A hunt to rope more investors

The growth in retail investors sharpened in 2020 as millions of people found themselves locked up in their homes with their computers for company and returns on their bank deposits plummeting with the general slowdown. As a result, new investors became active on the stock exchange even at the peak of COVID, when stock indexes were declining. That was a rare case when people en masse acted smartly and joined a falling market.

Vladimir Pestnya / RIAN
Vladimir Pestnya / RIAN

“It is important to note that, contrary to professional participants’ expectations, despite the declining markets in the spring of 2020, retail investors were in no hurry to sell their positions and move into cash,” the trustee of IFC Solid, Yevgeny Marishin, shared with some surprise. “On the contrary, the new money inflow to the exchange only shrank by a fraction. This means people continued buying after the crash almost as before. This situation is new even to many experienced players. The second half of 2020 secured profitability two to three times higher than the average annual growth since at least 2017.”

This year, according to analysts, the inflow of funds from new Russian investors will fully compensate for the outflow of foreign capital from the toxic Russian market.

In addition to falling interest rates, other objective factors pushing people to move into stocks include tax incentives and a generally improved financial literacy, including through government policies.

As a result, according to Deputy Governor of the Central Bank Sergei Shvetsov, 4 million new investors entered the stock market in 2020. According to the Moscow Exchange reports, the number of individuals opening brokerage accounts more than doubled between March 2020 and March 2021, from 4.6 mio to 11 mio. Even though not all of those new account holders made a lot of transactions, the number of active market participants also tripled over the year, from 0.6 to 1.8 mio. In March 2021 alone, individuals invested a total of about RUB 74 bln on the Moscow Exchange (RUB 58 bln of that in bonds). The number of Individual Investment Accounts in Russia in March exceeded 3.8 mio; the number of users of Tinkoff Investments app almost doubled and exceeded 2 mio in 2020.

Such rapid growth rates prompted Deputy Governor of the Bank of Russia Vladimir Chistyukhin to offer a radical forecast:

“We have an economically active population of 74 mio people. I think at least as many brokerage accounts can be opened.”

Wolves and sheep

Hundreds of thousands and – ultimately – millions of Russians are flooding into the financial markets trying to find lucrative investment options – an ideal situation for fraudsters who have been refining their social engineering skills by fooling pensioners and bank clients for the past few years with impunity.

Beginners and inexperienced investors are sufficiently protected from risks in the official financial market by a system of categorizing investors proposed by the Central Bank, which does not allow beginners to purchase too many securities or making risky investments. However, only bona fide financial intermediaries respect the rules for working with investors of different skill levels; fraudsters most certainly don’t.

Financial fraud is changing its patterns. Earlier, scammers scavenged for financially illiterate, mainly elderly people and took advantage of their ignorance; now they are hunting investors who have basic financial literacy and at least know the meaning of stocks and cryptocurrency. Modern fraudsters do not stop short of targeting young people either. According to CEO of the Federal Foundation for the Protection of Investors and Shareholders Rights Marat Safiulin, scammers have special offers for each of the age groups: crypto assets for young people, real estate and precious metals mining for users aged 45 and older, and pension increments for retired citizens. According to Central Bank experts, people with high income are no less vulnerable than senior citizens as they tend to spend money easily and trust new technologies too much.

Scammers used to pose as Sberbank security department; now they are increasingly introducing themselves as Moscow Exchange reps, financial analysts, securities traders and representatives of “foreign companies.” Marat Safiulin told Invest Foresight that, although the Bank of Russia’s 2020 statistics indicates an 8% decline in the number of exposed financial pyramids, with pseudotrading companies taken into account, the number of scams has increased by around 17%. The Russian Interior Ministry has reported an almost triple increase in the activity of so-called social engineers.

For example, to beginner investors, scammers offer investing into a lucrative asset, which, of course, implies transferring money to their bank account. Scammers even set up fake websites to make these wire transfers more convenient. Sometimes a lucrative asset is cryptocurrency, often a cryptocurrency that does not even exist.

In a more sophisticated way to appropriate money, scammers propose that an investor verify his broker online, for which he has to enter his personal data and provide information about his broker, followed by wiring all the money to a “secure” account.

Masterful scammers even create phony investment platforms from which it is impossible to the money back. An unsuspecting victim may replenish his investment account for several subsequent months. So, what can be done?

More than literacy

Obviously, financial literacy is important.

“An additional way to improve financial literacy appears to be monitoring learning materials for investors, across all major portals and channels such as Telegram, YouTube, independent financial experts’ databases, and so on,” Yevgeny Marishin suggests.

These efforts should go beyond financial literacy. According to professor Artem Genkin, President of Autonomous non-profit organization Center of Protection of Bank Clients and Investors, financial fraud undermines people’s trust in financial institutions and the idea of private investment; therefore, preventing fraud is extremely important for the country’s overall economic development. In response to new challenges, law enforcement agencies must employ new tactics.

The expert suggests that, due to the specifics of criminal procedural action (especially it was true during the pandemic), before first criminal cases on property loss are opened, scams often continue, thus misleading more potential victims.

“Criminals are actively relying on social engineering. Even though our people are becoming well-versed in finances, they are still not completely immune to financial fraud,” Artem Genkin concludes.

He believes that new strategies for proactive preventive measures are necessary to expose and stop dishonest practices at the root, including by sending unambiguous warnings to customers.

“Availability, transparency and clarity of information about financial products are also essential,” the economist says.

By Konstantin Frumkin

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