Client and adviser failings lead to fraud

Blindclient trust and internal procedural failings within financial planning firms are the two over-riding factors allowing fraud to go unchecked, a report on fraud in the industry will reveal when released in a fortnight.

“Client trust is the key factor that enables fraud to occur, closely followed by a lack of internal procedures and controls,” says Tepana Associates director, Kathleen Tepana, who was involved in the report.

“In around half of the cases [in the report] a high level of client trust was nominated as a key to allowing the fraud to take place or the selection by the adviser of which client to defraud,” Tepana says.

The release of the Protecting Retail Investor Savings analysis will attempt to aid the industry and consumers in protecting themselves against incidences of fraud, as first reported inMoney Managementin mid-August.

The study involved liaising with more than 25 dealer groups, which are responsible for 6,000 representatives.

As part of the study’s first phase, Tepana, along with the group’s other two principals — Tim Farrelly and Gail Burke — assessed 43 specific cases of fraud, including interviews with dealers, advisers and compliance personnel.

“While less than 0.2 per cent of licensed advisers commit fraud each year, when fraud does occur it can have a devastating effect on the client, the advisory firm concerned and the overall reputation of the industry,” Farrelly says.

He adds that while regulators and police have achieved some significant success in combating fraud when it occurs, there is consensus that more needs to be done.

The second phase of the research project will involve consultation with the industry over the next three months, before the release of recommendations on how dealer groups, industry bodies and consumer groups can reduce the incidence and impact of fraud.