Fraud is big business. Costing the UK £14 billion a year, the sheer size and extent of the fraudsters’ impact on business cannot be underestimated.
Of course, on the flip side, the government’s attempts at quelling the issue are also increasing to meet the problem and, for the mortgage world, this is becoming ever-more apparent as the Financial Services Authority (FSA) takes the lead in combating financial crime.
Anti-fraud measures
Anti-fraud initiatives are increasingly on the rise, including the project jointly set up by the Council of Mortgage Lenders (CML) and the FSA to streamline the reporting system for lenders to pass on information about suspect brokers and mortgage applications to the regulator.
This initiative has already garnered significant results, with the FSA recently revealing that over 30 lenders have brought more than 200 cases to its attention in the last 18 months. This in turn has lead to a third of these cases going on to enforcement action.
One of the Attorney General’s recommendations from the 2006 Fraud Review will also be formally launched in the latter half of this year in the shape of the National Fraud Strategic Authority (NFSA) – an effort to fully co-ordinate the efforts against fraud through one nationwide organisation.
To garner industry opinion before the launch, it will be conducting roundtable consultations over the coming months to discuss how to overhaul the mortgage fraud reporting system to improve the detection and prevention of fraud.
Oddly enough, fraud as a general criminal act was not officially recognised as an illegal offence until January 2007 following the government’s Fraud Review. Prior to that those accused were tried under very specific terms, inadequate in the face of the wide-ranging possible frauds of today.
Now fraud is defined quite simply as being committed in three ways: false representation, failing to disclose information, and abuse of position. According to the City of London police, in some circumstances, a fraudulent act does not even need to take place for it to be a criminal offence, if two or more people have agreed to commit fraud.
Certainly, the need to tackle fraud head on in all its forms is clear. Sandra Quinn, programme director for the NFSA development team, told the CML’s Mortgage Fraud Seminar that the impact of fraud has never been higher than now.
She said: “The opportunities of open, dynamic markets can be used to do harm as well as good. In recent decades, sophisticated criminal and terrorist networks have emerged to become every bit as entrepreneurial and international as modern businesses.
“Specialising in deception; compromising others; camouflaged by rising property prices – criminal networks have launched a sustained attack against lenders. Mortgage fraud is a fraction of the UK mortgage market, but it’s a relatively big slice of the UK’s fraud overall.”
Co-ordination is paramount
With this in mind, the need for different arms of the sector to confer and pass on intelligence is paramount and trade bodies such as the FSA, CML, Association of Mortgage Intermediaries (AMI) and Royal Chartered Institution of Chartered Surveyors (RICS) are actively seeking to take steps towards greater co-ordination of resources.
Yet, such co-operation can bring its own problems. Bernard Clark, communications manager for the CML, said: “Lenders do support the FSA whistleblower campaign and many lenders are contributing.
But the FSA needs to understand the sensitivities. Lenders are wary of the information being relayed to brokers. If a lender reports its suspicion, it still might be useful, but if that information is relayed to brokers, lenders might be worried it will damage commercial relationships.
“Lenders do take fraud seriously and they support initiatives. But lenders will balance sensitivities over suspicion and damaging commercial relationships.”
Gillian Charlesworth, director of regulation policy for RICS, also warns that while it is good for the industry to talk, it is currently unclear whether it will lead to anything.
She explains: “Discussion is good, but acting upon it is the difficult part. There are a number of bodies and police forces involved and some good things are being done. But without real results, all the talk will be a waste of time.”
Yet steps are being taken. Charlesworth highlights the example of the initiative to tackle the particular problem of fraud in new build properties, and explains: “New build has given fraudsters opportunity unlike other areas. There is an attempt to get better information and increase transparency around incentives from developers to customers, which, if not declared, can have a distorting affect. Because you have a whole batch of new properties in one area, fraudsters have used these blocks over the last year or two.”
Clear differentiation
However, while much has been focused on lenders reporting suspicious brokers, Richard Farr, director at AMI, points out that there is a decided difference between a mortgage broker and a criminal.
He cautions that there needs to be a clear differentiation between the FSA’s intelligence and financial crime section and its normal enforcement arm when it comes to the action taken against brokers.
Farr says: “One fraud case is too many and we are fully in support of smoking out the fraudsters. AMI has put out three factsheets on anti-fraud and fraud prevention and we have always had a strong stance and are fully behind the whistleblower initiative.
"Together trade bodies must combat the problem. But this is about crime and not mortgage brokers – they are not interchangeable currency.”
Farr stoutly defends the reputation of mortgage brokers and brands the recent media furore around the third of 200 cases passed onto enforcement as ‘ridiculous’ for saying it was 70 brokers.
He says: “It was pure speculation and I don’t know where it came from. We don’t know that it is the number. The message to brokers is to be calm. Finger pointing is unhelpful and the tightening liquidity market makes it very difficult for everyone.”
Indeed, Philip Robinson, financial crime and intelligence division director for the FSA, comments that the greatest threat is of organised rings using mortgage and property fraud to make profit.
He says: “The organised rings can include brokers, solicitors, valuers and other professionals in the property market. The police tell us that these frauds are also carried out by criminals who are involved in other criminal activities, such as drugs or human trafficking, and money laundering too.
"There seem to be a lot of criminals who have realised that mortgage fraud allows them not only to wash their ill-gotten gains, but make a profit in the process.
“Alongside the losses, actual or potential, that this can cause for mortgage lenders, this threat is creating a ‘social harm’ that isn’t going to show up on the bottom line, but is something we all need to bear in mind in our day-to-day businesses.”
Better transparency between parties
Nevertheless, Charlesworth says that while fingers cannot be pointed solely at intermediaries, there is an issue surrounding the sheer number of people involved in a mortgage transaction.
She says: “I don’t think we should or can limit the number of parties, but we need better transparency between parties so information is preserved as it is passed along.
“People say to get fraud going you need a lawyer, a broker, and it may be helpful to have a valuer involved as well. If you piece all those people together, then it is difficult to prevent fraud if you have a determined group.”
She continues that all the industry bodies and firms must be prepared to put their money where their mouth is and play their part.
She adds: “A lot of what we are seeing now was happening in the early 1990s. It would appear it is difficult for the market to learn lessons when it is going up. When the market goes down, it comes out. There’s a cyclical aspect. Fraudsters take opportunities and those will end at some point.
"Communication is better now than at the beginning of the 90s and there is more of a will to organise whistleblower initiatives. All these things will be put into place and we will learn a little bit this time and make progress. I’m optimistic there is a will do this.”
Indeed, Quinn says that action taken must ‘cut across traditional barriers in the economy and the professions’ in order to have an impact.
She says: “The vulnerabilities that give fraudsters a head start are often outside the control of the lender, for example, the surveyor who values a house, or the solicitor who confirms someone’s identify. This is why a national programme is required, because the potential enablers of fraud are often beyond the control of those who ultimately pay the price for them.”
A difficult and insidious problem
Fraud is a difficult and insidious problem that requires a far-reaching and co-ordinated approach by many different parts of the industry.
The introduction of the NFSA will hopefully spur on the many parts of the financial industry, be they intermediary, lender, surveyor or solicitor, to contribute to the discussion on what is the best way forward and work together in a meaningful manner.
While it may be impossible to prevent fraud fully, the industry as a whole can do its best by working in conjunction with each other to make it as difficult as possible for the criminals to succeed.
