Third party oversight

Lenders have less control over third party fraud so they should be taking on the responsibility of vetting their suppliers, suggests Mark Blackwell, managing director of xit2

The Mortgage Market Review consultation has come to end. So what good has come out of it? From a fraud perspective, not as much as we’d hoped.

The MMR proposed all mortgage advisers and those who arrange non-advised sales will be individually accountable to the Financial Services Authority, but, disappointingly, it didn’t explicitly address the problem of third party oversight.

The FSA’s Thematic Review, published in June last year, said, in no uncertain terms, that lenders needed to improve their third party oversight if fraud was to be tackled with any success.

It also said lenders needed better information about their third party suppliers, and suggested the lending industry should be sharing information about third parties and anti-fraud provisions.

Supplier-led fraud

According to CIFAS, the UK's fraud prevention service, 34 of every 10,000 mortgage applications were fraudulent in 2011. Much of the focus has fallen on first party fraud, but supplier-led fraud is more dangerous to a lender.

As things stand, lots of third party frauds go unnoticed, which allows fraudulent rings of suppliers to operate under the radar. Lenders should be getting better data about their third parties so the processes going on in their supplier networks are more transparent.

To do this, they need to use trusted technology providers who can help them with their third part oversight.

Better oversight of third parties becomes particularly important in a suppressed market place, where the temptation for suppliers to resort to fraud is ratcheted up several notches.

Transactions are only at half the levels they were in 2007, meaning there is less work out there. Times are tough. It doesn’t surprise me that every time I check my inbox for the latest industry news, I read about the latest high profile fraud case.

Vetting the suppliers

The crux of the fraud issue is this: third party oversight has to improve. If lenders really want to get tough on fraud, they need to take responsibility for managing and vetting the suppliers they deal with.

Detecting supplier-led fraud is something lenders need to take responsibility for themselves, rather than relying on panel managers. The panel manager can’t do it all on their own.

Anti-fraud technology provided by technology suppliers can complement their work by providing lenders with an independent source of management information. Technology providers relieve the panel manager of distribution work, which enables them to do more manual checks on service quality.

Flexible technology such as the Valuations Exchange (VEX) takes the onus off the panel manager and puts lenders in a better position to manage their third-party networks, and provide risk directors with the information they need to manage their third parties more effectively. Fraud is, after all, a risk issue as much as an operational issue.

The best anti-fraud tools give risk directors access to reams of third party data. These tools also connect the lender directly with the panel manager, which gives them access to a steady flow of ‘real time’ data. It improves their business analytics and increases the likelihood that fraudulent trends will be spotted.

More data about third party suppliers - delivered quickly and in a single easy-to-read format - also allows the lender to manage provisioning levels more effectively. Not only does this make business processes more efficient, it also helps the lender tackle fraud. It allows the lender to distribute cases randomly, rather than relying on one panel manager and a single pool of surveyors.

Conveyancing panels

Solicitors have grabbed the fraud headlines recently, with plenty of noise around lenders using small, handpicked panels of conveyancers. Lenders clearly feel panel validation isn’t one of the core competencies.

They don’t trust themselves to be able to weed out fraudulent solicitors from larger panels. Lenders need better information about their conveyancer panels, and a more analytical approach to selecting them.

Anti-fraud tools, like our lender to conveyancer exchange, vet suppliers and provide lenders with a constant stream of information about their panels. This decreases the likelihood of shady practitioners getting onto their panels, and increases the chances that fraudulent activity is detected.

If used by the whole industry, it can create one national panel of trusted conveyancers that the whole lending community can use.

Lenders need to know more about their third parties. The delay to reform of the FSA’s approved persons scheme (until 2013 at the earliest) is an unwelcome setback in this regard.

Lenders need to use quality anti-fraud technology to help them connect more closely with their third parties. It will help them meet FSA stipulations for tighter control of supplier networks.

Using a trusted technology partner will give lenders better data about their networks, making the processes more transparent and helping lenders reduce supplier-led fraud.