Financial fraud scams are on the rise at the moment, with boiler room scams a particular favourite for the scammers.
There were some articles in the papers just yesterday about how boiler room scams are on the rise. The average boiler room victim loses £20,000!
Nearly half the victims wished they had more information, so here goes…
Just what is a boiler room scam?
A boiler room scam generally involves a salesman calling about an amazing new stock that’s either just about to launch on the stock market or has a limited listing. The victim sends money to invest in the stock on the promise of amazing returns only to find that they never get anything or that the stock never existed.
The Promised share price listing never happens. Joe public never receives the share certificate and even if he had done it would be worth nothing because he wouldn’t be able to sell the shares on to anyone. Meanwhile the boiler room closes down after landing a good number of people and re-opens under a different name ready to sucker another cycle of people.
Thanks to the amazingly named Mr Madof, we’ve probably all heard of the term Ponzi scheme this year. If not, it basically involves someone pretending to manage your money, when infact he’s just keeping it all. Any payments requested are paid out from the money coming in from new investors, not profits (because there aren’t any).
Ask this question and avoid being caught by the latest financial fraud scams
Anyone trying to sell you financial advice, be it tips or which ISA to buy has to be authorised by the FSA (Financial Services Authority). Anyone wanting to manage money on behalf of other people also needs to be authorised by the FSA.
So if you get any calls, promotions for tips or for someone asking you to send funds, do not do it unless you can verify that they are licensed by the FSA to do so. Never take their word for it if they say they are. Don’t be pressured by a scare story like “we have to make the deal before we end this phone call”. If in doubt ask for the firm’s name, their address and their licence number.
You might receive promotions from people in other countries. It is the same deal, anyone wanting to market to the UK needs to be licensed by the UK FSA to do so. Again, if in doubt call the FSA, they are generally very helpful.
Finally the FSA describes the typical boiler room victim as follows, if you fit any of these descriptions, be extra careful as you may be a likely target!
- Most likely to be male
- Usually over 51 years old
- An experienced investor
- Spending on average £20,000
- Once you’ve fallen for one boiler room there is a greater chance you will fall victim a second time
That last one is an interesting point. You’d think that it would be once bitten twice shy, but what actually happens is that psychologically people cannot hold two competing beliefs at the same time. This might be “I’m an intelligent person” and “I did something stupid in falling for this scam”. This inability to hold competing beliefs is called cognitive dissonance.
To reduce the dissonance, people will either believe “I’m an intelligent person” or “I did something stupid”. You can guess that people want to hang on to the belief that they are intelligent people, so they reject the idea that they did something stupid and rationalise it by thinking to themselves “I’m intelligent, it can’t be my fault, so maybe I was just unlucky with that transaction”.
All of this actually makes you more likely to fall for the same trick again.
I hope this helps you to avoid the scams. For more on the psychology of justification from victims and perpetrators in finance, politics and even war, I highly recommend the excellent “Mistakes were made (but not by me)” by Tarvis and Aronson.
