Challenger Banks Warned About Financial Crime Controls by the FCA

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A proportion of challenger banks have significant weaknesses within their financial crime controls and need to improve how they assess financial crime risk; according to the results of a recent review conducted by the Financial Conduct Authority (FCA).

The review, conducted over the course of 2021, revealed that in some instances challenger banks did not have financial crime risk assessments in place for their customers.

“Our three year strategy highlights our commitment to reducing and preventing financial crime,” comments Sarah Pritchard, executive director, markets at the FCA. “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.”

The FCA’s 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 eight million customers.

The review 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 review did find some evidence of good practice, for example innovative use of technology to identify and verify customers at speed.

Last year, there were a number of instances where the actions of challenger banks raised the eyebrows of both their customers and the regulators.

Monzo, for example, was investigated by the FCA back in July, when it was suspected that the challenger bank had breached serious financial crime regulations.

Even prior to the incident, the same bank suffered a serious glitch in its services, when in 2020, hundreds of its own customers reported being frozen out of their accounts.

For the FCA to now question the safety, security and legitimacy of its services and its role as a bank, is not unfounded.

It’s not surprising that around the same time, Monzo reported £114million in losses. Its losses then continued to increase into last year, topping a more severe £130million.

Even beyond the scope of the FCA, the security failings of challenger banks have quickly become the talk of the industry. Bank of Italy recently banned the German neobank N26 from interacting with its customers when its anti-money laundering (AML) failings came to light.

However, this isn’t to suggest that this is solely an issue that affects the challengers. In 2021, the FCA handed HSBC a fine for £64million, when the regulator uncovered what it described as ‘serious weaknesses’ in the bank’s procedures for identifying fraudulent activities amongst the millions of transactions it processes every month.

Around the same time, banking giant NatWest received a fine from the FCA for not a penny less than £265million, when the regulator uncovered that the bank had failed to flag £400million in dodgy transactions.

So although the report isn’t wrong to call out the challengers for their failings, it should be remembered that financial crime touches many aspects of the financial industry and that not all the players are perfect.

However, it could also be argued that if banks remain incapable of preventing, or at least reporting crime and safeguarding sensitive financial data, they should forgo their licence to practice within the industry.

What does the industry think?

Dr Henry Balani, global head of industry and regulatory affairs for Encompass CorporationDr Henry Balani, global head of industry and regulatory affairs for Encompass Corporation
Dr Henry Balani

Dr Henry Balani, global head of industry and regulatory affairs for Encompass Corporation, comments:

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

“Adopting best-of-breed KYC automation is the only way for banks, specifically, to effectively address the problem. Using innovative technology ensures continued high standards of compliance at scale, while improving the customer journey and experience.

“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 continued innovation.”

Colum Lyons, CEO of the identity verification company ID-Pal comments:

Colum Lyons, CEO of the identity verification company ID-PalColum Lyons, CEO of the identity verification company ID-Pal
Colum Lyons

“The challenges highlighted in the FCA’s review are not unique to challenger banks, and all financial services companies should have rigorous processes in place to protect their business and their customers from financial crime.

“The regulator is being very vocal that scrutiny across financial services is going to increase in the coming months and years, so it’s vital that companies get their controls in place to avoid serious monetary and reputational damage.

“The only way to do that is to adopt proper identity checks, so it’s promising that the FCA is recognising the benefits of digital ID&V services as good practice for businesses to identify and verify customers quickly. Customers want speed and efficiency, and these tools help financial services meet the demands without cutting corners or letting compliance slip.”

Stephen Baker, CEO of Baker & Partners, concludes with:

Stephen Baker, CEO of Baker & PartnersStephen Baker, CEO of Baker & Partners
Stephen Baker

“Is it too obvious to say that challenger banks present a challenge? The original challenge was intended to be against the established high streeters, but the challenge has developed from a commercial one to a regulatory one. And a big one at that.

“While it is true that challengers are out of their infancy, it is probably fair to say that they are still in very early adolescence. The analogy is decent. Challengers are fresh, exciting and agile, but there are growing pains, most notably associated with risk-taking which is often unconscious.

“Challengers depend on technology, notably mobile tech, which, with the ideas behind it, grows at an almost unfathomable pace. It seems inevitable that existing methods of regulatory compliance have not kept pace internally with the challengers.

“The risks are patent: loss of customer funds, data loss and money laundering are high among them. How is all of this to be viewed? History helps. Any innovation of worth has suffered early setbacks but has survived and the worst dangers designed out by refinements. They have survived because their utility has been irreplaceable.

“We predict the same journey for the challengers and it is of comfort to note that the FCA is abreast of the problems so that lessons will be learnt and incorporated into what remains a highly valuable offering.”

  • Tyler is a Fintech Junior Journalist with specific interests in Online Banking and emerging AI technologies. He began his career writing with a plethora of national and international publications.

https://thefintechtimes.com/challenger-banks-warned-about-financial-crime-controls-by-the-fca/