Crime fighter

In 2005 fraud will be one of the FSA's top priorities. Armed with its new policy on tackling fraud, the regulator is looking for "collective effort" from the insurance industry in its fight against fraud.

Over the coming months, the FSA will be paying close attention to brokers' and insurers' arrangements for managing fraud risk. It will also be looking for greater sharing of information between organisations and for the ABI and Biba to lead the way in fraud management.

Philip Robinson, financial crime sector leader at the FSA, is the man spearheading the regulator's drive to get the industry to "work harder" at combating fraud.

He recognises that fraud is not a new issue for the insurance industry.

His argument is that the industry has failed to take a sufficiently "strategic" view of it.

"Evidence shows that sometimes firms see fraud as a cost of doing business," he points out. "I don't think all firms are doing as much as they could do and I think they are often doing it reactively rather than proactively."

He points to research carried out by the FSA that found that 71% of small and medium sized firms had no earmarked budget for tackling fraud. Yet for those that spent money on controlling fraud risks the returns were significant: every £1 spent yielded £3.80 in savings.

Of these results he comments: "There seems to be a disconnection between the kind of business case that's being generated and the actual allocated funds for fraud prevention. Have firms decided that they shouldn't be spending money on fraud prevention, or has it just happened by default?

"The evidence from the industry itself seems to indicate to us that there is not necessarily enough strategic engagement. The business case seems to be there to reinforce that, but the spending is not happening."

So how can this be achieved? According to Robinson, better information is the key to developing good practice.

"The larger institutions, be they banks or insurers, may be quite on top of fraud risks but many of the smaller institutions are not. Firms aren't addressing the issue strategically. If you look at firms' strategies, they generally don't have a section addressing the fraud, or the financial crime risk, separately. It often gets wrapped up in operational risk."

It is necessary, he says, to ensure that senior management is getting the information necessary to make decisions and develop good practice.

"Are senior management, for example, getting a clear understanding of how they're achieving (in terms of fraud risk management)? Do they have some targets for financial crime mitigation? Are they getting reports on it? Do they know what's being achieved, or is it simply something that's dealt with down below as part of management of wastage? That's really the question I'm asking."

And brokers should not just think that fraud and financial crime is only something for insurers to be concerned about.

"I would expect brokers, just as much as insurers or underwriters, to have an understanding of the financial crime risk their firms present," says Robinson. "The broker is often the one that's interfacing with the customers. If you are looking at fraud reduction, it's a question of understanding who it is you're dealing with: who is the customer? Are they doing things that suggest a greater risk that should be investigated?

"Brokers will have to consider their role, because if they're the people who are handling information flows to insurers, they are an important channel for knowing who the customer is and knowing what their business is and knowing whether there are any risk patterns."

What the FSA is also looking for is greater levels of information sharing within the insurance industry. He argues that in some sectors of the financial services industry there are greater levels of cooperation and that this deters criminals. As a result they target areas that demonstrate a less organised approach.

"If there's not adequate information sharing so that everyone has got a reasonable defence, there will be costs to firms that are less well defended."

He recognises that the insurance industry is already making efforts to share information, but says that more can be done. Trade bodies, he says, have a key role to play in building up a better picture of the fraudsters' activities.

"What I'm going to be interested in with ABI and Biba is how they're working together," he says. "What are the risks that are presented from that economic relationship between the brokers and the insurers? And where's the best place for those risks to be mitigated? It might be that the risks are better mitigated by the insurer than by the broker."

In order to monitor and control the financial crime risk faced by firms, the FSA is not using a separate set of detailed rules. Instead it will use the systems and controls rules already in place. "Having good systems and controls to control is something that firms are required to do anyway.

We're just simply saying: 'Think about the financial crime and consequences of that'."

Identifying risk

The FSA's supervisors will be assessing the way firms manage fraud risk as part of the ordinary supervisory process. "When the supervisors are carrying out their risk assessments, they will do so in a way that makes sure it addresses the Financial Crime Objective," he says.

He admits the FSA's supervisors have not always had a clear understanding of financial crime risks, but that is set to change. "I need to equip the supervisors to ask the right questions where there is risk, so the first thing we need to do is to become better ourselves at identifying where the risk areas are in financial crime and particularly in fraud and dishonesty.

"Typically, supervisors are worried about a firm failing and not having enough capital. But sometimes when you're looking at a firm that's been involved in financial crime, you'll see a firm that's unexpectedly successful, rather than one that's about to fail.

"So you just need to change your mind and think about it in the right way, and I think that's true of firms as well. There's a fine line between innovation and criminality," he concludes.