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The Cost of Fraud in Financial Services

The first step to formulating this strategy should be to assess and acknowledge the scale of the problem. The UK’s fraud epidemic has a drastic negative impact on both individuals and companies, outside of the cost to the overall economy. 

According to ONS data, fraudulent activities are by far the most frequent crimes in the UK and account for over 40% of all offences in England and Wales. In a 2020 report, the Economic Crime Survey, highlighted that approximately one in five companies had been a victim of fraud in the previous three years. Identity fraud particularly poses a deep threat, accounting for two thirds of reported fraud.

Fraud is prevalent across many industries, however, with the UK being the world’s largest centre for international debt issuance, commercial (re)insurance and foreign exchange trading, it’s fraud’s most popular sector. UK Finance has reported that in 2021, its members lost more than £1.3 billion to fraud. 

Building a line of defence

The UK government has proposed several measures to stop fraud in the new national strategy, including banning cold calls on financial products, spotlighting spoofing tactics, streamlining fraud communications and tightening up on business compliance. These are critical steps for helping financial firms better protect their customers and for consumers to be better educated on what is genuine communication and when is there a fraudster at work.

In addition to the above, the plan includes targeted efforts to mitigate identity fraud, such as the Payment Systems Regulator’s proposal to extend the reach of Confirmation of Payee to over 400 firms and the new risk-based approach for payment service providers. The latter approach allows for more time to investigate potentially fraudulent payments and establishes a system for careful transaction monitoring.

Fraudsters are operating on all channels from SMS to landline, email to postal campaigns. It’s clear the fraud report is about action, for example, there will be an outright ban on cold-call telephone sales for any financial products and biggerpenalties to deter fraudsters. However, the situation has progressed to a stage where the risk/reward ratio far outweighs the price of being caught. Fraud is happening on an industrial, global, organised scale that rivals leading big-name tech companies– it’s ‘fraud as a service’. Putting morebad actors behind barsfor longer is not addressing the cause. The reward is too tempting, and many industries are still playing catchup to put basic fraud prevention measures in place, all the while fraudsters are working to find ways to exploit them.

Also, a flat ban on cold calling by financial service providers could be argued to be handing the keys to fraudsters to dominate this channel. The window for genuine service providers to reach consumers is removed–providers who could potentially alert an individual when their money is at risk. Fraudsters have developed all the techniques to mask who they areon such calls. Larger fines and longer prison terms will not deter them. 

Leveraging best-in-class technology

The fraud strategy outlines how, “New technology and legislation aimed at disrupting those stealing and selling data will make the internet a more hostile place for identity fraudsters” and identity verification play a critical role in planning reforms to successfully prevent fraud at source. 

Know Your Customer (KYC) processes that use biometric, document and database checks toverify the authenticity of documents, data and individuals in real-time, can protect customers and businesses alike. By leveraging AI-powered technology, organisations can simplify anti-money laundering (AML) procedures, to give more capacity and resources back to risk and fraud prevention teams. By automating decisions based on the information presented, it affords these teams more time to focus on high-risk submissions. 

Cross-industry endorsement by the government to use digital identity verification for in-person and remote onboarding of any new customer is an important step to stop fraud in industries still using manual methods of identity verification. The human element is what leads to fake documents being accepted as real, data flight and many other risks. Using tech to tackle the problem at its source is the most efficient approach.

Leading by example

Looking further afield, Singapore has created an Anti-Scam Command to work with both public and private sectors that include government agencies as well as overseas law enforcement agencies to create a “scam-smart nation”. Education is being used as the first-line defence, even as there is now an Agency for Integrated Care to teach vulnerable citizens about the scams to watch for. The Singaporean approach is to involve non-financially regulated industries like telcos providers, social media platforms and aligning on an approach to fight fraud on these channels.

Similarly, the Hong Kong Monetary Authority (HKMA) regularly collaborates with tech providers on sessions educating financial services on AML andregulation technology. These series aim to encourage further innovation within banks and boost the adoption of technology that strengthens their capabilities to protect customers from fraud, and financial crimesas well as improve compliance.

Singapore and Hong Kongare developing their approachto stopping fraudthrough education, endorsement and collaboration between industries, to learn how technology can identify bad actors and protect individuals. The UK has taken the correct first steps in the right direction–thanks to collaboration between banks and the telcos sector, there are new data-sharing exercises to detect scam phone calls currently being rolled out across all mobile networks

The most successful fraud is powered by technology, artificial intelligence (AI) and automation. Fraudsters themselves add creativity and context to get the most impressive results from the fraud campaigns they create. To fight fraud in its current form and to prepare for its next iteration, we need to leverage the advanced technologies used by the fraudsters, but as part of a national response to stop them and to stop fraud from ever taking place.