With the ban on pension and investment cold calls delayed because of the upcoming general election, concern has been raised that unregulated introducers are using this as a ‘window of opportunity’ to target investors.
Two weeks ago a TV documentary exposed the aggressive sales practices at one introducer. Further to this, New Model Adviser® revealed earlier this month that the staff of one introducer, investigated in a separate BBC documentary last year, had started again at a new firm.
Both examples show introducers are still operating in the market, despite the government’s efforts. A new common trend has emerged using discretionary fund manager (DFM) portfolios to ‘hide’ complex underlying investments.
New Model Adviser® has been told introducers are ramping up activity ahead of the forthcoming ban. If investments are still being sold that are inappropriate and high risk, this could ultimately mean higher Financial Services Compensation Scheme (FSCS) levies for all advisers, as an advice firm is normally involved in the process.
Unregulated introducers are firms that generate leads for IFAs. In many cases they are paid in commission from investment companies. This means they use pushy sales tactics, such as cold calling, and their commission is dependent on the investments they sell, which is not necessarily in the best interests of clients.
Historically they have been used to sell overseas unregulated property investments into Sipps which have, in certain instances, led to investor losses.
New Model Adviser® revealed last year the FCA was looking into the activities of introducers and the regulator issued a warning last August over authorised advisers accepting business from introducers.
Last year IFA Darren Cooke (pictured above), director at Derbyshire-based Red Circle Financial Planning, started a petition calling on the government to ban cold calling on pensions and investments. The petition was successful in gathering support and led the Treasury to announce a ban in last year’s Autumn Statement.
The consultation on this measure took several months and the initial timeframe was for the ban to come into effect this spring. But following the prime minister’s announcement of a snap general election, the period of enforced departmental inaction known as purdah has delayed the results of this consultation, meaning it could be months before a ban comes into force.
Cooke started the petition as a direct result of a BBC Panorama documentary that focused on two Derby-based introducers: Lifestyle Connections and First Review Pension Services.
Panorama was told Lifestyle Connections and First Review would stop taking new business after 30 June 2016.
However, New Model Adviser® revealed earlier this month that the staff of First Review Pension Services had moved to a new unregulated introducer called Pension Connect. A regulated advice firm, Asset IFA, confirmed it was using Pension Connect to access clients.
An ITV documentary also recently uncovered an introducer, Cherish Premier Wealth, was promoting aggressive sales practices at the firm. New Model Adviser® had already reported on Cherish’s links to introducers.
In undercover footage, Cherish Premier Wealth call centre manager Qasim Rafiq said he was training call centre staff by encouraging them to ‘promote fear’ in potential investors. An undercover reporter was also told to make 300 calls every day.
Rafiq also said he would try to get around the impending ban by setting up call centres in places like Pakistan and South Africa.
Cherish Premier Wealth told ITV: ‘Individuals are quite able to give generic advice and/or information without contravening FCA guidelines.’ The firm added that Rafiq was ‘indulging in a bit of sales puff that overstated the position’ and the firm would not try to dodge the cold call ban.
Both of these examples show introducers are still active in the market and have not been put off by the impending cold call ban. While the firms above were involved in cold calling there is no implication they were involved in fraudulent activity. However, cold calling is a tactic used by those who do set out to scam people out of their savings.
Tom Selby (pictured above), senior analyst at AJ Bell, said introducers would exploit the legislative delay by putting more calls in.
‘The longer you delay, the bigger the window of opportunity for people to possibly get scammed,’ he said. ‘You can absolutely guarantee the volume of calls going out of these places has increased because at the moment it is not against the law and while that is the case they will call as many people as possible.’
The Treasury said last year almost 11 million people were being targeted every year by cold callers.
Luke Sharman, director of claims management firm Get Claims Advice, sees the effects of introducers first hand, and he said their activities were not decreasing.
But even when the ban comes into effect, the public will still not be safe from investment cold callers.
Sharman said introducers would try to bypass the ban by using overseas operations, as suggested in the ITV documentary. He said the scope of the regulator’s remit needed to be widened, as well as making advisers responsible for the way their introducers find business.
‘Cold calls are still being used to sell pension reviews,’ he said. ‘Although the cold calling ban is a good idea, firms are already crafting ways around this by using overseas call centres.
‘The FCA needs to regulate call centres and introducers for any marketing activity involving pensions and make financial advisers responsible for the actions of those who market on their behalf. Making the people who are receiving large commissions accountable for their actions is what is needed.’
Third gen scams
In February the FCA issued a notice warning that scammers had become ‘increasingly sophisticated in developing products designed to defeat firms’ due diligence efforts.’
The regulator said it had seen the nature of scams ‘evolve’ and a third generation of scams ‘now use the services of a DFM to create an investment portfolio that does not require the direct input of the investor; this portfolio then invests in special purpose vehicle bonds’.
Julian Penniston-Hill (pictured below), chief executive of investment manager and Sipp provider Intelligent Money, said he had come across similar processes to what the FCA described, with IFAs using ‘obscure’ DFMs.
Intelligent Money has decided not to take any non-standard assets but that has not stopped the firm receiving approaches from advisers.
‘We are very worried about a small but increasing trend of advisers approaching us who want to use very obscure DFMs for a huge variety of clients,’ he said.
‘The DFMs haven’t really been used before and we believe the reason behind this interest is the marketing allowances that can be paid from bond issuers being used to pay for leads [passed to advisers].
‘Advisers in the main claim they receive nothing from this, but if they are receiving leads because of it then that is a tangible something. Whether the marketing allowances are being paid to introducers or if the DFMs are retaining part of it, I don’t know.’
Penniston-Hill said he had seen cases of DFMs with turnover of less than £200,000 ‘suddenly attracting widespread interest from certain advisers – that alerts us to something’.
He said a common trend he was seeing was corporate bonds listed on a stock exchange being sold using a certain structure.
He said: ‘Go to Companies House tomorrow and set up a company. Then issue half a billion pounds worth of bonds. Then we get listed on an Irish or Luxembourg stock exchange. Then we seek to raise money by speaking to DFMs and we have, say, a 10% marketing allowance. We will give that to an unregulated introducer who makes some calls and passes those leads to an IFA.
‘Let’s say you have raised £100 million on that, we have paid away £10 million and we are sat on £90 million. We will invest some of that in what we said we were going to do and we will use it to service the dividends for a few years and pay ourselves a healthy salary.
‘But further down the line, the property development may go wrong and the whole thing gets wound up.’
Just as pension scammers have evolved their tactics over the past few years, there will be those who find ways to get around the cold calling ban – even if it makes life somewhat harder for them.
Cooke said it was important the cold calling ban was not seen as the end of the road in the battle against scams or aggressive investment sales. ‘There are regulated companies involved in this and as soon as there is a regulated company in the chain, it will fall on the FSCS and we all end up having to pay for it,’ he said.
‘We need to be vigilant and we need to report on it. It is not an issue that you can bury your head in the sand about.’
It is essential the government and the regulator do not see the ban as the silver bullet against pension scams. The regulator needs to act now to get ahead of the problem instead of being two steps behind.