FCA finds weaknesses in challenger banks’ financial crime controls

A review by the FCA has found that challenger banks need to improve how they assess financial crime risk, with some failing to adequately check their customers’ income and occupation. In some instances, challenger banks did not have financial crime risk assessments in place for their customers.

Related topics:  Regulation
Rozi Jones
22nd April 2022
Weak link unprotected protection warn
"Challenger banks should consider the findings of this review and continue enhancing their own financial crime systems to prevent harm."

The review, conducted over 2021, identified a rise in the number of Suspicious Activity Reports reported by challenger banks, raising concerns about the adequacy of these banks’ checks when taking on new customers.

The FCA’s review during 2021 found some evidence of good practice, for example innovative use of technology to identify and verify customers at speed.

The review focused on challenger banks that were relatively new to the market and offered a quick and easy application process. This included six challenger retail banks, which primarily consist of digital banks and covering over 8 million customers.

Sarah Pritchard, executive director of markets at the FCA, said: "Our three-year strategy highlights our commitment to reducing and preventing financial crime. This is important in creating that confidence for consumers and market participants in financial services and in demonstrating that the UK is a safe place to do business.

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

John Wilson, UK managing director at Avaloq, commented: “That some challenger banks fall short of their more established rivals when it comes to financial crime compliance controls is perhaps unsurprising, but it is something they should urgently address. While it is encouraging that the FCA found evidence that the technology focus of challenger banks confers benefits when it comes to rapid client identification and verification, challengers need to leverage technology yet further to better know their clients and identify key risks.

“By leveraging AI, machine learning and automated compliance processes, challenger banks can better detect potential financial crime while increasing the speed at which they perform. An automated compliance solution can deliver anti-money laundering and know-your-customer checks ‘as-a-service’, enabling banks to quickly strengthen and scale up their controls without significantly expanding their middle office. As a challenger bank matures, its financial crime controls will grow in complexity, and automation will be vital to implementing robust and efficient processes, for example around sanction and embargo monitoring, and prevention of insider trading and market abuse.”

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