IFAs must take measures to guard against the risk of being used by employees as a vehicle for fraud.
The FSA has recently targeted 200 IFAs and mortgage intermediary firms to assess their systems and controls and has banned a number of individuals.
In light of this, IFAs should be aware of the pitfalls that need to be considered when investigating employee fraud.
The concept of putting in place systems and controls is hugely misunderstood. Firms too frequently opt for off-the-shelf risk-control mechanisms (internal manuals, instruc-tions, training) without first considering the particular features of their business and the industry in which they operate that make them susceptible to fraud.
For example, while mortgage fraud can be seen as essentially about deviant behaviour committed by individual brokers with a desire to get rich quick, it can also be regarded as a control failure within firms.
Mortgage fraud will not be the only issue that IFAs need to consider. For example, is there a risk that brokers might get payments from surveyors or solicitors for referring clients to them? To what extent are such payments regarded as legitimate?
The FSA will expect those who break a firm’s rules (or who sail close to the wind) to be disciplined, irrespective of how profitable those individuals are for the firm.
Employers should be aware of the warning signs of employee fraud and take whistle-blower allegations seriously.
The first thing that firms will need to consider is who (if anyone) they should notify.
Firms must disclose to the FSA “fraud, errors and other irregularities”. The FSA will need to be notified if an employee who is an approved person is suspended or if the police are aware of the invest-igation and have asked to be kept informed.
They should be told about any plans to interview staff. An accurate note must be taken and the employee should be sent the papers that the firm intends to rely on at the interview. The more complicated the alleged fraud, the greater the onus to provide timely and comprehensive disclosure.
The order of interviewing will depend on a number of factors. If the risk of leaks is high and the element of surprise important, then interview the key players first. If the fraud is complicated, it may be best to interview peripheral staff first.
Firms should take employment law advice when interviewing and suspending staff to avoid wrongful and unfair dismissal.
Steven Francis is a partner at Reynolds Porter Chamberlain