Last year saw the FSA take aggressive action against mortgage brokers who had been implicated in alleged mortgage frauds. In 2008/2009, the FSA prohibited 26 individuals and issued over £500,000 in fines.
Some practitioners have questioned FSA enforcement action over criminal prosecutions for incidences of mortgage fraud. While arrests and raids are headline grabbing and may act as a form of policing, the criminal justice system is inherently time consuming. Arrests made in 2008 may not result in conviction and confiscation proceedings until 2010.
By comparison, FSA enforcement sanctions are swift and final, delivering an immediate message to facilitators of mortgage fraud: assist in the submission of fraudulent mortgage applications, and you face exclusion from the financial services market.
That said, in keeping with the FSA’s battle cry of ‘credible deterrence’, the FSA has referred some cases to the police for further investigation and possibly prosecution under the Fraud Act 2006.
What is around the corner?
The economic downturn, tightening market conditions and more cautious lending may result in fewer fraudulent mortgage applications, but this does not mean that firms should become complacent.
The FSA’s Business Plan 2009/2010 sets out the regulator’s stall for meeting its statutory and regulatory objectives to the next year.
In terms of mortgage fraud, the FSA states: “Improving industry defences against mortgage fraud continues to be an important objective for us in 2009/10. We will encourage market-led initiatives and work closely with relevant trade bodies to deliver these, but we will continue to supervise both brokers and lenders to ensure that the industry raises its defences against mortgage fraud. We will continue to take enforcement action, such as prohibition of intermediaries, where necessary”.
But what does this really mean for mortgage intermediaries and their senior management? Parallels can be drawn with the FSA’s action against the banking sector in 2002/2003 for inadequate anti-money laundering systems and controls. While there was no direct evidence that the banks had been used inadvertently to facilitate money laundering, the message from the FSA was clear: while there remains a risk of money laundering your systems and controls must be adequate and robust.
This message has been repeated by the FSA across the spectrum of anti-financial crime initiatives – from insider dealing and market abuse through to data security and the more recent FSA enforcement action for inadequate anti-bribery and corruption systems and controls. Inadequate mortgage fraud defences may result in FSA enforcement action.
Now is the time for mortgage intermediaries and networks of advisers to stress test anti-mortgage fraud systems and controls and bridge any gaps.
Defining mortgage fraud
Before assessing an anti-mortgage fraud system and control it is necessary to understand the nature and scope of mortgage fraud.
Mortgage fraud occurs when an institutional or private lender is defrauded through the mortgage process. Perhaps the most common type of mortgage fraud is undertaken by the individual purchaser, either desperate to get on the property ladder and/or driven by greed, securing a mortgage greater than they are entitled to by providing false or misleading information considering their income and/or employment status. The FSA has prohibited and fined various mortgage intermediaries for participating in such mortgage frauds, which included shocking examples of falsifying payslips or creating fictitious jobs.
At the other end of the mortgage fraud scale are professional and sophisticated fraudsters, seeking to obtain the proceeds from over-inflated or multiple mortgages. Such fraudsters target the buy-to-let market and use sophisticated techniques such as corporate structures and ‘flipping’ (back-to-back sales of the property) to secure mortgage funds.
The fraudster, be he the opportunist or the professional, may well seek to involve professionals either knowingly or unwittingly in the fraud to give the fraud a veneer of legitimacy and reassure the lender. All professionals involved in the mortgage process, to include the mortgage intermediary, the lender, valuers and solicitors or conveyancers need to be alert to mortgage fraud.
Fraud from the FSA’s perspective
In July 2008, the FSA’s director of financial Crime and intelligence division, Philip Robinson, wrote to the key trade bodies including the Association of Mortgage Intermediaries (AMI). Robinson asked the AMI’s director general to remind its members that they need to be able to demonstrate compliance with the following three principles:
Recording – ensuring that all transactions and relationships are properly documented.
Reporting – alerting counterparties such as the lenders and the FSA of any concerns or suspicions which may emerge during transactions.
Responsibility – ensuring transparency and openness in all of the intermediary’s relationships with both customers and counterparties and recognising the need to apply common sense and caution when assessing applications against the risk of mortgage fraud.
Robinson made the point that the FSA is not imposing an additional regulatory burden on regulated firms, but “simply asking firms to ensure that they do what they are already expected to do”. The regulator will lack sympathy for any firms that do not adhere to these principles.
On top of a firm’s responsibilities, what additional steps has the regulator taken to counter mortgage fraud? Last year, the FSA rolled out a programme of anti-mortgage fraud initiatives. These included:
Targeted supervisory visits – during the second half of 2008, the FSA visited a sample of 200 mortgage intermediaries with a particular focus on anti-mortgage fraud systems and controls.
Increased intelligence from lenders – the information from lenders (IFL) project was launched in 2006 and has led to over 300 reports received from lending institutions regarding mortgage intermediaries that they suspect are involved in mortgage fraud. Such reports have allowed the regulator to impose prohibitions and facilitate the passage of essential intelligence to other law enforcement agencies. The FSA is currently heavily championing the IFL project and wishes to see more lenders participating in the project.
Enhanced FSA intelligence – the development of an FSA mortgage fraud database has allowed the FSA to identify patterns in mortgage fraud and make better use of resources to target financial crime.
Engagement with other law enforcement partners – through Memorandums of Understanding with other regulators and law enforcement agencies for example the Solicitors Regulatory Authority and the City of London Police (the lead police force for fraud), key intelligence can be collated and shared. The FSA is also working with the National Fraud Strategic Authority (NFSA) to co-ordinate strategies to tackle mortgage fraud.
The NFSA’s strategy on mortgage fraud identified the following strategic priorities, which are applicable to the whole sector concerned with property transactions:
Removing the fraud risks in different mortgage products and processes
Enhanced preventative safeguards and controls within firms at the right levels to make the identification of mortgage fraud much easier to spot it and stop it
Promoting professional integrity across the sector
Increasing the risk to mortgage fraudsters that they will be detected and face prosecution.
Market led solutions – the FSA has always held the view that the industry is much better placed to police itself. This is not necessarily suggesting a return to self-regulation but simply identifying that industry practitioners can more easily identify suspicious activity in their contemporaries and employees than the regulator who is reliant on being fed intelligence.
Examples of the property industry policing itself can be found in the recent launch of PFAST (Property Forum Acting For Safe Transactions). An initiative led by the Metropolitan Police’s Operation Sterling Unit, it has seen major stakeholders in the property sector uniting to educate the industry about the pitfalls of property fraud and to strengthen the industry-wide anti-fraud measures.
Anti-fraud systems and controls
The FSA does not expect every mortgage intermediary to become a crime fighting arm of the FSA, but it does expect regulated firms to make mortgage fraud difficult for the fraudster and should the firm identify fraud to provide accurate intelligence to the FSA.
To meet these expectations firms may employ different systems and controls to tackle the mortgage fraud risks specific to their business model, but there are common areas which firms may wish to consider:
Education – it is important that all staff understand, can identify and know how to correctly report mortgage fraud. Comparisons can be drawn with anti-money laundering training. Training should be regular and relevant. Like the professional money launderer, to the mortgage fraudster fraud is a full time job, he or she will adapt their methods to circumvent new anti-fraud procedures and develop new methodologies. Staff can only keep abreast of these techniques through training and briefings.
Due diligence -the opportunistic fraudster may be deterred by robust due diligence of their identity and the nature of the transaction. Putting aside the British reserve of not asking questions may pay dividends in identifying a potentially fraudulent transaction.
Internal fraud – as illustrated by FSA enforcement action against individuals there are some mortgage intermediaries who are themselves prepared to sign off and submit to lenders’ mortgage applications containing false details regarding the applicant’s income and identity. Firms should have sufficient procedures in place to identify and investigate such internal frauds and refer these to the FSA and other law enforcement agencies.
In the FSA’s Financial Risk Outlook 2009, one of the key messages from the FSA to retail intermediaries, which include mortgage brokers, is that in tightening economic conditions firms “should resist the temptation to reduce expenditure on compliance given that pressure on income and profitability could tempt advisers to treat customers unfairly or act fraudulently. Firms with appointed representatives should ensure that they continue to have compliance resources in place that reflect the risks inherent in their business”.
Reporting – firms should have sufficient reporting lines to enable internal reporting suspicions to the correct person and onward reporting to the FSA and if appropriate the Serious Organised Crime Agency.
Presentation of compliance monitoring systems and controls – while the FSA has completed its mortgage fraud focused visits, regulated firms cannot rule out the possibility of further scrutiny by the FSA of anti-mortgage systems. Firms would be well advised to ensure that their systems are maintained and managed.
Meeting any regulator’s expectations is made much easier when the regulated community believe in the core objective, stamping out mortgage fraud. The FSA has made some notable inroads into combating mortgage fraud, the next steps rely on the mortgage intermediary sector. n
Richard Burger is a lawyer in leading city law firm Reynolds Porter Chamberlain LLP. A former FSA enforcement lawyer, since returning to private practice, he specialises in financial regulation and compliance.
