The Compliance Audit: Ten "red flags" for Reviewers


Despite the recent coverage, there’s no fraud epidemic in financial services; but it’s inarguable that the increased reporting undermines public confidence in the advice profession.

Accordingly, Licensees (and advisers) need to do more to detect, prevent and mitigate fraud. Personally, I am surprised by the view that Licensees’ Compliance Teams "can never detect fraud" or criminal activity. 

In reality, most adviser fraud is relatively unsophisticated and, even with the effort taken by fraudsters to conceal their contraventions, I believe that Licensees can improve their capacity to detect misconduct.

Even in the absence of specialist compliance systems, a Licensee can increase the likelihood of detecting adviser fraud by ensuring that: 

  • the Licensee’s Compliance arrangements consider those lead and lag indicators that correlate with fraud;
  • staff and advisers understand that fraud is not a “victimless” crime; and
  • 1st and 2nd line resources have the courage and capacity to identify, escalate or pursue these matters. 

Identifying fraud

So what elements should be built into your compliance framework to allow your Compliance Reviewers to increase their likelihood of detecting fraud? In my view, an initial step might be to ensure that their review process requires them to identify, consider and, where appropriate, escalate concerns where

  1. a common address is frequently used on client application forms (look for patterns in the submission of applications too); 
  2. the Adviser seems to "living beyond their means" based on the reported remuneration;  
  3. files scheduled to be reviewed are offsite or unavailable; 
  4. there is an unusually high turnover of the adviser’s support staff (or office relocations);
  5. the adviser’s has close relationships with vulnerable or disadvantaged clients;
  6. there is a sudden increase in “new business” with a similar lapse rate after 1 year;
  7. the adviser pays clients’ premiums (or claims to do so);
  8. the adviser holds Powers of Attorney, discretionary authorities (contrary to your policies) or offers a custodial service for clients;
  9. the adviser is identified as being bankrupt or banned (or previously bankrupted or banned); and
  10. the adviser routinely collects client payments from product manufacturers or “deposits” cheques on clients’ behalf.

Happiness: a common give-away

Perhaps cynically, you should also be alert if the adviser responds to an unscheduled (and horribly inconvenient) compliance review by being overly welcoming and solicitous.

In my experience, there is always a degree of tension in compliance reviews - few advisers really enjoy having their work critiqued - so when the adviser responds with charm and bonhomie when you turn up unannounced on their doorstep, take the time to wonder why.





(c) Sean Graham 2013.