Fraud and financial services: where to from here?
How widespread is fraud right now?
Based on the recent figures, fraud is on the rise in a big way. UK Finance has reported that in the first half of 2021, impersonation scams more than doubled, resulting in the theft of over £129 million. During this same period, reports of text message scams (called ‘smishing’) increased by almost 700% (as against the last 6 months of 2020). In total, over £750 million was stolen through fraud, an increase of 30% compared to the same period last year.
These increases have inevitably led to a loss of consumer confidence in communications from businesses. In a recent Which? report, 71% of those surveyed said they no longer trusted texts received from companies. Maintaining consumer confidence is a very important issue for businesses. In a recent survey published by Riskified, only 34% of consumers said they trusted businesses to protect them against online fraud. Arguably even more concerning, 62% of the businesses surveyed said they were confident in their ability to prevent fraud – highlighting a serious disconnect between businesses and consumers. This loss in consumer confidence can only serve to compound the already substantial losses being caused by online fraud.
One area where fraud is of particular concern is in relation to property transactions. This is largely due to the nature of the transactions, and in particular the substantial funds involved in purchasing, refinancing, and otherwise dealing with property. As a result, banks, lenders, and conveyancers dealing with property transactions have become prime targets for fraudsters. And unfortunately, the trend here too is one of increase: the Solicitors Regulation Authority (SRA) reported a 147% increase in cyber attacks on law firms in the first three months of 2021 (as against the first 3 months of 2020).
What action are regulators and businesses taking?
With fraud already such a substantial and difficult issue, and cases being so rapidly on the rise, taking robust steps against fraud is going to be increasingly on the agenda for the financial sector. David Postings, Chief Executive of UK Finance, has noted that: “Tackling fraud is an absolute priority for the banking and finance industry…” that will “require work across different sectors of the economy.” The Managing Director of Economic Crime at UK Finance, Katy Worobec, has expressed similar sentiments, stating: “Our latest figures show the sheer scale of fraud taking place in the UK and highlight clearly the need for coordinated action to address this threat.” She went on to call for “coordinated action and increased efforts from government and other sectors to tackle what is now a national security threat.”
Large technology companies are already leading the charge, with their particular focus against online fraud. Tech giants such as Google, Facebook, Amazon, Microsoft and others collectively donated $1million to advertising campaigns being led by “Take Five to Stop Fraud”. It may only be a matter of time before the banking and finance industry will need to follow suit, and start looking at new and innovative ways to tackle fraud.
And the sooner this can be done the better – because it may not be long before we see yet further increases in the legal requirements imposed on businesses, in particular aimed at tackling fraud. Just this month, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) authored a joint letter to leading UK banks, setting out a stark warning that they need to improve their trade finance oversight. Amongst other things, this highlighted the need for banks to conduct robust risk assessments, in order to prevent money laundering, evasion of sanctions, and of course, fraud. The letter went on to state that banks should be undertaking holistic assessments of financial crime risks, including fraud, and clearly documenting this process. In signing off, the FCA and PRA state that they may in future ask to see any risk assessments carried out, as well as any follow-up actions undertaken as a result.
What’s the outlook for anti-fraud measures?
In the context of property transactions, it is worth remembering that the consequences of fraud can be particularly severe, and as such, robust anti-fraud prevention measures will be even more vital. This has never been more true than in the post-Covid climate, where physical checks have become increasingly difficult to perform, and both consumers and businesses are increasingly relying on digital and online transactions.
Banks and lenders will need to ensure that their client ID checks and anti-fraud verification processes are, and remain, fit for purpose in an increasingly digital world. As the pressure ramps up, both from a regulatory perspective from the financial governing bodies, and the economic pressure of preventing losses from fraud, we are likely to see an increasing reliance on sophisticated anti-fraud technology being utilised, so as to decrease reliance on outdated (and easy to bypass) manual checks.
So as not to end on a low note, it is worth a mention that against the backdrop of £398 million of losses due to unauthorised fraud, the banking and finance industry was able to prevent a further £736 million of attempted unauthorised fraud. Expressed as a ratio, that means that £6.49 of every £10 of attempted unauthorised fraud was blocked. Clearly, this shows that positive and effective steps are already being taken to tackle fraud. However, as fraudsters evolve and improve their methods, and crucially, adapt to the rapidly changing post-Covid environment, business are going to need to be additionally vigilant, and increasingly sophisticated, in what measures they adopt to manage the risks of fraud.