The UK Financial Ombudsman Service has sent a clear message to financial advisers that they must be vigilant to the risk of fraud when processing transactions on behalf of their clients. In its 23 August newsletter the FOS highlighted a recent case in which an adviser was ordered to pay fraud losses that the Ombudsman considered could have been avoided had the advisor heeded clear “alarm bells” that a transaction might be fraudulent.

The Fraud

In the case before the FOS, a financial adviser’s client lost £250,000 in bond savings. Scammers hacked her email account and instructed her adviser to transfer funds to an account said to be a solicitor’s bank account in Hong Kong. The adviser instructed the client’s investment provider to make the transfer. But the investment provider could not trace the solicitors firm, and so declined to make the transfer.

The adviser emailed the client to explain that the money could not be transferred. The fraudsters replied providing details of a UK bank account in the client’s name. Although the account was in the client’s name, it was not her account. The investment provider highlighted to the adviser that the account details were different to their records. The adviser confirmed they were correct and the transfer went ahead.

The investment provider later sent a letter to the client confirming the withdrawal, which alerted her to the fraud.

The Remedy

The client reported the fraud to the police and luckily was able to recover £170,000. She asked her adviser to reimburse the shortfall. The adviser offered to pay only 25% of the £80,000 residual loss. The client brought her case to the FOS.

During the FOS investigation it came to light that the client had been a customer of the adviser for more than ten years and always attended face-to-face meetings when she wanted to discuss her investments. The client therefore expected the adviser to have at least phoned her before acting on email instructions to transfer a significant sum. In its defence, the adviser confirmed that the client had recently been emailing about a mortgage, so the email regarding the transfer did not seem odd. As the client had previously worked in Asia, it seemed reasonable for her to use a bank account in Hong Kong.

The FOS noted that “as a finance professional, the adviser would have been aware of the risk of fraud and scams”. It decided that the nature and content of the communications with the fraudsters should have put the adviser on notice of the risk of fraud. It commented that, “having received an email asking for such a large sum of money to be transferred overseas, the adviser could have realised something was not right. If that wasn’t enough, we thought alarm bells should certainly have started ringing when the investment provider said they couldn’t trace the firm of solicitors. We found it hard to see why, at that point, the adviser hadn’t phoned [the client]”. The FOS concluded that the adviser should have prevented the fraud, and ordered it to make good the shortfall in the client’s investments.

With an estimated £755 million lost to financial fraud in 2015, including £121 million lost to fraudulent bank transfer scams, this ruling suggests advisers will be called upon to be the first line of defence for their clients. They need to make sure they are up to date with potential fraud risks and remain vigilant, or risk bearing the cost.