The sharpest tools in the box

The sharpest tools in the box

March 2011

by Chris Childs, Director, Aon

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Careful due diligence has traditionally been the instrument of choice for lawyers in the fight against mortgage fraud. But as fraudsters become increasingly sophisticated and the issue is becoming more widely spread, Chris Childs, director of specialist PI insurance at Aon, examines insurance-based solutions that can give solicitors the edge.

During the Council of Mortgage Lenders' (CML) fraud conference in October 2010, it was emphasised that lenders, the legal profession and insurers alike are increasingly vulnerable to the criminal activities perpetrated by mortgage and identity fraudsters. By the very nature of fraud, the precise losses to lenders can never be truly known but estimates from the CML, KPMG and others put it at more than £1bn per year and rising.

Looking at this subject from the perspective of Professional Indemnity (PI) insurers, it is recognised that a very large proportion of solicitors' claims are attributable to residential conveyancing. Whereas limited market statistics are available, Charles River Associates estimates that 50% of all claims by value extend from residential conveyancing. Of that, it is further estimated that 50% (or 25% of the total) of these claims are those made by institutional lenders.

Institutional lenders apart, what about the consumer? Elsewhere in this edition of First Comment, Dr Julian Farrand raises the question of what can be done to protect them.

As it is clear that fraudsters are creating more complex and elaborate means to perpetrate this type of financial crime, this article considers the key anti-fraud tools embodied in Aon's Quality Assurance Risk Management (QARM) process; tools that have been designed to aid in the battle against fraud. Moreover, we examine the extent to which solicitors use these tools as evidenced by data generated from the QARM process.

The process employs 199 quality assurance / risk management indicators to establish the risk profile of any given firm, with these indicators being aligned to worktypes. In this article, we explore some of the more common non-compliances that detract from a firm's ability to frustrate fraudsters.

  1. Has the firm published a 'Whistle-blowing Policy' that requires the sole practitioner or partners and staff to report misconduct, criminal activity and serious financial difficulty within the firm and at other firms?
  2. Does the firm subscribe to agencies that provide enhanced customer due diligence services?
  3. Has the firm described the methods of supervision to be used in writing including those for self-supervision by sole practitioners?
  4. Does the firm produce case plans for complex cases?
  5. Has the firm published clear procedures for dealing with enquiries for legal services from existing or new clients?
  6. Upon production, at the end of concluding risk assessments, does the sole practitioner or risk manager update generic risk factors by case type (when appropriate) and cascade this information to all relevant fee earners?
  7. Has the firm developed a structure for supervision including all fee-earning staff in all areas of law?
  8. Is there a competent nominated person within the firm with overall responsibility for the prevention of financial crime as required by the Prevention of Crime Act 2002, e.g. a Money Laundering Reporting Officer (MLRO)?
  9. Has the firm established a process for file reviews?
  10. Does the firm actively promote and document its duty to prevent financial crime and have all relevant personnel been trained accordingly?

Our findings suggest that solicitors are hamstringing themselves in the battle against financial crime by not making sufficient use of these anti-fraud tools. The overall objective of the QARM process is to enhance a firm's risk profile and, therefore, over time, reduce claims. Given the extent to which residential conveyancing claims impact the industry, addressing these issues is key to improving claims performance. While broader use of these anti-fraud tools can doubtless reduce fraud and claims, clearly fraud cannot be totally eliminated. So, what more can consumers do to protect themselves?

An indemnity insurance solution may be one effective option. First Title's Home Owners' Protection Policy (HOPP) is a case in point. It provides first party cover to the consumer for, amongst other things, diminution in the value of property resulting from a range of risks including fraudulent activity, boundary disputes, and seller misrepresentation. Additionally, the policy offers cover for certain types of solicitor error, negligence or participation in mortgage fraud. First Title provides HOPP coverage for firms' clients and, in addition, overcomes some of the coverage limitations within the PI policy. This product is tried and tested, having its origins in Ontario during the 1990s, when practitioners experienced significant increases in PI premiums as a result of residential conveyancing losses.

It remains to be seen whether solicitors in this country will follow the Canadian market where, in Ontario at least, every consumer has to be offered the option to buy their own protection - 98% of whom say 'yes' - and start using the HOPP as a risk management tool. If they do, they will be protecting their clients from the increasing risk of mortgage fraud and, in so doing, help themselves by reducing the possibility of conveyancing claims that fuel the continual upwards pressure on PI premiums.

Aon are renowned for their Professional Indemity insurance offering. This is one of the insurance products that we have developed specifically for solicitors. If you would like to find out more regarding this or HOPP protection, please contact Kim Swestun at Aon on 01268 578381.

“This material is intended to provide general information only. For specific coverage and exclusions, refer to the policy.”

For more information on the HOPP

• Read compliance advice/guidance about the HOPP,provided by Frank Maher of Legal Risks LLP

• Read the HOPP media coverage

• Speak to one of the HOPP underwriting team