Risk management – time to fight fraud from the inside?
John Cupis, managing director of PMS, believes the relationship between lenders and intermediaries should be one of working together in order to mitigate risk and combat fraud
We are living in increasingly volatile times – the Eurozone crisis, lack of business investment confidence and spiralling funding costs are causing many people to become more concerned about the markets in which they have invested. As a result, funding is in tight supply, causing a ripple effect of expensive lending and reduced funds on offer.
A combination of issues has resulted in a weaker mortgage market, which unfortunately doesn’t show much sign of improvement this year. There is a glimmer of light at the end of the tunnel with the government’s Funding for Lending scheme, but I see the impact of this more likely to support next year’s market rather than in the nearer term.
Nobody likes uncertainty and this is obviously not the ideal recipe for a healthy mortgage market, but at least we have seen some stabilisation of mortgage volumes and we should look forward with some hope that government actions at home and in Europe will start to pull us out of the low levels of activity which we face at the moment.
Alongside the economic factors, our industry is also dealing with the impact of intensive and intrusive regulation. This is expected to move to another level with the advent of the Financial Conduct Authority (FCA). As a result, the whole approach to the way that lenders and distributors manage risk is changing.
The risk and impact of financial crime is just one of the issues under the spotlight that is driving industry change. It is clear that lenders want to be reassured about the robustness of the approach being adopted by distributors and individual adviser firms, to minimise the risk of fraudulent activity.
To achieve this, lenders and distributors need to work together in order to deliver quality solutions for consumers.
Among the provider requirements laid out by the regulator is the importance of responsibility when it comes to due diligence of distributors and brokers with whom they have a relationship. This includes thorough vetting of any new entrants, fitness and proprietary checks and a full background check.
Although the FSA requirements ensure that all firms have a solid groundwork of risk management, larger adviser networks, such as Sesame, will often go the extra mile to make sure that they not only comply with the basic requirements but apply these robust checks across the board so that risk is managed all the way down.
Being part of a larger group such as Sesame Bankhall Group (SBG) gives us significant regulatory expertise and insight. Given the ever tougher regulatory environment, we continually strive to improve our processes and guidance.
One of the steps taken with our regulated network is the increased supervision of all our members in order to prevent financial crime from the outset. In our experience, it has been beneficial to grade our advisers according to the risk that they pose by examining issues such as their business mix.
Our financial crime controls are embedded throughout the network, and at the current time, the majority of the suspicion reports received by our financial crime team are related to mortgage fraud.
Whilst this is a concern as it reflects the prevalence of this type of fraud, we also consider it to be a positive reflection of our advisers’ understanding of illegal practices, their ability to identify fraud and their knowledge of when and how to make a report. In order to stop the spread of financial crime, it is essential that this understanding is maintained with regular training schemes and that any shortfalls are addressed immediately.
It is evident from the ‘Thematic review of lenders’, published by the Financial Services Authority in 2011, that lenders aren’t immune from this increasingly intrusive regulatory behaviour either and are being tasked with tackling the risks that mortgage fraud poses to their business too.
Mortgage Market Review
As a result of the Mortgage Market Review (MMR), lenders will be ultimately responsible for affordability, but there will still be a big onus on the broker to provide lenders with the information they need in order for the lenders to carry out their duties.
MMR is all about regulating advice to ensure that the end consumer receives protection. As a result, in order to avoid regulatory action, lenders must carry out their own due diligence and, on top of this, be able to evidence that both their customers and the individuals with whom they do business are fit and proper.
We have already touched on the relationship between lenders and larger networks, however lenders’ relationships with directly authorised (DA) adviser firms - particularly the smaller adviser firms - is posing another challenge.
Managing the DA market also falls under the ‘know your customer’ rules and we have seen some varying approaches being adopted by lenders in this area, such as who undertakes the due diligence.
Improving the quality of business submitted – linked to the payment of procuration fees – is going to be another big issue going forward and we are now seeing some lenders move in this direction.
These are sensitive areas and the need for an open and constructive dialogue between lenders and intermediaries will be crucial. A disjointed approach ultimately costs everyone more time and money, and leads to a worse outcome and experience for the end-customer.
Working together in the pursuit of solutions
With regulation becoming more intrusive and extensive, a more co-ordinated approach would be useful for all those in the mortgage industry in the battle to tackle risk. For example, lenders request information in different formats.
As such, a recognition of minimum standards would save intermediaries both time and money – a saving that could be passed down along the chain. A better structured and more transparent interaction between lenders and distributors is vital to ensure equal conduct and to achieve the right outcome for all those involved.
Collaboration across the industry in order to share information and best practice would also help ensure that no fraudulent activity slips through the net. There needs to be better engagement between distributors and lenders. In our opinion, the best lenders on these issues are the ones that really engage in an open dialogue, for example, providing examples and sharing their thinking on emerging trends. This relationship is vital in order to help manage risk from the outset.
The current housing market means that lenders are in a strong position when it comes to their relationship with individual brokers and are using this to re-evaluate their view of brokers who are not meeting their standards. In some cases lenders are right to remove brokers from a panel and as part of their increasingly transparent relationship with providers, will share their information and reasons for this serious action.
However, striking advisers off lender panels is a serious issue that could jeopardise their livelihood and should not be taken lightly. Whilst in no way diminishing the need for high industry standards, considering the weight of such a decision, we do need to ensure that there is a right of appeal.
It is important for lenders to investigate both sides of the story before taking action to ensure that this action does not lead to unwarranted and unjust dismissal. Again, further regulation and better organisation needs to be embedded across all those involved in the mortgage market to avoid any unwanted negative results of this more intense supervision.
Another theme which appears to be echoed across the lenders with whom we engage is that the emerging fraud area is not with brokers themselves but through branches. Couple this with the disjointed information provided by the FSA’s ongoing thematic reviews of lenders on one hand, and the implementation of the ever-changing MMR on the other, and we clearly need to ensure that we avoid at all costs a more complicated market where fraud can potentially thrive amid the confusion.
One lender recently told me that of the 1500 applications that they receive each week, 12 to 15 per cent are fraudulent – mostly in the buy-to-let market.
Although consumers who go through advisers rather than straight to branches can be assured of greater protection and less exposure to risk, as well as a well-rounded picture of the mortgage market, they are still facing a veritable minefield when it comes to applying for a mortgage.
With interest only, fast track and new quality measures, to name but a few, all being withdrawn or introduced at different speeds and by different lenders, I pity the poor consumer this year trying to get through the process, and that’s before they have even got close to buying a house.
We all need to work together to get the best outcomes for consumers. The majority of intermediaries play by the rules and do an excellent job, but we are paying an increasingly heavy price for the small minority who don’t comply with regulatory standards.
One of the main reasons why the UK mortgage market works is because consumers receive great advice and service from a strong, vibrant and flexible intermediary profession that can respond quickly to changes. However, in order to maintain a healthy mortgage market, we need to wipe out fraudulent activity and ensure that standards are kept at this high level.
The approved person’s regime, which was a cornerstone of the MMR, has been postponed to many years away to come into effect – which poses a risk in itself. While the FCA has pledged to introduce all those who advise on, or who sell mortgage contracts onto the regime as soon as possible, the fact that so many people are currently practising unassessed is a large concern.
If the regulator is unable to pull together a structured regime and database, perhaps now is the time for the industry to come together to develop its own registration database and to crack down on fraud from the inside.
The newly invigorated Association of Mortgage Intermediaries is one of the great opportunities we have to coordinate our voice. As a member of the board, I will be working hard to ensure that we get heard amongst both regulators and lenders to preserve our industry, which ultimately benefits consumers in these challenging times.