Fraud Isn’t Going Away – and Neither is the Need for Training


Reports coming out over the weekend suggest that between April and August this year, over £9 million has been stolen from pension policyholders in what is known as pension liberation fraud.

Figures released by City of London Police also show that this figure has doubled when compared to the same period last year.

To a certain extent, this may not come as a surprise to many of you. After all, with the introduction of the new pension freedoms which took effect from April, the potential for fraud was always going to be much greater than it had been before, because now, people can take out all of their pension fund as cash, if they are 55 or over.

This fact hasn’t been lost on the regulator either. When setting the rules for pre-retirement disclosures earlier in the year, the FCA stated that one of the risks factors firms must communicate is the risk of pension–related scams. The risk is still high on the FCA’s agenda, as it’s been mentioned again in its latest consultation on pension reforms, as one of the key risks it’s monitoring.

The part we have to play

It would be easy to conclude that the financial services industry has failed in its role to prevent an increase in the level of reported fraud. But the picture isn’t that clear.

Firstly, the rules around what firms can do to prevent pension liberation have never been entirely conclusive. Firms are put in a difficult position if the scheme in question appears to be legitimate and has the requisite approvals, including registration with HMRC.  Secondly, however strong firms’ controls are in order to prevent fraud happening to their customers, these are only as good as the person who is implementing them. Even the strongest of controls can be bypassed if the fraudster is clever enough.

The other reason is that, if the customer takes their pension fund as cash under the new rules, and then invests it in what turns out to be a fraudulent investment, there’s only so much a firm can do to warn their customer of the consequences. After all, once the money has been paid to the customer, the firm has no control over what happens to it next. Whilst the FCA is doing what it can with its ScamSmart initiative, continuous notifications of unregistered firms and mandated risk warnings for firms to deliver to their customers, none of these at the moment seem to be enough to stop the rising tide of fraud.

But this doesn’t mean that firms can sit back and say that this is someone else’s problem, once they’ve delivered their risk warnings. Sitting in its Threshold Conditions is the requirement that all FCA-regulated firms must not let themselves be used for the purpose of furthering financial crime (or words to that effect). When it comes to fraud, this means not just the fundamental stuff like carrying out risk assessments, setting risk appetites and dishing out warnings. In addition, the firm and all staff must understand what the warning signs are to look out for when being presented with a situation that could potentially be leading to fraud.

Nothing new

Of course, none of this is “new news”, as these fundamental requirements have been in place for a long time now. But pension liberation as a specific concept, is something that has been plaguing firms for the last few years in particular. The good news, though, is that firms appear to be getting more confident in saying “no” to what appear to be potentially fraudulent pension transfers, even if some of the technical boxes have been ticked. And where cases have resulted in complaints and have been referred to the Financial Ombudsman Service, firms have not always gone the loser and have not been told to just make the transfer anyway.

The solution

So, in the future, what can firms do to try and help bring these fraud figures down? Apart from the obvious point around putting in place robust controls, I have two questions:

  1. Firstly, how well have the control functions identified where pension frauds could materialise from? Especially taking the pension freedoms into account.
  2. Secondly, how well are the staff who deal with customer queries on a daily basis trained to pick up suspicious activity specifically relating to the new pension freedoms?

For the first question, what I mean is – has the firm identified and documented what it considers to be the means by which pension frauds can occur at the expense of its policyholders (and ultimately itself)? For example, are all the procedures still fit for purpose to deal with identity fraud, transfers of funds to overseas territories, withdrawals of funds with unusual or inconsistent patterns etc? And then, how do these sit against the firm’s risk appetite? If the risks are in excess of appetite, what’s to be done?

For the second question, how comfortable and competent are the staff taking phone calls and dealing with written requests, to be able to identify something that doesn’t quite add up? With fraud being as sophisticated as it is these days, sometimes a slight hunch about a situation not being quite right is all that’s needed for fraud to be stopped. And then, how confident are they about handling the situation without inadvertently tipping someone off?

Both of these situations, and the way in which pension fraud is developing, mean that knowledge and understanding of fraud prevention, through training, is more important than ever before. Luckily, the resources that are available, whether conferences, training courses, bespoke training or qualifications, can be easily sourced, and new developments delivered to your inbox.

 

Martyn Oughton    

By Martyn Oughton a Professional Member of the International Compliance Association (ICA).  Martyn now writes a regular blog for Industry Events Online focusing on the importance of training in all aspects of compliance. Read Martyn's other publications at Martyn's Writers' Residence website.

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