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Crackdown on crime

The regulator is focussing on mortgage fraud and will come down hard on bad apples amd firms that do not have the appropriate checks and balances in place, says Stephanie Spicer

Financial crime manifests itself in varying degrees of severity, making it difficult to ascertain what constitutes a breach in the law for brokers and their clients.

A client tweaking their salary to get the loan they need to buy a property may seem acceptable, as might the act of getting an estate agent to inflate the price of a property so they can pocket the extra on the loan.

But jail sentences are applicable for both of these acts, however ‘white collar’ they may be regarded by some.

And these are exactly the sorts of areas the Financial Services Authority is clamping down on. Together with lenders, the City watchdog is working hard to sift out not only blatantly criminal acts but also the sort of ‘white lie’ activities that put borrowers in a position whereby they take out mortgage loans they are unable to afford.
And the regulator is prepared to come down hard with fines on practitioners who are not ensuring consumer protection by having the right checks, balances and procedures in place to meet their responsibilities to clients.

Fighting financial crime is one of the FSA’s four statutory
objectives under the Financial Services and Markets Act alongside maintaining market confidence, promoting public understanding of the financial system and securing the appropriate degree of protection for consumers.

The scope of the FSA’s financial crime sector team is wide but is presently focussed on money laundering, identity fraud and insurance claim fraud. The team focusses on firms’ risk management systems and controls.

It exists to “coordinate and support the work of the whole organisation” as part of the FSA’s financial crime objective. Internally, this involves helping various teams throughout the FSA identify financial crime risks and devising ways they can be mitigated.

So what does this mean for the mortgage industry? Last April, the FSA launched an initiative to tackle mortgage fraud, setting up a streamlined reporting system designed to reduce fraud involving loan applications processed by brokers.

The system was piloted with a number of lenders tasked with helping the FSA deal with fraudulent mortgage applications where lenders considered matters “sufficiently serious to remove an intermediary from their panel or where a subsequent investigation identifies fraud”.

The FSA called on lenders to provide names of intermediaries, details of individuals involved, details and evidence of the fraud, the names of any customers involved and a summary of their investigations.

This represents another strata of monitoring the FSA is putting in place to protect the industry from some of its less compliant operators and customers.
So how can brokers ensure they stay on the right side of the law?

”For mortgage fraud we operate on a case-by-case basis and these can be allocated to any associate in our small firms division,” says FSA spokesman Robin Gordon-Walker.

“The key issues for brokers for avoiding financial crime are to ensure they are comfortable with information supplied to them, their sources of introductions and their vetting

Gordon-Walker says brokers should look out for lack of evidence of income and falsified bank statements or employment details. And, while he acknowledges that the FSA does not expect brokers to be forensic experts, he says it does expect a common sense approach with scrutiny of the documents brokers are provided with.

“They should consider whether incomes look realistic and watch out for suspicious trends such as similarities in applications,” he says.

As for accountability for suspected criminality, Gordon-Walker says brokers and lenders are responsible for identifying and protecting themselves, with brokers being responsible for the advice they give.

One year since the initiative’s launch, Gordon-Walker says that the drive to cut mortgage fraud is working well.
“We are getting notifications from lenders which we are obviously not going to go into much detail over because we can’t name names,” he says.

“They are sent in on that basis and we wont publicise who has reported what, or indeed who has been reported on. But we will follow up the leads that come in.”
Gordon-Walker says the FSA is particularly looking for collusion between borrowers and intermediaries. But he highlights the difficulty of checking cases in which overstatements of income come from borrowers and brokers are not in collusion.

“We don’t expect intermediaries to double, triple and quadruple-check every single thing they receive from every borrower since that would be rather elaborate,” he says.
“But they must take a common sense approach.”
So what should brokers be vigilant about when they are processing clients’ applications?

The FSA gives some examples of proven and suspected fraud. Proven fraud can involve:
• Fraudulent documentation such as bank statements and wage slips.
• False employment or income details and inconsistent information relating to the same applicant.
• A number of applications being made to the same lender with differing in-comes or details.
Suspected fraud relates to:
• Doubt over income and employment details.
• Suspected fraudulent documentation or applications cancelled when verification is requested.
• Cumulative suspicious behaviour or trends on completed accounts such as when a broker’s completed cases have an unusual rate of suspicious arrears or repossessions, benefit claims or fraud complaints.

The extent to which financial crime affects the mortgage industry is unclear. Bernard Clarke, a spokesman for the Council of Mortgage Lenders, says the number of cases is so small that it is not the highest profile area of the CML’s work.

Nevertheless, he says the organisation is right behind the FSA in its endeavours.

“We have been supporting this FSA initiative to encourage lenders to contribute information on cases where they suspect fraud and to take action such as removing brokers from their panels or refusing business from individuals within a brokerage where they have identified fraud,” says Clarke.

“The idea is to pool information to get a clearer perspective on the extent of this issue.”

Clarke says this helps to provide a view of the extent of the problem across the industry.

Gary Wood, managing director of fraud solutions at credit report agency Experian, is more bullish.

“Mortgage fraud is prevalent,” he says.

“However, we can prevent it through our systems. You can have valuers and solicitors and others taking part in fraud by inflating values of houses or the amounts of mortgages. People attempt inflating their salaries to get mortgages they shouldn’t and they have little chance of repaying these further down the line.”

Experian provides shared mort-gage data across lenders and financial institutions.

“None of our systems automatically decline Joe Public,” says Wood.

“We identify cases that could be fraudulent and refer these back to institutions. It is down to their fraud organisations to carry out investigations and determine if it was something genuine on an application form that led a case to be referred, in which case they can accept the mortgage.

“But if on further investigation they don’t believe what they are being told and uncover or prove a misdemeanour, they can turn the mortgage down.”

Brokers are unlikely to have the resources to check every application to this extent but there are some checks they can carry out.

“There’s nothing to stop brokers having a system like ours in place,” says Wood.

“But it is usually the lending institutions that suffer the loss and want to ensure they have appropriate safeguards in place.

“We provide authentication checks so if brokers don’t want to do full application processing they can do authentication checks that establish if, for example, a person exists,” he adds.

Neil Monroe, external affairs director at credit report data firm Equifax, agrees.

“Most brokers do some basic documentary evidence-gathering and then rely on lenders to do fraud checks,” he says.
“They would probably not have the resources to do the fraud checks for every case. If they are local brokers they probably know the people and have strong gut feelings about whether people are genuine or not. If they feel there is anything suspicious they can obviously ask for additional documentary information or do online checks.”
Lenders are increasingly integrating a variety of checks into the mortgage application process.

“Lenders use us for credit risk assessment purposes but what we are called in to do more of now is fraud risk assessment,” says Monroe. “Fraud risk assessment has always been a back office rather than a real-time check, but we are trying to provide a fraud tool at the same time as a credit risk tool in an online environment.”

Traditionally, lenders have completed credit risk assessments, says Monroe. Once deals have been accepted they are overnight batch processed and a comparison of details is made with other applications to try to pick up anomalies.
“Most fraudsters make mistakes with identification,” he says.

“By comparing their application with previous applications you can pick up trends. That is effective but takes place after a credit risk position has been taken.

“What is needed, especially with online mortgages, is to have the checking of applications for ID fraud running at the same time as you are running credit checks on them.”
This is where Equifax’s online Siran product comes in. It can highlight cases which may look good credit risks but where there are in fact issues which give a strong indication of fraud.

“It incorporates standard risk with application comparison techniques,” says Monroe.

Lenders therefore have many options when it comes to ensuring the right checks are in place. This involves checking on other practitioners in the application process while brokers are checking as much as they can about the authenticity of clients

“Any responsible lender will have processes in place to mitigate fraud and those processes go through borrowers, properties, any solicitors involved, intermediaries and packagers,” says Alex Hammond, a spokesman for Kensington Mortgages.

“For every party at every juncture there are checks to ensure that part of the process is isolated from fraud,” he says.

“For example, every time we check that all our intermediaries are FSA-authorised we have a full assessment of packagers. With solicitors, we check with the Law Society’s register to check that they are legitimate,” he says.

In terms of borrowers, Hammond says it’s a case of lenders being as responsible as they can.

“Lenders need to think about maintaining service levels and building structures for fraud mitigation,” he says.
“But they have to ensure these are not obstructive to the service they provide to customers, whether brokers, packagers or borrowers. They also need to have checks in place at every stage.

“More than 99% of the time things run smoothly,” Hammond adds.

“But occasionally something may look suspect and that is when it comes down to having experienced underwriters to look at cases pragmatically and if there are inconsistencies, assess why. That is part of the process.”
As Hammond acknowledges, thousands of brokers are out in the field doing a good jobs – there are only a few bad apples. But the emphasis is on the few, he warns.

“If there are bad apples it is in the interest of the industry that they are picked out because it only takes a minority to taint the reputation of the industry externally,” he says.

“As a regulated industry we must be about building reputation, trust and understanding among consumers.”
Of course, the bad apple scenario applies to consumers, too. But brokers can maximise their compliance by having the right checks and balances in place. This will be crucial should a client prove to be fraudulent.

“It’s a good message to hammer home – you need to maintain the audit trail,” says Hammond.

“You can do everything in your power but if you can’t prove that, it’s going to come down to your word against someone else’s.” •

Past mortgage crimes and misdemeanours

• December 2006
The FSA fined buy-to-let intermediary Home and County Mortgages £52,500 for “management failures and a lack of skill, care and diligence”. The FSA found that one of HCML’s advisers had inflated customers’ incomes on mortgage applications and HCML had not acted “quickly and appropriately to deal with the matter”.

•October 2006 was fined £455,000 for “failing to treat its customers fairly when selling payment protection insurance”. It was found the firm did not have appropriate systems and controls in place to minimise the risk of unsuitable sales. It is well documented that the FSA is clear that the total cost of single premium PPI including the effect of paying interest when a PPI policy premium is added to a loan should be disclosed so customers understand the product and the cost.

•July 2006
A Statement of Misconduct was awarded against Steven Leslie Davis “for falling well below acceptable standards in the way that he carried out his duties as a director of his firm”. Davis, as chief executive and director responsible for the accounts and finance functions at Essential Mortgages, had “failed to ensure adequate systems and resources were in place for processing, accounting for and monitoring customers’ applications in respect of payments for accident, sickness and unemployment insurance policies”. The FSA decided not to levy a fine but to publish a statement “having taken into account his ability to pay a fine and the impact any fine would have had on his ability to pay back creditors”.

•November 2004
Six people were jailed for mortgage fraud following a joint investigation between the Serious Fraud Office and the West Yorkshire Police Economic Crime Unit. The case involved a systematic abuse of the mortgage lending procedure over five properties, involving a mortgage broker who put the five mortgage applications together and a conveyancing clerk. There were also two solicitors – one of which had a client’s account used to channel funds from the other law firm – two mortgage applicants and a chartered accountant who provided false financial references for the applicants. The nature of the fraud was that the property price quoted was higher than the actual price in the applications. False and forged documents were used and the money obtained was laundered through the second solicitor.

When sentencing the judge said to the broker: “You were and remain totally indifferent to the suffering caused to others involved. Your dishonesty, conceit and arrogance blinded you to the consequences of your actions and the suffering caused.” The broker was imprisoned for six years.

Rob Griffiths is associate director at the Association of Mortgage Intermediaries

Financial crime comes in many forms, from email ‘phishing’ scams to ID fraud but it has one constant – it leaves behind victims struggling to comprehend what has happened and how they have lost money.

It can sometimes seem that the regulator and government are fighting a losing battle in tackling financial criminals but it is an important battle to fight. Consumers must have confidence that the industry not only has a policeman but also a regulator that is keeping pace with criminals.

The issue of fraud is one we take particularly seriously. It impacts not just the mortgage sector but the whole financial services industry. Fraud is a phenomenally expensive business costing financial services firms billions of pounds each year and it is important that measures are in place to tackle it.

We supported last year’s system set up between the Financial Services Authority and the Council of Mortgage Lenders to report proven or suspected fraud as it is not in our members’ interests for intermediary firms engaged in fraudulent activity to continue trading. The good reputation of the mortgage advisory sector is crucial to ensure consumer confidence and intermediary firms engaged in fraudulent acts, however few in number, will affect this.
We recognise that intermediary firms are often in the frontline in tackling fraud and to help members we have produced a fraud prevention factsheet outlining things for firms to consider.

One of the key areas to review is systems and controls. These must be robust and essentially fit for purpose in countering any risk. The scope of ‘systems and controls’ is broad and encompasses IT and manual systems, segregation of duties and internal audits.

Firms should have a strong anti-fraud culture, there should be a clear allocation of responsibilities for the everyday management of risk and there should be training on fraud prevention and how to identify likely frauds.

The factsheet also contains a handy list of basic questions to help firms understand and tackle fraud risks including:
• Who is responsible for managing your fraud risks?
• How do you identify fraud risks?
• What are your fraud risks?
• What are your systems and controls for managing your fraud risks?
• What whistle-blowing arrangements do you have in place and how successful are they?

The whistle-blowing point is a pertinent one. The FSA/CML initiative is a formalised whistle-blowing arrangement and intermediary firms should also ensure that they are set-up to inform the FSA of any suspicious activity, be it from consumers or lenders.

The FSA has been concerned about potential mortgage fraud around the provision of self-cert mortgages. In its research it found a few cases where intermediaries were willing to collude with customers and inflate incomes to secure mortgages.

In these cases, intermediaries were clearly at fault but at other times customers are the knowing source of fraud. Having robust systems and controls in place will flag up such cases and help protect firms against unfounded suspicions.


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