High Risk Investments

In 2013, the FCA issued warnings about con-artists running boiler room scams to target investments by members of the public. Products that were being launched included Graphene, ‘Rare Earth’ materials, carbon credits, and other overseas investments in land and crops. As these are generally unregulated products, the FCA warned investors that if the investments failed, there would be no compensation available.

More recent warnings have been directed to ICO’s – initial coin offerings for cryptocurrencies, with specific caution being urged in the purchase of CFDs (Contracts for Difference), which include spread bets. The three main risks that have been identified is the lack of any compliance or formal prospectus, lack of Know Your Customer (KYC) or anti-money laundering procedures (AML) and extreme volatility of the underlying currencies.

Although there has been a worldwide clamour for regulation or legislation in this area of activity, many commentators believe that the existing rules that require the issue of prospectuses for fundraising, Unregulated Collective Investment Schemes [UCIS], AML, and the provisions of the Fraud Act in respect of false and misleading representations, provide the FCA with sufficient powers to deal with situations that may well arise in future.

The SRA issued guidance in 2013, then again in 2016, and recently issued further guidance on 23rd June 2017. The warning is aimed both at practitioners who might be tempted to act for clients who are either promoting or acting as agents for promoters, and also clients who might be tempted to invest.

The main concern of the SRA is that the involvement of a law firm can give an impression of credibility or security. Such dubious schemes can often be designed to look like investments in land, where the reality is very different. Promises of high returns are often illusory. High deposits are often requested when they are not required.  Other schemes include those where a supposed lease is taken over an asset such as a hotel, but the ‘investment’ potential in reality depends not on the security of the underlying asset, but on the manner in which the scheme is operated.

The SRA are also concerned that solicitors’ clientaccounts are being used to run ‘escrow services’ to create the impression that the client’s interests are being protected. However, it is now settled law that solicitors cannot operate such accounts except in very limited circumstances, as it is in direct conflict with their obligation not to allow a conflict of interest to arise. In an escrow account where a dispute arises, the solicitor will often have to decide which of the two clients to favour, which creates a conflict of interest that is impossible to resolve.