Scams – who do fraudsters target most? (Robert Morfee)
Wednesday, November 8, 2017
Victims of fraud in financial services are not in an easy position. The fraudster of course has disappeared or is insolvent. The normal avenues for address, the Financial Ombudsman Service and the Financial Services Compensation Scheme, will not help because the fraudster almost always was not regulated.
The private investor is a popular target for fraudsters. The normal regulated financial firms have such a poor reputation that it is easy for a plausible shark to persuade even normally prudent people that he has something special to offer.
The investigation and prosecution of unauthorised financial advisers is the business of the Financial Services Authority (FSA). They get no money from the government for this; the FSA is funded by the industry. The FSA’s unauthorised business team is notoriously under-resourced. I have at least two cases in hand where the FSA knew that a crook was taking investors’ money, yet did nothing effective about it for months, even years.
All is not always lost in such cases, however. A fraudster seldom works alone and it is sometimes possible to obtain redress from those who knowingly or even carelessly gave the fraudster the opportunity to cheat. Each case has to be seen on its own, with its own particular circumstances, but the following are examples of the possibilities:-
“Tortfeasor” is a legal word meaning someone who does someone else a civil wrong. If the fraudster was engaged in any kind of joint enterprise with another party, that other party will also be liable for what the fraudster does.
The Employer or Principal
If the fraudster is employed by somebody or is an agent of another person or organisation, even if not specifically employed to engage in fraudulent activities, the employer or principal may be liable. For example, in the old case of Lloyd v Grace Smith &Co., decided in 1912, a solicitor was liable for the thefts of his dishonest clerk, although, obviously, he did not employ him to steal.
The Financial Services and Markets Act 2000, sections 26 to 28 provide that, generally speaking ,agreements made by or through unauthorised persons are unenforceable , and investors have a limited right to “unscramble” the resulting investments, even though the investments may have been passed through or ended up with a reputable business, such as a bank or life assurance company.
Curiously some businesses run dishonestly have sufficient of a veneer of respectability to become authorised and therefore insured. These insurers will probably deny that they are liable for the dishonest activities of their insured, but their position is not strong. It’s worth pressing.
A fraudster will commonly have a bank account and banks do have some duties to non-customers. If a banker has reasonable grounds, although not necessarily proof, for believing that a fraudster is an attempt to misappropriate funds, then it has a duty at least to enquire. If an unauthorised financial business was obviously been carried on by a bank customer, it is at least strongly arguable that the bank should have made enquiries, and if those enquiries would have yielded a result that an illegal business was being carried on the bank may be liable for the consequences of its neglect.
The police and the criminal courts
The police and prosecuting authorities will be sympathetic but not much help. They will only really be concerned with the fraudster. A compensation order may be made by the court which convicts the fraudster, and an additional term of imprisonment imposed if the compensation is not paid. But in practice of course the fraudster may either have no money or may choose to serve the additional term.
I regard these fraud cases as both interesting and challenging. Each of them is a bit like a complicated exam question – how can liability be pinned on someone who can pay? The task is often difficult but not always hopeless. It is worth taking advice if you are in this unhappy position.
Robert Morfee has over 40 years' experience in dispute resolution and has specialised for the last 15 years almost exclusively in financial services and investments for small businesses and individuals.