Earlier this year, the Financial Services Authority (FSA) announced details of its mortgage fraud initiative. The scheme was backed by the Council of Mortgage Lenders (CML) and the Association of Mortgage Intermediaries (AMI). It involved the creation of a streamlined reporting system designed to reduce the level of fraud involving loan applications handled through mortgage intermediaries and financial advisers.
The move followed a series of steps by the regulator to tackle the growing threat of crime and fraudulent activity in the financial services sector. The regulator had already announced a planned review of its stance on its anti-money laundering (AML) regime, which included the complete removal of the existing detailed rules on AML controls and replacing them with high-level requirements for financial firms to have their own risk-based controls in place to cover the issue of money laundering.
The regulator has been very clear in outlining what it considers to be fraudulent activity in the mortgage industry. Its statement reads: “The FSA is interested in fraudulent mortgage applications where the lender considers the matter sufficiently serious to remove the intermediary from their panel or where a subsequent investigation identifies fraud.”
A serious matter
The fact that four advisery firms were referred for possible enforcement action following a trial run of the initiative shows the mortgage market is not untouched by financial crime. Commenting, Stephen Bland, director of the FSA’s Small Firms Division, says: “Mortgage fraud is a serious matter that can lead to criminal proceedings both for intermediaries and mortgage applicants. We are looking at all lenders to help us in the fight against this practice.”
The streamlined rules were also joined by the publication of radical new Joint Money Laundering Steering Group guidance also aimed at driving a more risk-based approach to financial crime.
As part of the initiative, the FSA is working with lenders to combat attempted fraud. Should a lender consider a mortgage application suspicious, a number of procedures must be followed. These include supplying the FSA with the name of the intermediary, details of any individuals involved, details and evidence of the fraud, the name of the customer and a summary of the investigations.
However, there are concerns about how exactly the situation can be monitored, says Andrew Seymour, chairman at Optoma Broker Solutions. He says: “In terms of the mortgage market, there are limitations to laundering money and I don’t think it is a massive concern. There is a difference between saying you earn £5,000 more than you actually do, to taking out a mortgage in a fraudulent name, but how is the broker supposed to know if the passport is fake? This is where there is a problem.”
Easing the confusion
Despite Seymour’s argument, the adoption of a risk-based approach means that it is up to intermediaries themselves to ensure they put the FSA’s recommended systems and controls in place. To ease any confusion brokers may have, AMI also released a fraud prevention factsheet with hints and tips to help brokers reduce the level of fraud in the mortgage industry. This includes asking questions such as ‘who is responsible for managing your fraud risks’ as well as asking what the key systems and controls are for managing fraud risks.
Rob Griffiths, associate director at AMI, says it is crucial that firms adhere to the recommendations made by the regulator. He said: “Our members are intermediary firms operating in the mortgage market. Therefore, we are trying to provide them with information to protect them against potential fraud to their business. By putting the suggested systems and controls in place, intermediaries can monitor all business activity and therefore, identify any suspected fraudulent activity that may take place.”
In fact, the FSA has recently contacted all intermediary firms, outlining details of its expectations with regard to the new AML practices that came into effect on 1 September. In this, it reiterated the need for firms ‘to deliver high AML/counter-terrorist finance (CTF) standards; to assess where their risks lie and manage them appropriately and to have regard to the content of their guidance in designing, implementing and monitoring their AML/CMF systems of control’.
Commenting on the correspondence, Bill Warren, compliance director at Complete Mortgage and Loans Service (CMLS), said it is imperative that firms look at ways to implement the guidance as failure to do so will have dire consequences. “The recent contact made by the FSA reiterates the urgency and importance of adopting a risk-based approach to mortgage fraud,” he explains.
“If a broker has any doubts over a mortgage application being submitted, then it is vital they contact the lender involved. Many have a fairly sizeable fraud department that would be willing to help. If not, submitting a fraudulent application could lead to the intermediary possibly having the lender and the FSA taking action against them for fraud. This is a huge risk to their business.”
Following the guidelines is vital and brokers ignore these recommendations at their peril. Fraud and crime in financial services is a very real threat and one that continues to grow every day. By setting in place systems and controls that enable it to try and identify these risks, the industry could work together on tackling this problem.
