ECC0048

Written evidence submitted by the Association of British Insurers

About the Association of British Insurers

The Association of British Insurers is the voice of the UK’s world-leading insurance and long-term savings industry. A productive and inclusive sector, our industry supports towns and cities across Britain in building back a balanced and innovative economy, employing over 300,000 individuals in high-skilled, lifelong careers, two-thirds of which are outside of London.

The UK insurance industry manages investments of over £1.7 trillion, pays nearly £12bn in taxes to the Government and supports communities across the UK by enabling trade, risk-taking, investment and innovation. We are also a global success story, the largest in Europe and the fourth largest in the world.

The ABI represents over 200 member companies, including most household names and specialist providers, giving peace of mind to customers across the UK.

Executive Summary

The current UK economic crime regulatory landscape is complex. There is a post-Brexit opportunity for the UK to align the regulatory ecosystem with the specific threats posed so that the overall UK response to economic crime is risk-based and proportionate. The Government should resist any proposals to extend the Anti-Money Laundering Directives to general insurance.

We support the aims of the Economic Crime Plan to make the UK more resilient to the threat of money laundering and fraud. There must, however, be proper oversight and transparency of expenditure so that a full, proper and informed assessment can be made of the effectiveness of the Plan Actions and their impact upon the economic crime landscape.

We are pleased that the Government has taken a largely risk-based approach to the implementation of the 5th Money Laundering Directive. It is vital, however, that guidance to be issued on the registration of express trusts makes it clear that low risk insurance products are deemed to be out-of-scope of registration, otherwise the use of trusts will be deterred and significant supervisory and compliance resource will be wasted with no positive impact on economic crime.

We supported the establishment of the Office of Financial Sanctions Implementation. Going forward, there must be greater engagement with the private sector so that sector guidance is kept up-to-date, thereby underpinning awareness and embedding compliance.

In light of the FinCEN papers, we support the Government working with regulators to review the supervisory approach and take necessary remedial action.

If an offence of corporate liability for failing to prevent economic crime is introduced, if the prosecution proves that the entity has been criminally involved in economic crime, the burden should fall on the entity to demonstrate that they had put in place reasonable preventative measures.
The ABI is supportive of the measures to reform Companies House outlined in the Economic Crime Plan. Such reforms must help identify suspicious activity and provide LEAs with better information on company ownership to aid criminal investigations and customer due diligence.

The insurance sector has proactively responded to the COVID-19 crisis identifying emerging fraud trends through the publication of a Quarterly Strategic Threat Assessment, raising customer awareness of investment and pension scams and contributing to the national police response to COVID fraud.

The ABI has noted mixed practice by banks on the Contingent Reimbursement Model Code. We believe that all banks should implement Confirmation of Payee. We would also support the CRM Code being made mandatory to promote more consistent consumer protection. The Online Harms Bill presents an opportunity to introduce further consumer protections against investment scams.

The insurance industry adopts a collaborative approach to tackling financial crime and fraud, spending around £200m pa adopting an agile approach to prevent, detect and enforce against insurance fraud, including the funding of key organisations such as the Insurance Fraud Bureau and Insurance Fraud Enforcement Department.

Introduction

The ABI welcomes the opportunity to contribute to the Inquiry. The UK must continue to attract legitimate business and retain its status as a leading global financial centre. However, money laundering and other financial risks evolve and it is equally important that the UK keeps under review the measures it has in place to tackle illicit financial flows and continues to make the UK a hostile environment for committing economic crime. The insurance industry is committed to working in partnership to tackle all forms of economic crime and protect honest customers from fraudulent activity. For this reason, the industry invests significant resources to prevent, detect and enforce against financial crime and insurance fraud.

Concerns regarding or improvements to the UK’s anti-money laundering and the sanctions regimes

The regulatory landscape

The UK must maintain a proportionate, joined-up and strategic approach to the prevention of money laundering.

The current anti-money laundering and sanctions landscape is complex. On the one hand, it is comprehensive. However, on the other, there are numerous regimes with which businesses must comply. Moreover, there are weaknesses in the UK’s infrastructure which undermine the effectiveness of the response to financial crime, though we are reassured that a more collaborative approach between the public and private sectors is being adopted as a central theme of the UK Economic Crime Plan.

Many obligations flow from the recommendations set down by the inter-governmental standard-setting body, the Financial Action Taskforce (FATF). The UK was a founding member of the FATF and must continue to play a leading role to ensure that the recommendations are proportionate, balancing the need to make domestic regimes hostile places for money laundering, with the need to ensure that the obligations placed upon businesses are not overly-burdensome.

UK insurers must implement systems and controls to ensure compliance with a plethora of AML regimes including the Money Laundering Regulations, Financial Conduct Authority (FCA) financial crime rules and guidance, and the Joint Money Laundering Steering Group Guidance (JMLSG). A coordinated and consistent approach must be adopted, where requirements are complementary, rather than in conflict.

There is an opportunity for the UK to improve its response to economic crime by placing more onus in a post-Brexit environment upon aligning the UK regulatory landscape to the specific threats faced by the UK and its law enforcement capability, rather than using EU legislative reform as a blueprint for UK reform. We would support a review of the SARs regime, development of a digital ID framework to aid customer due diligence and removal of UK ‘gold plating’ of some FATF recommendations.

UK Economic Crime Plan

We support the aims of the Government’s Economic Crime Plan, with the initial focus on making the UK more resilient to the threat of money laundering through the identification of a series of core capabilities to promote better public-private cooperation through improved information sharing, resource pooling and technological innovation.

These measures are expected to cost around £150m pa and the Government proposes to impose a levy upon the regulated private sector of c. £100m pa from FY 2022/23. Throughout the development and implementation of the Plan, the ABI has highlighted the importance of oversight and transparency. As a guiding principle, so that firms can adequately plan and budget, the ABI asserts that the levy should be timebound and subject to review. A review of the effectiveness of spend in any given financial year should be undertaken and addressed in the Annual Report. A full review of the levy should be carried out after three years. The Government should develop a set of key criteria against which effectiveness of spend can be assessed in terms of whether implementation of the recommendations effectively has been achieved, targets have been met and the overall impact, positive or otherwise, on the economic crime and money laundering landscape.

National Risk Assessment

The Government should engage with all relevant private sectors in preparing the National Risk Assessment (NRA). Notwithstanding that the insurance sector has been classified as ‘low risk’ relative to other sectors, the NRA 2017 merely provided a single paragraph in respect of the sector, with information seemingly provided mainly by the regulator. It is important that the Government engages with representative bodies, including the ABI and others representing the London Market, on an ongoing basis. We are still awaiting the publication of the 2020 NRA, in respect of which we made comprehensive representations.

Scope of Anti-Money Laundering Directives

The European Banking Authority (EBA) has recently put forward a proposal that the European Commission should review and clarify the application of the EU’s AML/CTF obligations. This would include assessing whether the scope of the Anti-Money Laundering Directives (AMLD) should be extended to include some or all general insurers (GI) and intermediaries and, if so, how, taking into account the level of risk to which they are exposed and the principle of proportionality enshrined in EU law.

The implications of extending AMLD requirements to GI and GI intermediaries are significant, in terms of the compliance burden and cost. From a UK perspective, there would be little benefit derived from these proposals given the existing advanced UK AML regulatory requirements and reporting obligations, as well as extensive JMLSG guidance that is considered by the regulator and the courts.  In short, it would be an expensive waste of valuable supervisor and organisational compliance resource. Moreover, the aggregate cost of meeting compliance obligations would be significant and ultimately passed on to policyholders.

Fifth Money Laundering Directive – registration of express trusts

We are pleased to see that the Government is taking a risk-based and proportionate approach to the implementation of the 5th Money Laundering Directive (5MLD) and the Trust Registration Service (TRS). However, as we made clear earlier this year in our response to the HMRC Technical consultation on the 5MLD and TRS, there needs to be clear guidance on insurance policies held in express trusts that are exempt from registration. While there have been good outcomes achieved already, there still exists uncertainty over certain low risk products [1], the registration of which would have no discernible impact on reducing economic crime.

If these products have to be registered, this could result in a significant waste of compliance and supervisory resource imposing a disproportionate and costly burden on all concerned, whilst not offering LEAs any valuable insight.

As well as deterring the future use of trusts, thereby depriving consumers of vital protections and benefits, there is the possibility that the UK Government could find its ability to combat money laundering hampered because of the obfuscating nature of swathes of irrelevant, yet registerable data, putting the UK in a worse position than at present.

Office of Financial Sanctions Implementation

The ABI welcomed the establishment of the Office of Financial Sanctions Implementation (OFSI) in 2016. A central aim of OFSI is to improve service delivery to the private sector and OFSI has put in place dedicated resource to engage with the private sector, including via an outreach and engagement team.

In the past, the insurance sector has experienced difficulties in interpreting EU sanctions because of imprecise language in legislation, notably in relation to scope. Sectoral guidance previously issued by the Treasury has sometimes been cumbersome, not timely and issued ‘after the event’. We welcome OFSI’s intent to be proactive, to review guidance on a regular basis and to work closely with bodies including the Foreign and Commonwealth Office and EU institutions to provide guidance. Best practice guidance published following consultation with industry, on expectations, including the standards of proof expected for identifying whether a sanctions match is positive or otherwise, would be helpful. We also welcome OFSI’s initiative to publish blogs to keep businesses apprised of financial sanctions events, changes to OFSI guidance and topical issues. Publication of case studies by sector, following conclusion of investigations, would assist firms in embedding compliance training and awareness and the consequences of non-compliance. The OFSI Annual Review 2019-20 states that domestic outreach and engagement has focused on the public sector. We look forward to OFSI engaging more with the private sector going forward [2].

End of Brexit Transition Period

In contrast to the broad continuity for the AML regime, there will be a new UK sanctions regime after the end of the transition period. UK sanctions will largely reproduce current EU sanctions but with some new individual designations and additional detail, which is likely to drive a significant short-term spike in screening alerts. The financial services sector is working with Government to take quick and decisive mitigating action.

The work of OPBAS and the profession body AML supervisors

This issue is more relevant to the accountancy and legal sectors. However, the ABI supported the establishment of OPBAS. Previously, the accountancy and legal sectors were regulated by a plethora of different supervisors. OPBAS has a key role to play in ensuring supervisory standards are consistent across professional bodies and in seeking to enable better information and intelligence sharing between the bodies.

Impact of FinCEN papers

We support the Government working with regulators, including the FCA, to review the supervisory approach and take necessary remedial action, including imposing penalties for systems and control failures.

Further, firms must have confidence that suspicious activity reports are kept secure. Firms have a legal duty to report and failure to do so would remove a firm’s legal defence from a charge of money laundering.

Corporate liability for economic crime

There is currently no corporate liability offence for failing to prevent economic crime, unlike bribery and facilitating tax evasion. We note that, in recently publishing the Government response [3], the Ministry of Justice has concluded that the evidence was inconclusive as to whether a new offence should be introduced and the Law Commission has been commissioned to conduct an expert review.

Should the Government consider introducing a new offence designed to prevent financial crimes such as fraud, false accounting and money laundering when committed by or on behalf of companies, the ABI view is that, in general, the regulation of the financial services sector provides a good benchmark for disincentivising corporate misconduct through improve compliance. If a new ‘failure to prevent’ offence is introduced, we assert that the approach should mirror that adopted for the failure to prevent bribery offence [4] and the facilitation of tax evasion offence [5]. While the prosecution should have to prove that the entity has been criminally involved in an economic crime, the burden should then fall on the entity to demonstrate that they had put in place reasonable preventative measures. The implementation of any new offence should be supported by guidance that clearly articulates what would amount to reasonable controls. This was not, for example, entirely the case in respect of the introduction of the tax evasion offence.

The work of Companies House

Reforms to Companies House (CH) are a key action in the Economic Crime Plan. The ABI is supportive of the reform measures outlined within the Plan and the commitment to £20m funding in 2021 [6], in particular measures to improve transparency on who is setting up, managing and controlling corporate entities, to allow better interrogation of information submitted to UK Companies Register, and to improve accuracy and usability of CH data.

However, as set out in our response to the HM Treasury consultation on the Economic Crime Levy [7], transparency of expenditure is vital to maintain private sector confidence and any reforms should not be generic, but directly relevant to economic crime. It is important that the reforms lead to the correct outcomes. Notably increased volumes of information held would improve identification of suspicious activity and trends or patterns. Further, both LEAs and regulated entities (including insurers) should have access to better quality information on company ownership, whether in pursuit of criminal investigations or in undertaking ‘Know Your Customer’ (KYC) checks.

One matter not directly addressed by the Economic Crime Plan is maximising the opportunities from Digital ID, which would promote benefits for stronger KYC checks, including CH verification of key individuals prior to registration, which in turn would support the regulated sector in placing reliance on CH data for their own checks, strengthen the due diligence ecosystem and allow resources to be reallocated to identify and report material discrepancies to CH, and suspicions to the NCA.

Consumers and economic crime

Emerging trends in consumer facing economic crime as a result of the COVID crisis

The insurance industry has been proactive in responding to the COVID-19 crisis and in identifying emerging trends in economic crime that consumers are facing.

The Insurance Fraud Bureau (IFB) ordinarily undertakes a biennial Strategic Threat Assessment (STA) which provides an overview of key fraud threats and recent trends in fraudulent activity. In light of the disruption and increased uncertainty caused by the COVID-19 pandemic, the planned 2020 STA was replaced with a new more agile, rolling quarterly publication, the Quarterly Strategic Threat Assessment (QSTA). The first QSTA was published in September and this publication, which will continue for at least the next three quarters, will reflect and respond to the changing insurance fraud landscape and new emerging threats.

The main findings from the first QSTA were that most fraud types across business lines reduced during Q2 and during lockdown. This was in part due to Government lockdown legislation put in place, restricting people from going to non-essential workplaces and limiting group gatherings. Opportunistic frauds such as exaggerated loss in claims and first party risk misrepresentation in motor policies were identified as the top fraud threats. Organised fraud types involving professional enablers such as rogue lawyers and claims management companies (CMCs) acting without instruction, staged or fabricated incidents and ghost broking remain significant threats with an increase of activity expected over the next few months. Experience shows that fraud often peaks later in a crisis, as general concerns (in the case of COVID, about health) give way to practical concerns about financial hardship.

The ABI funded Insurance Fraud Enforcement Department (IFED), within the City of London Police, has played a key role in both the national police response to enforcing against COVID-19 scams (such as fake personal protective equipment) and the specific insurance response (e.g. in respect of ghost brokers offering discounted fraudulent motor insurance to NHS workers)[8].

The ABI published a press release warning people to be on their guard against scammers, impersonating insurers and pension providers, looking to cash in on the financial hardship that COVID-19 is causing for many families and firms [9]. The release outlined potential scams, provided tips for checking whether a person or product is genuine and advised how to report scams to the IFB and LEAs.

On pension scams, the ABI undertook a member survey in April to understand any emerging trends. Although members did not report any surge in the number of cases, they reported some increase in investment scams that targeted pensions and anticipated scams offering ‘early access to pension’ or to ‘reduce losses’ to increase. In response, the ABI published a warning [10] against ‘pension panic’ and making rash decisions to use pensions as a quick way of raising funds.

Separately, members also reported an increase in CMCs making claims against ceding schemes or advisers on behalf of victims for allowing bad transfers to go ahead. Astoundingly, some of these transfers were encouraged by individuals who set up the CMCs in the first place. CMCs are also using data subject access requests to collect customer information and file complaints alleging loss for high risk investments on their behalf. Some of these allegations are inaccurate, triggering concerns about customers being exploited and unknowingly involved in potential frauds.

The operation of the Contingent Reimbursement Model for Authorised Push Payment Fraud

Investment Fraud is an ongoing, burgeoning issue. Between September 2019-September 2020, Action Fraud received more than 17,000 reports of investment fraud, amounting to £657.4m in reported losses, a 28% increase on the previous year.

Authorised Push Payment (APP) fraud is primarily an issue impacting the banking sector and its customers. However, fraudulent investments sold via cloned websites are a form of APP and this is a growing issue for the insurance and long-term savings sector.

Insurance and investment brands are being actively misused by organised crime groups to defraud members of the public. Brand misuse takes many guises including insurers and investment banks having their brands cloned and misrepresented on fake domains to induce consumers into making fraudulent investments.

The insurance industry has been proactive in combating the issue of brand misuse and is taking forward a raft of measures to tackle the issue, including awareness campaigns, intelligence sharing, and engagement with the Government, FCA and the City of London Police to drive regulatory reform and enhanced enforcement action.

Combating cloned websites and brand misuse used to perpetrate investment fraud should be a core issue addressed as part of the fraud strand of the Economic Crime Plan. We believe there should be more action by telecommunication providers, internet service providers and web hosting services. These platforms are often used to perpetrate brand misuse and fraud and currently there is no financial incentive for such platforms to help combat fraud. The proliferation of fake websites, online advertising of scams and misrepresentative emails illustrate that these channels should do more to help combat scams.

The upcoming Online Harms Bill presents an opportunity to introduce further protections for customers. In particular, the ABI supports large tech companies being made legally responsible for, firstly, designing systems and processes to prevent scam content appearing on their sites and, secondly, to move quickly to take down fake websites and content.

With regards to the Contingent Reimbursement Model (CRM) Code, the ABI has noted mixed practice by banks. We believe that all banks, whatever their size, should be implementing Confirmation of Payee so that the payer can be confident they are making a payment to the right person before authorising the transfer. The ABI is also supportive of the CRM Code being made mandatory, as this will help create a level of consistency in the protection that customers receive against APP fraud.

The response of financial institutions to economic crime as it affects consumers

Alarmingly, insurance fraud has become perceived to be socially acceptable and continues to corrode trust in society. The economic and physical harm inflicted on victims of fraud can be grave. Aside from driving up insurance premiums for everyone, fraud puts lives at risk through induced ‘crash for cash’[11] and fraudulent arson [12]. It also has consequences for society at large by wasting the resources of the NHS, fettering court time and funding other serious organised crime.

The insurance industry is committed to tackling all forms of insurance crime, including fraud, and protecting customers from becoming victims of criminal activity. The industry adopts a collaborative approach to tackling financial crime and fraud.

Insurance fraud cuts across every type of insurance. At one end of the spectrum, fraud may be committed by opportunists, where people encounter an opportunity within their everyday experiences to invent or exaggerate a claim or to deliberately or recklessly provide false information when applying for insurance. At the other end, there are highly organised criminal gangs, for example, fraudsters involved in ‘crash for cash’ or ghost broking scams.

In 2019, insurers detected 107,000 dishonest general insurance claims valued at £1.2billion. The volume increased by 5% on 2018. Insurers also detected 760,000 fraudulent insurance applications, valued at £1.4billion.

It is conservatively estimated that ABI members spend around £200m each year on measures to combat fraud that focus on the three core pillars of prevention, detection and enforcement. This includes several key initiatives, including the IFB and IFED, that have led to a sea-change in the way that insurance fraud has been tackled for the last decade. Further details on the work and successes of the IFB and IFED can be found in the ABI response to the Public Affairs Committee inquiry into organised fraud [13].

As insurers tighten controls in one area, fraudsters will look to exploit opportunities in another, where they perceive controls may not be as well developed. As such, the industry’s counter-fraud strategy continues to evolve to stay ahead of increasingly mobile and sophisticated fraudsters. In order to counter the behaviour of fraudsters and enablers, the industry is developing an increasingly agile approach to combatting fraud.

In the prevention space, the industry is developing innovative ways to sway consumer perceptions, attitudes and behaviours towards insurance fraud. In particular, we have conducted research founded in behavioural science which demonstrates how insurers can nudge customers towards greater honesty during the insurance process.

On detection, we are developing a clear strategy for managing industry data to improve counter-fraud capability which recognises that technology must be responsive to external influencers (such as the ongoing personal injury reforms) to ensure it remains fit for purpose. The ability of the insurance sector to join its prevention and data workstreams with work being undertaken in other sectors, including the public sector, would leverage mutual benefit for all contributing sectors and better protect consumers.

The industry is developing an agile approach to enforcement and disruption. While IFED continues to focus on the industry’s strategic priorities, the industry is developing relationships with key regional forces and special operations units. The IFB has also developed referral mechanisms with the Solicitors Regulation Authority and the FCA to refer rogue solicitors and CMCs for investigation. In line with a recommendation of the Insurance Fraud Taskforce [14], insurers increasingly look to bring actions for fundamental dishonesty and private prosecutions.

December 2020

[1] For example, where multiple protection policies are held in a single express trust