The Financial Conduct Authority has conducted a review of “Financial crime controls at challenger banks”. The basis of the review was a statement in the 2020 UK National Risk Assessments that criminals may be attracted to faster/streamlined onboarding processes.
The FINTRAIL team have been discussing the report and associated media coverage, and as you might expect, had a number of thoughts!
Media coverage somewhat obscures the fact the FCA declares, “we remain of the view that there are limited differences in the inherent financial crime risks faced by challenger banks, compared with traditional retail banks.” This is borne out by the fact the findings largely align with the topics raised in the FCA’s previous “Dear CEO Letter” to traditional retail banks, indicating there isn't a significant difference between challenger and traditional institutions.
This chimes with assessments within the industry of the risks associated with challenger vs. incumbent banks, which some of our team have been involved. They found that the way challenger banks were used by criminals differed to the way the same criminals used incumbent banks - challenger banks were typically used for high volume low value movements, whereas incumbent banks were used for low volume, high value crimes. In other words, neither type of financial institution was necessarily riskier than the other; it was how they were used by criminals that was the clear separator.
The FCA criticises lenders for failing to take details of customers’ income and occupation. Strong views on this one - there is absolutely no regulatory requirement to do so, and it’s questionable what value such self-declared, unverified information would provide. This ‘failing’ has been highlighted in the media (e.g. the Financial Times), with no mention of the fact banks are not actually obliged to collect this information.
The FCA cites a 'substantial' increase in the number of SARs filed last year, but this could either mean an increase in suspicious activity, OR that firms are getting better at identifying it, making it hard to draw conclusions from this statistic in isolation.
Many of the areas of weakness are key components of a good financial crime programme, requiring a ‘back to basics’ review by banks:
Lack of / poor customer risk assessment frameworks
Inadequate resources to manage alerts
Inconsistent or undocumented enhanced due diligence (EDD) procedures, including for PEPs
Weakness management of FinCrime change programmes, meaning control frameworks are not keeping up with rapid levels of growth and changes to business models.
The FCA is reportedly struggling with high levels of job vacancies. This is a common theme across every organisation involved in fighting financial crime (and crime more broadly) - from Companies House to regulators and supervisory bodies and all branches of law enforcement. This must be addressed at the government level - adequate resources must be given to institutions involved in the fight against financial crime.