asian-property-investors.html "Investment Inspection Trips bring Liverpool to life for Asian property investors"). Compounding the above, COVID-19 may have made the situation worse. In addition to the obvious economic influences and stresses, lockdown has forced us to operate in a more [virtual world](https://www.financedigest.com/why-its-time-to-adapt-to-the-virtual-world-how-to-master-online-negotiations.html "Why it’s time to adapt to the virtual world: how to master online negotiations"), and we are more isolated and vulnerable than usual. The marketing of unregulated investments to individuals is restricted to “high-net-worth” and/or “sophisticated” investors. However, [potential investors](https://www.financedigest.com/virgin-orbit-says-space-startup-in-talks-with-potential-investors.html "Virgin Orbit says space startup in talks with potential investors") qualifying as high-net-worth or sophisticated may not necessarily fully appreciate the risks associated with the investment, and those classifications do not provide immunity to old fashioned sales tactics and unconscious bias. Further, the [assessment of an investor](https://www.financedigest.com/dollar-tentative-as-investors-assess-rate-hike-path.html "Dollar tentative as investors assess rate-hike path") as high-net-worth or sophisticated is essentially one of self-certification and takes moments to complete. In reality, many of these schemes are marketed using persuasive or even high-pressure [sales tactics](https://www.financedigest.com/winning-fintech-seo-tactics-to-boost-traffic-and-make-more-sales.html "Winning FinTech SEO Tactics to Boost Traffic and Make More Sales") to ordinary people, who may have raised funds by cashing in pensions or other life savings, through inheritance, or even through refinancing their home. The authorities are well aware of the issue, but is enough being done? The UK government introduced a [ban on cold calling in relation to pensions that came into effect](https://www.financedigest.com/eu-approves-effective-ban-on-new-fossil-fuel-cars-from-2035.html "EU approves effective ban on new fossil fuel cars from 2035") in January 2019.  At the same time, the FCA was investigating [London Capital](https://www.financedigest.com/london-the-capital-of-cyber-crime-in-the-uk.html "London: the capital of cyber crime in the UK") & Finance, which collapsed later that month. So, there are legacy issues, but has the problem now gone away? Unfortunately, the answer to that appears to be no. There have been public awareness campaigns, which are important, and the FCA does, on occasion, take action against unregulated firms, but [resourcing and the potential](https://www.financedigest.com/hmrcs-newfound-status-as-preferential-creditor-on-corporate-failures-represents-another-potential-drain-on-the-resources-of-the-ppf.html "HMRC’s newfound status as preferential creditor on corporate failures represents another potential drain on the resources of the PPF") scale of the problem outside the regulatory perimeter mean that not very much has changed. The ban on pensions cold calling was a welcome step forward, but it may have had little impact on the promotion of high-risk, unregulated investments. On a more positive note, the Work and Pensions Committee recently conducted a major inquiry into the problem of pension scams, making a range of recommendations in relation to reporting, prevention, enforcement and victim support. Additional legislation has also recently been passed or is in the pipeline. The Pension Schemes Act 2021 received [royal assent earlier this year](https://www.financedigest.com/another-momentous-year-beckons-for-britains-royal-family.html "Another momentous year beckons for Britain’s royal family"), providing for new preventative regulations and new enforcement powers for the pension regulator. Separately, the FCA recently issued a discussion paper to canvass views on changes that can be made to strengthen the FCA’s financial promotion rules for high-risk [investments and for authorized firms which approve](https://www.financedigest.com/board-of-russias-avtovaz-approves-585-million-in-2023-investment-programme-ria-agency.html "Board of Russia’s AvtoVAZ approves 5 million in 2023 investment programme – RIA agency") financial promotions. Positive steps indeed, but all of this takes time to put in place and to become effective. In the meantime, if such a scheme collapses, the fallout may be complicated by poor record keeping, complex group structures, intra-group lending and the existence of charges over the underlying assets. This means that it might not be straightforward to establish what happened, and there may be competing claims for the remaining assets. More clearly needs to be done to prevent it from getting to this stage in the first place, but for investors who find they have a problem with their investment, they must understand their rights under the [investment documentation and be aware of their options in terms of recovering their money](https://www.financedigest.com/ethical-property-investment-can-your-money-do-more.html "Ethical property investment: Can your money do more? "). --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---