Updated: Sep 2, 2022
The Financial Conduct Authority (FCA) has expressed alarm over new challenger banks' financial crime defences, citing a "substantial" spike in suspicious activity reports filed in 2021.
The FCA said a review found that challenger banks “need to improve how they assess financial crime risk”, with some banks “failing to adequately check their customers’ income and occupation.”
The FCA stated in a statement that several of the challenger banks it identified did not have financial crime risk assessments in place for their customers.
The FCA's examination last year found an increase in the number of SARs submitted by challenger banks, raising worries about the "adequacy of these institutions' processes when taking on new clients."
Despite this, the FCA stated that it discovered evidence of excellent practice done by challenger banks, such as "innovative use" of technology to "identify and authenticate consumers at speed."
The FCA said weaknesses identified “create an environment for more significant risks of financial crime to occur” when customers are on-boarded and throughout the customer journey.
“We would expect financial crime control resources, processes and technology to be commensurate with a bank’s expansion,” said the FCA, who advised challenger banks to apply a risk-based approach to AML controls.
The watchdog discovered that several challenger banks were not regularly conducting enhanced due diligence and were not recording it as a formal method to follow in higher risk situations, such as when dealing with politically exposed individuals (PEPs).
The FCA stated that it found “ineffective management” of transaction monitoring alerts, including “inconsistent or inadequate rationale used for discounting alerts,” and identified that some customer risk assessment frameworks were “not well developed and lacked sufficient detail.”
Challenger banks strive to compete with conventional high street banks by employing better technology and information technology, with many challenger banks offering online-only business models.
Executive Director, Markets at the FCA, Sarah Pritchard 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.”
She added: “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,” said Ms Pritchard.
The assessment focused on six challenger banks, each of which had more than 8 million clients in 2021.
However, Kathryn Westmore, Senior Research Fellow at RUSI, who took to Linkedin to share her opinions on the story, has partially challenged the FCA's worry over the growth in SARs.
“I think it’s problematic to equate an increase in the number of SARs with there being inadequacies in the financial crime controls. The relationship between the two is more complicated than that,” she wrote.
By fLEXI tEAM