Are you investing safely?

Around four in 10 savers aren’t spending enough time researching their investments, putting them at risk of getting scammed. But working out if an investment is safe isn't always easy. 

Reasons for the lack of research included finding it 'too complicated' or 'too time-consuming', according to a joint study from the Financial Conduct Authority (FCA) and the Financial Services Compensation Scheme (FSCS). 

Both organisations offer online tools to help people decide whether or not an investment is the real deal, but with so many investment scams to keep track of, and their increasing complexity, tools can only go so far in helping investors make informed decisions.

Here, Which? explains how these investment tools work, and offers tips on how to protect yourself from investment scams. 

How are investments protected?

The FSCS protects those who lose their cash as a result of an authorised financial services firm going bust. The firm must have been authorised by the FCA or Prudential Regulation Authority (PRA).

When it comes to investments, you may receive up to £85,000 in compensation if you lose money due to negligent advice or fraud (if the adviser or firm is unable to meet the claim), or if the investment company goes bust.

According to the FCA’s recent survey, 22% of investors haven’t checked or don’t know if their investments are FSCS-protected.

To make things easier for consumers, the FSCS launched its Investment Protection Checker earlier this year. You simply look up the type of investment, and the FSCS tells you whether it's protected. 

But we found that for 70% of the investment types you can look up, the checker produces this result: 

‘You might be protected, depending on the circumstances […] we can't say for sure whether your investment is or isn't FSCS protected.’

A spokesperson for the FSCS told Which?: ‘Whether an investment can be protected by FSCS depends on a range of factors – including the type of investment product, if it involves a regulated activity, individual eligibility, and whether any exceptions may apply. This makes it challenging to provide all the answers on whether a specific investment is protected. 

'However, our new Investment Protection Checker tool is designed to encourage consumers to think about protection and ask the right questions when considering a product. 

'We signpost them to seek guidance from their providers and regulated advisers when we can’t say for sure if their investment is protected.’

• Find out more: FSCS explained: are my savings safe?

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What is and isn't regulated?

You can also use the FCA's website to make checks on any potential investment providers.

The FCA says it received a total of 34,244 reports of unauthorised businesses in 2021 - a 10% increase on the previous year. It issued 1,410 alerts, mostly for unauthorised financial promotions and false claims to be authorised by the FCA (including clone firms).

An FCA spokesperson told Which?: ‘To help with protection against scams, we urge consumers to refer to the Financial Services (FS) Register, and our warning list, to ensure that it is a legitimate, authorised firm or individual that they are dealing with.’

Once you've found a firm on the FS Register, you're urged to 'check the full record for what regulated activities this firm has permission to do.' However, firms can be authorised to carry out lots of investment activities - but often with 'limitations', as shown in the screenshot below:

In theory, if you were to invest with a company that was operating outside of its authorised limitations, it might mean you'd no longer qualify for FSCS protection.

There's also the issue of scam firms not appearing on these lists at all - or pretending to be companies that are. 

On its website, the FCA says, ‘Even if a firm isn't on the Warning List, it might still be a scam. Even if it's on the FS Register, it might still be a 'clone firm' pretending to be a genuine firm, and you should do more checks.’

• Find out more: who regulates financial products? 

How to spot an investment scam

In addition to making the most of the available tools from the FSCS and FCA, here are some tips for avoiding investment scams:

1. If it seems too good to be true, it probably is

No investment is risk-free, so if it's marketed as such, that's an immediate warning sign. The same is true for any investment claiming to guarantee high returns.

2. Avoid providers that pressure you

If you feel like you're being rushed into making a decision, take a step back and consider investigating the firm further. Trustworthy firms won't use a discount or a time-limited offer to push you into investing your money.

3. Don't trust firms or individuals that contact you out of the blue

If you find out about the investment via email, text, cold call or through social media, it could be a scam. 

• Find out more: how to spot an investment scam