A significant increase in prohibition orders and the introduction of substantial fines mark a significant step-up in the FSA’s campaign against mortgage fraud in 2008. Improvement in the sourcing and handling of intelligence have contributed to this increase in enforcement actions and should continue to do so as the FSA develops new partnerships and processes.
Phillip Robinson, director of the FSA’s Financial Crime & Intelligence Division, suggested in his keynote speech to the Council of Mortgage Lenders (CML) earlier this year that, “you could say market conditions have already done a lot to tackle mortgage fraud”. This may be taking the FSA’s recently maligned reliance on market-led solutions too far. The fraud has already happened. Market conditions are are merely revealing the open secrets.
Robinson’s comment was only a prelude to a staunch reaffirmation of the FSA’s commitment to focus on mortgage fraud. He added that, “in the current climate, a high-quality loan book – the right loans, made to the right people – is more important than ever”. The safety net provided to lenders by a rapidly growing market, protecting them from possible losses on fraudulently obtained loans, has now been taken away. Bringing this into sharper focus, “[the FSA’s] 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?”.
Given that the FSA has banned only five individuals since October 2004 when its regulation of mortgages began, this year’s figure of 20 and rising represents a marked shift in the FSA’s campaign. The recurring theme in recent enforcement actions resulting in bans has been a knowing and dishonest involvement in mortgage fraud and, more generally, behaviour which has shown them to lack the honesty and integrity necessary to be considered a fit and proper person to carry on regulated activities.
Clear evidence of fraud by the broker has revealed a new willingness by the FSA to levy substantial fines. However, individuals have also been banned in the absence of allegations of dishonesty where they have failed to take steps to ensure that their business is not used for financial crime. The FSA's campaign is focused not only on rooting out individuals who intentionally perpetrate frauds, but also on ensuring that firms maintain suitably robust due diligence procedures.
Ms Nasir and Mr Fawole - fulfilment of the FSA’s promise to increase fines
In July, the FSA banned Ms Nasir and fined her £129,000 for numerous fraudulent mortgage transactions. In only five years, Ms Nasir submitted seven mortgage applications in her own name containing false information about her employment and earnings. In addition, she submitted mortgage applications for clients in which she had entered her own bank details and failed to disclose to the FSA details of a court order entered against her.
Concluding that Ms Nasir posed a serious risk to lenders, to consumers and to confidence in the financial system, the FSA made a prohibition order against Ms Nasir preventing her from performing any function in relation to any regulated activity and, in addition, imposed a financial penalty of £129,000. It was considered that Ms Nasir’s profit should be disgorged and this accounted for £29,000 of the fine. The remaining £100,000 reflected the “need to punish [Ms Nasir] as well as deter others from engaging in this type of activity”.
In August, the FSA continued its hard line by banning Mr Fawole and fining him £100,000 for knowing involvement in mortgage fraud. In June 2006 Mr Fawole made a mortgage application on behalf of his firm in which he had intentionally entered grossly inflated net profit figures for the business. In addition, Mr Fawole submitted a mortgage application on behalf of an employee whose earnings he stated to be £70,000 despite the fact that tax records for that year showed the employee earned just £5,248.
Mr Keay - failure to ensure business not used as an instrument of fraud In April, the FSA prohibited Mr Keay from continuing to perform any function in relation to regulated activities after concluding that he was not a fit and proper person to perform these functions. Specifically highlighted were Mr Keay’s general lack of competence and the serious compliance failures within his business. Mr Keay failed to check the authenticity of key documents relied upon in applications, such as payslips, and where no such supporting evidence was produced he failed to obtain any verification of clients’ incomes. He also made it standard practice to certify copy documents as genuine without having examined the originals. Further, Mr Keay resubmitted applications which had been rejected by lenders without fully investigating the reasons for these rejections. In interview, he stated that he had considered it to be the sole responsibility of the lender to check the authenticity of applications submitted. Despite being given almost a year to remedy these failings the FSA concluded that Mr Keay had “failed to put in place adequate systems and controls to prevent [his] business being used as a conduit for financial crime” and had no hesitation in banning him.
Strategy going forward - progress through information sharing
The FSA claims its recent successes in relation to mortgage fraud are largely attributable to better communication between interested parties. Since launching its Information From Lenders (IFL) programme in collaboration with the CML in 2006, over 300 referrals have been received from more than 35 lenders in respect of brokers regarded as suspicious. These referrals have prompted enforcement actions against dozens of brokers and new cases continue to arise. The FSAnow hopes that the scheme will expand with participation by the remaining 115 lenders operating in the UK. Robinson suggested in a recent open letter to the CML that, “in future, engagement with the IFL project is likely to be seen as one yardstick by which to judge a lender’s ‘state of readiness’ to confront mortgage fraud”.
The FSA also recognises that any programme to combat mortgage fraud needs to be considered as part of a broader strategy in relation to financial crime. Accordingly, the FSA will continue to work with law enforcement agencies and, in particular, the City of London Police, the national leaders for fraud work. In this vein, an investigation into Gordon Benville, an IFA, involving close collaboration between the FSAand Kent Police’s Serious Economic Crime Unit eventually led to him being jailed for three and a half years in July for a string of fraud offences and obtaining money by deception. Given the circumstances in which some brokers have been banned this year, it would not be surprising to see criminal sanctions following on from more FSA investigations in the near future. Further, there will be close engagement by the FSAwith the fledgling National Fraud Strategic Authority. It is also recognised that more effective use of information gathered from IFL and other sources is key. To this end, the FSAis in the process of developing a mortgage fraud database.
It remains to be seen whether the FSA’s efforts, combined with the effects of a falling market, will be sufficient to root out unscrupulous brokers and prompt others to make the improvements in procedures necessary to ensure the authenticity of mortgage applications.