FSA Publishes Fraud Governance Report

by Robin Pilgrim, LawAndTax-News.com, London

01 March 2006

The Fraud Governance report, published by the UK's Financial Services Authority on Monday, found that the country's larger financial firms, driven by mounting fraud losses, have taken steps to strengthen their fraud management capabilities.

However, the financial services regulator revealed that these improvements are relatively recent, and stated that firms can go further to protect themselves and their customers from fraud.

The report examined the ways in which senior management is tackling fraud risk in 16 mainly larger financial services groups. It found that CEOs or other senior figures generally recognise that the increasing threat of fraud needs to be managed in a more effective and integrated way.

It also noted several areas in which firms need to work harder, and encouraged financial services organisations to collect more detailed and accurate data and invest in systems and controls to detect mounting fraud threats at an early stage.

Philip Robinson, financial crime sector leader at the FSA, explained that:

"A robust fraud strategy is one that is sponsored at the highest level within a firm and embedded within the culture. While the larger firms have been forced to wake up to fraud, those that have so far remained outside the fraudsters' radar are not as developed."

"Fraud threats are dynamic and fraudsters constantly devise new techniques to exploit the easiest target. Firms need to continue to invest in systems and controls and manage their responses to fraud in order to avoid being targeted as the weakest link."

The report found firms that underinvested in anti-fraud measures tended to suffer relatively high levels of losses. Investment in systems and a focus on robust anti-fraud operational processes, which are embedded in business units, are key to improvements in fighting fraud, the FSA explained.

"Where firms are getting better at identifying, assessing, mitigating and reporting fraud risk, this is a recent improvement and needs to be sustained. Only a handful of firms were found to be developing formal risk assessment processes and, as a result, firms tended to respond to fraud in an incident-driven manner. In particular, the report warns smaller firms to analyse their vulnerability to attack and consider the threats to their business in a structured way because the impact of an attack or series of fraud events could be particularly damaging," it announced.

There is increased co-operation within the industry, according to the report, and firms see this as critical to the success of anti-fraud measures. There was particular support for the lead taken by some trade associations and initiatives, such as information sharing between firms.

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