Challenger Banks Failing To Tackle Financial Crime, FCA Says

April 25, 2022
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A review carried out by the UK’s Financial Conduct Authority (FCA) has called out challenger banks for not properly assessing financial crime risk, as well as failing to carry out adequate due diligence on customers.

A review carried out by the UK’s Financial Conduct Authority (FCA) has called out challenger banks for not properly assessing financial crime risk, as well as failing to carry out adequate due diligence on customers.

The review, conducted in 2021, identified a rise in the number of suspicious activity reports (SARs) flagged by challenger banks, triggering concerns about the adequacy of these banks’ checks when taking on new customers.

“Challenger and digital banks have experienced tremendous growth in their customer bases in recent years, however, this rapid scaling has meant that compliance programmes have not always kept pace,” said Dr Henry Balani, head of industry and regulatory affairs at Encompass Corporation, a regtech specialising in financial crime.

Dealing with increased volumes of customers and transactions while expanding into new markets has added complexity to anti-financial crime initiatives, he continued.

“Challenger banks are an important part of the UK’s retail banking offering. However, there cannot be a trade-off between quick and easy account opening and robust financial crime controls,” said Sarah Pritchard, FCA markets director, in a statement.

Challenger banks should consider the findings of this review and continue enhancing their own financial crime systems to prevent harm, she recommended.

When carrying out the review, the FCA assessed six challenger banks, and with that a customer base of 8m.

In the review, the FCA said that weaknesses were found in customer due diligence.

For example, most challenger banks did not obtain details about customer income and occupation, resulting in an incomplete assessment of the purpose and intended nature of a customer’s relationship with the bank.

Some challenger banks were also not consistently applying enhanced due diligence and were not documenting it as a formal procedure to apply in higher-risk circumstances, for example when managing politically exposed persons (PEPs).

The FCA noted that some customer risk assessment frameworks were not well developed and lacked sufficient detail, and some did not even have a customer risk assessment in place.

In addition, the FCA complained that challengers were not effectively managing their transaction monitoring alerts, as well as failing to effectively implement financial crime change programmes.

This included inadequate oversight and a lack of pace of implementation, which meant that the control frameworks of challenger banks were not able to keep up with changes to the business models.

The FCA’s review did, however, find some evidence of good practice. For example, it noted the innovative use of technology to identify and verify customers at speed.

“Challenger banks have a reputation for being digitally advanced, but the need to maintain high levels of customer growth, while managing increasing financial crime risks, requires continuous innovation,” said Balani.

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