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Protecting against mortgage fraud


Last October saw the publication of a Final Notice issued by the Financial Services Authority which found Mr Wagner guilty of: I) being reckless by allowing mortgage applications containing false and misleading information to be submitted to a lender; II) failure to supervise his employees (they had been submitting false information to lenders); and III) insufficient controls and systems in place, putting his firm at risk of being used for financial crime. The tribunal found that Mr Wagner’s conduct, whilst not deliberate, did breach Statement of Principle 1 (integrity) and The Fit and Proper Test of Approved Persons: FIT 2.1 (honesty, integrity and reputation). Therefore as an approved person, the FSA prohibited Mr Wagner from performing any function in relation to a regulated activity carried on by an authorised or exempt person, or any exempt professional firm. In fact since 2006, of approximately


1200 reports to the FSA, over 100 have resulted in prohibition orders. When the Financial Conduct Authority comes into play later this year it will want to change the public perception of the financial services industry and create a sound, stable and resilient market. A thematic review of intermediaries may well be on the FCA’s agenda to crack down on mortgage fraud.


WHAT IS FRAUD?


Fraud encompasses several causes of action involving deliberate (as opposed to negligent) actions which usually involve dishonest conduct. In this context, we are referring to obtaining money by deception.


For mortgage fraud to take place,


there must be the following: • A representation by the borrower, this could be made by way of silence upon which an inference is drawn. • The representation was false and/or


by David Bailey, head of the Finance disputes team and Angela Flight assistant solicitor at SGH Martineau LLP


the borrower was reckless as to its truth when giving it.


• The representation was intended to induce the lender into agreeing to lend.


• The lender relied on the information provided by the borrower.


• The lender has suffered a loss.


If a mortgage broker fails to detect fraud, they are likely to be caught up in legal action and it is probable that the FSA will bring enforcement action against the broker (if they are an authorised person) under Section 64 of the Financial Services and Markets Act (“FSMA”), Statement of Principles, namely, Principle 1 and 2; breach of integrity and failure to exercise due skill, care and diligence.


The company in which the broker is employed could also be prosecuted under the Principles for Business, Principle 1, failing to conduct its business with integrity, Principle 2, failing to conduct its business with due skill, care and diligence, Principle 3, failing to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems and Principle 5, failing to observe proper standards of market conduct. However, each case is determined on its own facts.


PROTECTION To combat fraud, the first rule is to make sure you have up to date and sufficient “Know your Client” documentation. You


should ensure that original documents were used to verify the identity of your client. Additional procedures should be put in place where you do not meet the borrower face to face. Such steps can be taken with ease and very little expense, for example a simple google search could produce information about your new client and provide you with links to social media pages such as Linkedin and Facebook. Where possible obtain original documentation. For example never verify a photocopy of a passport as the original. When identifying the correct mortgage for your client you need to review their income and expenditure. You should ensure that you have obtained sufficient evidence to support your client’s assertions and close scrutiny of their bank statements should be undertaken to identify all of their assets and liabilities. To ensure your firm is not used by fraudsters, all staff whether permanent, temporary, full or part time should be given training with records kept and updated regularly. Employees should be properly supervised and they should be aware of who they report to. Beware of changing trends – if there is a sudden increase in business from a new introducer, ask yourself (and them) why. If you suspect that the new introducer is not being entirely honest with you, you should investigate the matter further or refuse any more business from them. Finally, if it transpires that information comes to light once you have submitted an application (or a series of applications) and/or documents, this information should always be passed on to lenders.


The quality of your business is important and through good compliance checks, quality assurance monitoring and working with lender’s financial crime teams firms can show themselves to be at the forefront of the fight against fraud.


MORTGAGE INTRODUCER JANUARY 2013 MORTGAGE INTRODUCER MARCH 2012 37


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