It's not fake reviews you need to worry about online, it's people who don't know what they are talking about

Amazon may be flooded with fake reviews and it is certainly a worry that platforms carry supposedly five-star reviews that have been generated by some computer on the other side of the planet. But actually it’s not fake reviews that we need to worry about when shopping online. It is people who don’t really understand what they are talking about.

We live in a world where people trust “real” reviewers rather than experts. So we choose a restaurant on the basis of its rating by hundreds of people who have eaten there, rather than the review in a guide book or a newspaper column. The same goes for a bit of equipment, a dishwasher or some headphones. We do that because the reviews are more up to date and we think we can usually figure out the duff comments and make allowance for them. The worst that happens is you have a mediocre meal or buy a substandard product; annoying, but not a catastrophe.

The much bigger problem comes when the reviewers praise a service that seems to them to be fine, but that they actually know nothing about it. At best, people who follow them encounter a huge amount of hassle. At worst, they can lose their life savings.

There are two particularly grave examples in the UK of people being misled by positive user comment. One is electricity and gas supplies; the other is financial products.

It has been extremely easy to set up a new company in Britain to sell gas and electricity. As a result, a string of suppliers have sprung up and duly gone bust. The government has just tightened up its rules on this, and not before time. But how do completely new companies, with no track record and hardly any financial resources behind them, manage to establish themselves?

The answer is they rely on social media. You get someone to design a cute website, boasting how green the electricity supply is, and when you have a few customers you offer them discounts on their power if they sell the service to other people. The business snowballs as each new customer is incentivised to recruit more people to switch server. New customers pay upfront, but the cost to the company – in terms of the discounts offered to the people who sell the service – builds up. So the business has to keep growing. If it stops growing, it folds.

Scores of companies have done just this, and their customers have to be picked up by other more substantial suppliers.

The point here is that people recruiting new customers have no qualifications to be a sales agent. They probably know nothing about the company’s finances and they may not reveal how much they are being paid, by way of a discount on their own supply, to make a sale. But they are trusted because they are on social media.

A couple of weeks ago I saw an advert for a new electricity supplier on my email feed. It looked a bit rum, so I checked online on the Companies House website (which, by the way, is excellent and free to use). It took two minutes to see that the man who had founded the company had been a director of several other companies that had gone into liquidation. That does not necessarily mean this one will fold, or that the founder is dishonest. But it is a huge red flag.

On social media you cannot see anything wrong with the company – rather the reverse. At Companies House you can. But most people would not think of doing a company search. Instead they trust online reviews.

If this is alarming, what has happened in the sale of financial products is worse. Earlier this year a company called London Capital & Finance collapsed. There is an independent inquiry now looking into this. The company issued bond to investors, which offered a high rate of interest, attractive in a low-interest rate world. Now it appears that losses of up to £236m are at stake. I am afraid that while some money is likely to be recovered, most won’t be. Thousands of investors will lose money, in some cases their life savings.

This is obviously a disaster in terms of regulation and auditing, but the company would not have been able to raise so much money had it not been for social media. On Feefo it got 4.8 stars, with only at the very end the reviews turning negative. Google reviews are more mixed, with the rating pulled down to 2.2 by recent ones. But most of the earlier reviews are fine.

The company’s adverts did warn that investors’ capital was at risk – but with all those five-star reviews saying that it had paid back on time, many people did not worry.

People who invested via an independent financial adviser may have some comeback. Anyone who trusted online reviews, rather than taking professional advice, will I fear have none.