During 2005, the Financial Services Authority (FSA) undertook a high level management review of fraud risk within a sample of sixteen larger financial services businesses. The purpose was to assess how the firms’ senior management teams were managing this risk. The key findings were as follows:
Anti-fraud responsibilities form an inherent part of the responsibilities of a wide range of employees, but poorly defined accountability can lead to them being de-prioritised in favour of other business needs.
Without accurate and detailed fraud data and analysis, firms cannot assess where and why they are exposed to risk of fraud.
Firms need to assess the degree of fraud risk to ensure the necessary controls are in place to mitigate it.
Embedding specialist anti-fraud responsibilities in ‘front-line’ functions is key to successful fraud mitigation.
This is not an isolated example of the FSA taking an interest in the subject of mortgage fraud. Back in February 2004, and before statutory regulation became effective, the FSA issued a ‘Dear CEO’ letter under the heading ‘Mortgage Application Fraud’ to a number of lending firms. It followed a review of self-certification lending, and concluded that the controls necessary to protect lenders were generally adequate.
Despite this, the regulator revisited self-certification in 2005. Its findings, published in November of that year, concluded as follows:
That lenders had strengthened their systems and controls, leading to increased detection rates for fraudulent applications.
Mystery shopping of 41 small broker firms found no evidence of systematic fraud relating to income inflation in order to secure larger mortgages. However, three intermediary firms were singled out for further investigation.
There were significant failings relating to affordability and suitability checks by brokers.
The FSA subsequently published examples of good and poor practice, and is expected to continue to show an interest in self-certification where it gives rise to fraud-related concerns.
Coming up-to-date, the FSA revealed in March 2006 details of its Intermediary Mortgage Fraud initiative. Now being rolled out on an industry-wide basis, the initiative follows discussions between the FSA, the Council of Mortgage Lenders (CML) and a representative group of mortgage lenders to establish how the industry can mitigate the risk of mortgage fraud and financial crime.
A consistent approach
The initiative sets out to achieve a consistent approach to reporting fraudulent activity involving intermediaries without adding an excessive burden to participating lenders. Its purpose is to gain greater understanding of such fraud, to gain a better sense of its extent and to tackle reported cases more effectively. A successful pilot scheme has already led the FSA to investigate four mortgage broker firms.
The initiative will operate on a voluntary basis and has the support of the CML and the Association of Mortgage Intermediaries (AMI). The FSA is inviting all lenders to participate. It says it ‘appreciates the value intermediaries bring to lenders, but that mortgage fraud and financial crime cannot be tolerated’. As such, the FSA is asking lenders to supply it with information relating to both proven and suspected fraud where it is serious enough to warrant the intermediary’s removal from the lender’s panel. The information to be provided comprises:
- The intermediary’s name
- Details of individuals involved
- Details and evidence of the fraud
- Customer names
The FSA has also provided examples of proven and suspected fraud. While not exhaustive, they include the following:
- Proven fraud
- Actual fraudulent documents, such as bank statements, utility bills, payslips, P60s, passports, driving licences, accountant’s references, etc.
- False employment or income details.
- Inconsistent information relating to the same applicant, e.g. various applications made with different details, such as income, either to the same lender or lenders within a group.
- Suspected fraud
- Doubts over income and employment details.
- Suspicious behaviour or trends occurring post-mortgage completion, e.g. where a broker records unusually high levels of arrears and/or customer complaints.
- Links with other applicants where fraud has not been proven, e.g. shared addresses, accountants, purchases on same development etc.
- Links between different applicants, e.g. shared bank accounts, addresses etc.
- Applications cancelled when further information or verification is requested.
- Suspected fraudulent documents.
- One or more of the above in several cases from the same intermediary.
The industry’s full response to the initiative has yet to be seen. However, early indications suggest that lenders and intermediaries alike are supportive, and will embrace it to help root out unacceptable behaviour.
No surprise
That the FSA is serious about mortgage fraud, and the possibility of intermediary involvement, should come as no surprise. With approximately 70 per cent of all mortgage applications originating through this channel, the regulator is understandably focusing on a sector for which it has primary responsibility.
However, considerable volumes of mortgage business still derive direct from customers, particularly in the mainstream market, a proportion of which will inevitably be fraudulent. This should be borne in mind when considering the extent and sources of fraud, and can be quantified with the help of data from organisations such as the Credit Industry Fraud Avoidance Service (CIFAS)
CIFAS is a membership association dedicated to the prevention of financial crime. It provides a range of fraud prevention and avoidance services to the majority of the UK’s financial services companies. And while not solely dedicated to the mortgage industry, its statistics provide useful insight into the trends associated with financial-related fraud.
In 2005, for example, CIFAS members identified over 355,000 instances of fraud – a 2.8 percent increase on 2004. Six and a half million fraud ‘warnings’ were also recorded, representing a leap of 10.4 percent. These were spread across a range of fraud classifications, but the biggest area of concern is that of identity theft.
Since 1999, the number of identity frauds recorded by CIFAS has risen from 20,000 per annum to over 137,000 in 2005, and the Home Office estimates that identity fraud now costs the UK economy £2 billion annually. Closer to home, GMAC-RFC recently fell victim to identity fraud thought to involve 10s of thousands of pounds. This is unlikely to have been an isolated case, so what can be done to protect against fraud?
Absolute sincerity
First, a business’ commitment to preventing and rooting out mortgage fraud must be absolutely sincere. The lead has to be taken by senior management who must set the example for the rest of the business to follow.
Second, the compliance team must be empowered to do its job effectively and with confidence. This requires clear terms of reference and a well-defined reporting process. For instance, the head of compliance should report on a regular basis to a firm’s board of directors and audit committee.
Third, the business must invest in management information reporting. This will provide the means to measure business performance, and therefore possible fraud trends, across a range of activities and locations.
Next, ensure that robust identity-verification processes are in place. These are set out in the FSA’s guidelines, the European Anti-Money Laundering Directive and the Proceeds of Crime Act. The much-mooted introduction of compulsory ID cards in the future may make this task easier.
Fifth, firms should make full use of proven external anti-fraud tools such as CIFAS and National Hunter, the application screening facility. Intermediaries should also ensure they seek help and guidance from trade bodies. AMI in particular has been very proactive, and has recently updated its factsheet and guidance for members.
Sixth – and particularly where there has been no direct borrower contact up to the point of mortgage completion – consider adding a “customer contact” component to the mortgage process. This allows the mortgage firm to carry out some simple security and identity checks over the phone.
Finally, invest deeply in training and competence programmes that raise awareness of fraud and improve your employees’ ability to detect and tackle it. This goes to the very heart of the FSA’s approach to reducing fraud, and will pay dividends if properly structured.
With the BBC’s recent Whistleblower on estate agents fresh in our minds, it is clear that firms who under-invest in fraud prevention will suffer the highest losses. It’s worth repeating the words of the FSA’s Stephen Bland who, on announcing the regulator’s latest fraud initiative, said: “Mortgage fraud is a serious matter and can lead to criminal proceedings – both for brokers and applicants. We are looking to all lenders to help us in the fight against this.” It’s as simple as that.
Chris Murphy is head of Compliance at Money Partners
