Working together to tackle mortgage fraud
Keynote speech by Philip Robinson, Financial Crime & Intelligence Division Director
CML Mortgage Fraud Seminar
13 February 2008
Thank you for inviting me to speak today, at this event. The FSA has been tackling mortgage fraud as a growing potential risk for a year or more. But in the past few months I have come to sense that there's a new meeting of minds on the need to tackle mortgage fraud together, and I hope today's exchanges will mark a big step forward in strengthening our collective efforts.
Of course, it's also a very difficult time. There's been a bewilderingly rapid transition from deluge to drought in the credit markets, and we're all seeing the knock-on effects.
In effect, you could say market conditions have already done a lot to tackle mortgage fraud. You may well ask, therefore, whether this is really the right time to be tackling mortgage fraud head-on. Why did we decide to mention it as a key risk in this year's Financial Risk Outlook, which we published last month?
First, the FSA has four statutory objectives, and the one which most directly governs the work of my division, Financial Crime and Intelligence, demands that we keep both regulated persons and unauthorised businesses from being "used for a purpose connected with financial crime".
But we are also conscious of the need to be proportionate, and maintain market confidence. I want to go with the grain of the market. If a market-based solution is there, and it'll do the job, that's good enough.
And there are incentives to deal with mortgage fraud. In the current climate, a high-quality loan book – the right loans, made to the right people – is more important than ever, and has to be good for market confidence too. So catching the fraudsters, and keeping them out of the mortgage market, works directly for your bottom line and reduces financial crime.
But sometimes there's an externality that a market may not be able to cope with on its own, or that existing general rules – such as SYSC 3.2.6, which puts responsibility for risk assessment and mitigation squarely in the hands of senior management – don't entirely capture, then we need to act.
Evidence
In mortgage fraud, that's what we're finding. I think we all know there's evidence that mortgage fraud goes beyond what's been called "fraud for property" – people lying about their salaries to get the home they want, and sometimes being allowed or encouraged to do so by brokers – although that's bad enough.
The greater threat is of organised rings, using mortgage and property fraud to make significant profits. They can include brokers, solicitors, valuers and other professionals in the property market. And the police tell us that these frauds are also carried out by criminals who are involved in other criminal activities – such as drugs or people smuggling. 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 lenders, this threat is creating a "social harm" that isn't going to show up on the bottom line, but nevertheless is something we all need to bear in mind. There's a phrase from last year's Financial Risk Outlook which reads:
We expect firms to take into account the social harm of crime as well as the direct losses to themselves when assessing their 'appetite' for fraud and other financial crime risks.
This is still true – and it needn't be unduly burdensome. I want to highlight a joint initiative with the CML which has shown that you, too, are recognising how important this point is. In 2006, we asked lenders to tell us about brokers they were worried about. More than 30 lenders have engaged with this Information From Lenders Project since then. It's a very good beginning, and it's time that together we make it into something even better.
More of that later – but it's worth mentioning it now, because the 200-plus cases that you've brought to our attention over the past 18 months have informed our approach to this problem. The inclusion of mortgage fraud on our list of priority risks; strategic intelligence work to work out what we're up against – and, of course, a string of cases going through our Enforcement division. Not many of these have seen the light of day yet, but they will. Watch this space.
My team in Financial Crime and Intelligence is putting the intelligence from those 200 cases, and the new ones coming in every week, side by side with some research into repossessions and possible new-build fraud from elsewhere in the FSA. We're firming up and expanding our understanding, and that's informing the creation of a control strategy to guide our work, both internally and with our partners. We'll be looking to work with you – both lenders and intermediaries – to help us with that.
But right now suffice it to say that the problem looks bigger and more widespread than we, and I believe others, once thought.
Working together
Let us go back to the original question: why now?
We're at a crucial time – a time when, more than at any point in recent years, the incentives on fighting mortgage fraud are shifting.
We all recognise the tension between the cost of fraud, and the cost of fighting it. On mortgage fraud, it's probably no secret that as property prices have soared, that balance has – effectively – been favouring the fraudster. If a mortgage goes wrong, yet the sale on repossession covers the losses, it's hard to justify extensive enquiries. That isn't to minimise the work done by lenders' anti-fraud teams, but the market incentives were in some cases pointing in the wrong direction.
An obvious question we could all ask is whether the potential risk was properly assessed in the past. But right now, I want to look ahead to what happens next, because things are already different. From the research the FSA has carried out and highlighted in this year's FRO, our estimate for the potential losses on repossessions connected with new-build mortgage fraud are around £45,000 per property.
Leaving aside social harm, doesn't that sound like a bottom line incentive for renewed efforts?
It's worth appreciating the lead that trade associations are taking in this. I'm thinking for instance of the work the CML is doing to make sure that incentives on new-build properties don't skew valuations and thus run the risk of encouraging fraud.
But the good news is that it's not only lenders' incentives that are shifting. The growing interest and concern elsewhere can be harnessed to all our benefit. For instance, I'm sure many of those here took part, as we did, in the research the City of London Police has been undertaking for the past few months, which is due out within just a few weeks. We're continuing to collaborate with them to work out where our efforts, and theirs, are best targeted. And in fact a number of police forces across the country are showing more of an appetite for tackling mortgage fraud.
The incentives are set to shift further in the next few months, as the National Fraud Strategic Authority comes into being. I've been advocating the importance of a National Fraud Strategy for some years, so I've been one of the NFSA's most enthusiastic supporters ever since it was mooted in the Government's Fraud Review in 2006. You'll hear later today from Sandra Quinn, who's leading the NFSA Development Team – a secondee from the FSA, incidentally! She will show you how the NFSA plans to change the rules of the game on fraud, once it opens for business later this year.
This is a crucial part of the kind of market-based solution I talked about before: the NFSA's role, as the home of a national, co-ordinated strategy, will be to shift the incentives further by making it easier for everyone, from lender to law enforcement, to justify taking action against fraud. Just to drive home the message about timing: Sandra's team is making mortgage fraud a top priority, and she has enlisted the CML, BBA and a range of other bodies – including ourselves – to help them.
Financial crime outcomes
So what should we do – both we, at the FSA, and all our partners? And what do we want to achieve?
It's clear that mortgage fraud fits into the FSA's statutory objective on fighting financial crime. But I want to frame the detail in terms of six financial crime outcomes, which we use to guide our implementation of the objective. On mortgage fraud, they help demonstrate exactly where we're coming from and how we can best collaborate to deter fraudsters, disrupt their activities – and ideally, put some of them behind bars.
The first is at the core of the FSA's job – not only on financial crime, but in terms of its other objectives too, such as market confidence and protecting consumers. It's this:
- The FSA is satisfied that persons of questionable integrity do not manage, own or control firms operating in the UK Financial Sector.
This is our gatekeeper function. And I know that for many lenders, it's seen as crucial. How can one know, for instance, whether a broker is reliable? Obviously, the first line of defence is to make sure that they're authorised by the FSA, that they're on the Register. And I'm sure we would all agree that that's the start of due diligence, rather than the end of it.
But whatever else happens, we share a common goal here: keeping problem firms out of the market. To do that, we need information – intelligence.
And this is where the Information From Lenders project is proving so beneficial. I've mentioned that more than 30 lenders have brought 200–plus cases to our attention. A third of them have gone forward for Enforcement action. You're now seeing brokers being suspended or banned as the Enforcement cases feed through. And our people are working closely with police up and down the country. Because while in the longer term we all want to harden up our systems against this kind of fraud, in the short term I think we can all see the need to take known fraudsters out of the market, and prosecute them.
It's a great start. But it can be even better. The first step is to ask those lenders who haven't yet taken part: why not? I know concerns have been voiced about not getting feedback which can show value for money, and that's something we are committed to improving. I also know that some lenders who are taking part have concerns about allowing us to make full use of their evidence against the brokers they suspect. That can have a significant bearing on the success of our investigations. So I very much hope that all lenders will give us the freedom to act on that evidence in the future, so that more cases can reach the successful conclusion that we all want.
If there are other things getting in your way – tell us about them. The more participants, the stronger the intelligence – and the better the results. It would be great for every lender to sign up.
If we at the FSA are the only ones who know, though, we all may not get the maximum dividend. Certainly there are competition issues, reputation issues, legal issues, and a raft of other reasons why lenders haven't always felt able to keep one another informed when one of them takes a broker off its panel.
But I also know that the CML is working on how you can share information among yourselves more easily, and that is something we wholeheartedly support.
So sharing intelligence more widely is clearly the way forward, and there is some good news on that front. Just as we and you, and the CML, are working to strengthen the information we get on the firms we regulate, the CML is talking to other bodies – notably the Solicitors' Regulatory Authority and the Royal Institution of Chartered Surveyors – to get something similar off the ground.
And all of us are discussing how best to share that greater pool of intelligence, so as to collaborate more effectively in taking the criminals out of the market.
It's not just about sharing information, but sharing expertise. This is what's going to be happening when the National Fraud Reporting Centre comes online next year. But we don't need to wait that long. We at the FSA, and our colleagues at the City of London Police – the national experts when it comes to fraud investigations – are already working with the industry on a way of putting our intelligence people together, in one place, to build the best possible ongoing picture of mortgage fraud.
These initiatives hold up the promise of creating more targeted intelligence. And putting that in the right hands will mean we can focus our efforts where they will achieve the most.
The way lenders are playing their part in this joint effort exemplifies the second of the financial crime outcomes I talked about.
It reads:
- Firms in the UK financial sector act proportionately to prevent financial crime - fewer commit financial crime themselves and firms manage the risk of being used by others to do so with appropriate skill and care.
This is really no more than a restatement of your general systems and controls responsibilities, which put the job of assessing risk and responding to it in senior management's hands. In other words, it's what you do already.
I explained how this applies to fraud at the FSA's Financial Crime Conference early last year. I said:
"It is vital that firms apply rigorous fraud controls towards external partners as well as their own employees, to make a decisive step in the fight against fraud".
I think there is often a three-stage process at work in the relationship between regulators and firms.
First there's Denial: either that there's an issue; or that anything practical can be done about it; or even that it applies to me.
Then we tend to move onto Compliance, when understandably firms are after precise instructions, a list of concrete things to do and not to do, possibly driven by their desire to avoid enforcement action. And finally there's the ideal stage, Engagement: active, creative efforts by all the players to achieve the outcome of reducing fraud.
Even when firms are in the Engagement phase, there's the risk that disproportionate actions by the regulator or law enforcement can push them back into the apparent certainty of Compliance. We're keenly aware of that, and very much want an enforcement approach that aims to achieve credible and understandable deterrence – not one that penalises every failure, willy-nilly.
But effective Engagement can benefit us all. So I ask you today to make Engagement with the Information from Lenders project a priority. If we all play our part, we'll get what we all want: a future where the bad apples are dug out of the barrel, and good business gets the space to flourish.
Now, this is never going to be a flawless process. And that's recognised in another of the financial crime outcomes, the one which states:
- The international and UK financial crime policy frameworks are more risk-based and proportionate, and FSA delivers what is required of it within those frameworks.
The FSA has long made it clear that we're not operating a zero-failure regime. And that applies here as much as it applies anywhere else. After all, lenders are among the primary victims here.
So we want a situation where those who are complicit, or reckless in such a way as to encourage or enable fraudsters, should be scared of the consequences. And along the way, people – or firms – who make honest mistakes, or are caught out in good faith, can feel reassured that we appreciate their predicament .
The important thing is to learn from frauds, or near misses, and – we're back to information sharing again here – to spread the lessons.
Consumers
At this point you might well ask: what about customers? Don't they have any responsibilities too?
Of course they do. And that's covered by another of our financial outcomes, which is:
- Consumers are better equipped to protect themselves from financial crime.
Obviously, this descends directly from another of our statutory objectives. Honest consumers are better protected when they know how not to get caught out by fraudsters, and are helped to do so by the firms in whom they have to place their trust – and their money.
Equally, protecting consumers also means making sure that their own assessment of risk is accurate. So it's important to remind consumers that they can still have confidence in the mortgage market overall – to make sure people don't end up terrified that a crook lurks round every corner. Working together to push out the bad guys will help sustain people's faith in the integrity of the professionals they're doing business with.
But consumer protection also means protecting them from themselves – by showing them that if they perpetrate fraud they should fear the consequences.
Inflating incomes, lying about their circumstances – it might seem harmless, but if there's one thing we've all learnt about fraud in recent years, it's that the old cliché about fraud being a victimless crime is simply false.
When it comes to mortgage fraud, there's another important reason for getting this message across. It's all very well making the distinction between fraud for property – the opportunistic version – and fraud for profit carried out by organised criminals. But from a lender's perspective, it can be very hard to spot the difference? The number of one-off cases is like a forest, and it's all too easy for the organised rings to hide among the trees.
We don't know, incidentally, how many perpetrators of fraud for property are among the people whose mortgages – as we also warned in this year's FRO – are at risk from high loan multiples and high loan-to-value rates. It may well be that there's a hard lesson ahead for some of them.
Even so, I want to repeat here: our aim, wherever possible, is to work with the grain of the market.
That is reflected in the fifth of the outcomes we seek:
- The FSA’s Financial Crime risk mitigation is increasingly effective, economic and efficient.
Right now, we're working with our colleagues from inside and outside the FSA to craft our programme of action. A big part of that, as I mentioned earlier, is ensuring we know how big the problem really is. To make sure we protect market confidence, our response needs to be proportionate to the risks we identify. So our work will be informed by our understanding, and we want your help, and your input, to make sure that we deliver the appropriate investment – and get the best return from it.
Getting a critical mass of lenders feeding us information is part of this, too. In fact, it's in your interest too – because once the majority are on board, it might make sense for us to target our regulatory attention at the outliers, rather than those who are Engaged.
I said there were six financial crime outcomes we were working towards. The last one is this:
- The FSA co-operates effectively with the right partners to achieve these outcomes.
This is the linchpin of what we do. A multi-faceted problem requires a multi-faceted response. Our objective, remember, is that firms shouldn't be used for the purposes of financial crime. If we can help others so that their work achieves this aim, then so much the better.
That's why the NFSA is going to be so important – and why it's good that Sandra is here this afternoon to sign you up. It's why building and maintaining the relationships that will expand intelligence sharing is crucial.
It's why the City of London Police research is such good news, since it represents a renewed focus on mortgage fraud within the police at the Chief Officer level. We all want to see people arrested, charged and convicted, as a deterrent to others, and this is another area where the NFSA's co-ordinating role is going to be vital.
It's why the communication and collaboration between ourselves at the FSA and our partners – through sharing intelligence and sharing expertise – is high on our agenda.
And, of course, it's why I'm here, talking with you today, because the really indispensable partnership is the one between the FSA and the firms. The better we work together, the better we understand one another and respect one another's obligations, and the more we aim for a relationship based on Engagement, the more we can achieve.
Conclusion
In the end, it all comes back to incentives. We all have an opportunity to grasp the nettle on mortgage fraud, to make a decisive difference which can make the mortgage and housing markets work better for all of us. And not only for now, but for the long term.
But criminals have incentives too. And although the current market conditions are certainly making life more challenging for them, thinner fees and tighter margins can unfortunately present a renewed temptation for people to cross the line into criminal behaviour.
Put differently, though, that is just one more reason for us all to come together and present a united front in tackling mortgage fraud. Our incentives are there. So the time is right for us, all of us, to respond – in as wholehearted, and creative a way as possible.