Last year witnessed a proliferation in boiler room scams attempting to lure investors into fake funds or shares (read more). More recently, financial fraudsters have been turning to carbon credit schemes as a means of persuading people to part with their hard-earned money.
In the summer of 2011 the Financial Services Authority (FSA) reported an increase in firms promoting spurious carbon credit schemes. The watchdog now lists these on its website as something to watch out for in 2012.
Of course not all carbon credit schemes are scams, but the FSA does not regulate the sale or trading of carbon credits unless they are collective investment schemes or certain types of exchange contracts. If they are unregulated and fail, you will not have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS). In contrast, when a regulated investment fails because the provider has gone into default, you can receive up to £50,000 per person per firm.
A suitable investment?
Beyond the glaring investment risks, there is also a question mark over whether private investors should buy carbon credits, as they are a relatively new and esoteric investment. You may lose money on your investment by not getting a competitive rate when trading a small volume or find them impossible to sell.
"The carbon markets have been designed for institutions and corporates to offset future liabilities rather than for small private investors to profit, and to date small investors are most likely to have lost a lot of money," says Mark Hoskin, managing partner at wealth advisers Holden & Partners. "The investment is for those who like to gamble, with a high appetite for risk and not a standard part of a long-term asset allocation."
If you are interested in carbon-related investments, you are probably better off getting exposure to this investment theme via an investment trust, unit trust or exchange-traded vehicle which invests in clean energy. Read more on alternative energy
Another option is ETFS Carbon (CARB), an exchange-traded commodity (ETC) offered by ETF Securities, which is designed to track the price of carbon emissions allowance futures. There are also shares in legitimate companies involved with carbon trading, like Trading Emissions or Camco, although both have suffered big falls in the past year.
"Investments of this type should never account for more than 1 or 2 per cent of your portfolio," says Danny Cox, head of advice at Hargreaves Lansdown.
Given the complexity of the investment you will be better off getting advice from an independent financial adviser with knowledge on carbon credits.
How they approach you
Companies claiming to sell carbon credits and other investments such as shares often make contact out of the blue on the telephone, although they also send e-mails and letters.
Claims such as "credits are the new big thing", "you could make significant profits" and that carbon credit trading is "an ever growing market" are typical. You may be told that in the current economic climate you will earn larger profits from carbon credits than traditional investment products.
The callers, often well spoken and very friendly, also often claim to have insider information, trade secrets, a hot tip or special expertise.
The companies often target vulnerable people. Investors Chronicle's sister publication FT Adviser reported last year that CarbonTrace Solutions persuaded an an elderly lady to purchase €4000-worth of carbon credits.
More recently, an unemployed reader told Investors Chronicle that a company called MC Expert Consulting, which is on the FSA's warning list of unauthorised overseas firms that pose a high risk to consumers, tried to get him to invest thousands of pounds in carbon credits after suggesting he could make returns of 40 per cent over eight months, and 600 per cent over five years.
Not all fund raising activities require authorisation or approval by the FSA. But the watchdog warns that investors who have given money to, or are considering giving money to, these firms or individuals, should exercise caution as they will not benefit from the UK compensation and complaint schemes if anything goes wrong.
The FSA says: "If it sounds too good to be true, it probably is. Authorised firms are unlikely to contact you out of the blue with investment opportunities. A legitimate company is also unlikely to use harassment, high pressure sales tactics, or long and persistent phone calls to get you to invest. We strongly advise you to only deal with financial services firms that are authorised by us."
You can check whether a firm is regulated by the FSA at http://www.fsa.gov.uk/register/firmSearchForm.do
The FSA also has a list of companies which it does not approve or authorise to conduct regulated activities http://www.fsa.gov.uk/pages/doing/regulated/law/alerts/unauthorised.shtml
