As we all know, regulation evolves. The UK’s new “Failure to Prevent Fraud” legislation has become a hot topic across financial services, particularly within FCA-regulated firms. The legislation is designed to heighten corporate accountability, ensuring that firms are proactive in preventing fraud, rather than merely reacting to it. At its core, it introduces an obligation on companies to prove they’ve taken “reasonable steps” to prevent fraud from being committed within their organisations. For employees, particularly in customer-facing and compliance roles, this means stepping up to a new level of vigilance and understanding to protect customers and the firm alike.
Understanding the “Failure to Prevent Fraud” Legislation: Key Points for Employees
The legislation, introduced through the UK’s Economic Crime and Corporate Transparency Act, establishes that organisations can be criminally liable if they fail to prevent fraud committed by employees or associates for the organisation’s benefit. This law aligns with the existing “Failure to Prevent” models applied to bribery and tax evasion.
We asked Rachael Tiffen, Director of Public Sector and Learning at Cifas, the UK’s leading independent, not-for-profit fraud prevention service, what employees in FCA-regulated financial services firms need to understand about this framework:
“The simplest way to look at the framework is in three parts, let’s have a look at those in more detail:
Knowledgeable, confident employees are more engaged and less likely to feel anxious about fraud-related duties
- What Counts as “Failure to Prevent Fraud”?
Firms face significant penalties if they are found guilty of failing to prevent fraud committed by an employee, agent, or external partner. Importantly, the definition of fraud includes financial misstatements, unauthorised transactions, and intentional misrepresentation to clients. Employees, therefore, need to maintain rigorous ethical standards and spot potential fraud risks early.
- “Reasonable Procedures” to Prevent Fraud
To defend against charges, firms must be able to demonstrate that they’ve implemented “reasonable procedures” to mitigate fraud risk. This means organisations must establish comprehensive policies and engage employees in regular training, fostering an environment where everyone is vigilant and empowered to act on fraud prevention.
- Who Is at Risk?
Given the legislation’s broad scope, all employees, especially those in roles related to finance, compliance, risk, and customer interactions, must be aware of the fraud risks they encounter in their day-to-day operations. From client advisors to back-office analysts, everyone has a responsibility to uphold anti-fraud measures.”
Now we have a grounding in the framework, let’s look at how financial services firms can equip their employees. Tiffen added:
“Achieving compliance and empowering employees go hand-in-hand under the new legislation. Firms that focus on robust training and support not only mitigate risk but also cultivate a proactive workforce ready to safeguard clients.
“Here are some practical strategies that firms can adopt to support their teams:
- Deliver Targeted Fraud Prevention Training
- Employees should understand the types of fraud that are most prevalent in financial services and be familiar with how to recognise suspicious patterns. Regular training sessions covering topics like identity fraud, misrepresentation, unauthorised transactions, and data protection are key.
- Scenario-Based Learning: Real-world scenarios help employees understand the complexities of fraud prevention, showing them how to apply policies in day-to-day situations.
- Role-Specific Guidance: Tailored training for different roles within the firm — such as customer support, financial advisers, and compliance officers — helps ensure each team member has the relevant knowledge for their duties.
- Encourage a Culture of Transparency and Reporting
A cornerstone of fraud prevention is creating a culture where employees feel comfortable reporting suspicions without fear of backlash. Building this culture requires clear communication from leadership, reinforcing that fraud prevention is everyone’s responsibility and that speaking up is encouraged.
- Anonymous Reporting Channels: Offering a confidential way to report concerns empowers employees to come forward without fear of retaliation.
- Rewarding Vigilance: Recognise employees who identify potential fraud. Highlighting these actions publicly can encourage others to remain vigilant and proactive.
- Leverage Technology for Monitoring and Alerts
Advanced fraud detection tools can help employees identify irregularities in transactions or suspicious patterns before they become major issues. Technology that automates parts of the fraud detection process, like transaction monitoring and behavioural analytics, is invaluable.
- Machine Learning Tools: These can detect unusual patterns that might escape human observation. Providing employees with training on how to interpret and act on flagged activities from these tools is crucial.
- Enhanced Customer Verification Systems: For client-facing employees, automated ID verification and authentication systems can help prevent identity fraud at the outset.
- Develop Clear, Actionable Fraud Reporting Protocols
When employees encounter suspected fraud, a clear, structured reporting procedure helps ensure swift action. For instance, knowing who to contact, how to document suspicious activity, and understand the steps that follow a report can streamline responses.
- Quick Reference Guides: Providing accessible reference materials for identifying and reporting fraud keeps essential information at employees’ fingertips.
- Regular Drills and Walkthroughs: Periodic practice drills can reinforce the protocols, helping employees act quickly and accurately in real situations.”
Lastly, it is important for us all to understand why this matters. “It is all about protecting customers, employees, and the firm”, says Tiffen. She added: “The true value of proactive fraud prevention lies not only in legal compliance but in safeguarding customers’ trust and enhancing organisational resilience. For employees, understanding the role they play in fraud prevention can empower them to protect clients and build deeper, more trustworthy relationships.”
- Protecting Customers’ Financial Health
Fraud can have devastating effects on customers, particularly vulnerable ones who may not recover easily from financial losses. By spotting and stopping fraud early, employees help shield clients from potential harm, fostering a stronger bond of trust.
- Reinforcing the Firm’s Reputation
For financial institutions, reputation is everything. News of fraud or fraud-related litigation can damage client relationships and erode brand value. Employees who are trained and prepared to prevent fraud act as brand ambassadors, bolstering the firm’s reputation as a safe, ethical institution.
- Enhancing Employee Confidence and Morale
Knowledgeable, confident employees are more engaged and less likely to feel anxious about fraud-related duties. Clear guidance and supportive policies empower them to take decisive actions without fear of making mistakes or facing disciplinary actions.
So how do we know our fraud prevention efforts have been successful? Tiffen advised that “measuring the success through a proactive approach to fraud prevention requires continuous assessment and improvement. Firms should regularly measure the effectiveness of their fraud prevention measures through:
- Incident Reporting Metrics: Tracking the frequency and types of fraud-related reports can indicate areas where employees may need additional support or training.
- Employee Engagement Surveys: Regular surveys can reveal how confident employees feel about fraud prevention efforts and identify any areas of concern.
- Customer Feedback: Customer satisfaction surveys and feedback loops can indicate how well fraud prevention efforts align with customer expectations for security and transparency.”
She added: “It’s a team effort. The “Failure to Prevent Fraud” legislation is an important step toward reducing corporate fraud across the financial services industry. But, compliance is just the baseline. For firms to truly excel in fraud prevention, employees need to be fully engaged, supported, and informed.
By creating an environment of transparency, providing role-specific training, and equipping employees with the right tools, FCA-regulated firms can not only meet regulatory expectations but also foster a culture of trust and responsibility that ultimately benefits everyone involved—most importantly, their customers.”
Cifas has developed a range of products and services to help organisations prevent fraud and keep their employees and customers safe. Improve your workforce’s counter-fraud skills through the Cifas Fraud and Cyber Academy and its Digital Learning programme today and download the Cifas Learning Survey 2024 for free.
