Challenger banks need to improve how they assess financial crime risk, with some failing to adequately check their customers’ income and occupation, according to a multi-firm review by the sector regulator. Some challenger banks did not have financial crime risk assessments in place for their customers, the Financial Crime Authority said.
To explain briefly, challenger banks typically aim to compete with the traditional banks, by offering services through apps rather than high street branches.
Sarah Pritchard, Executive Director, 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.’
Background
The FCA points to that the risk that criminals may be attracted to the fast on-boarding process that challenger banks advertise, particularly when setting up money mule networks. Money mules are people who, often without knowing it, have been recruited as money laundering intermediaries for criminals and crime groups. The money mules transfer stolen funds between accounts, often in different countries, on behalf of others. If challenger banks promote the ability to open accounts very quickly to attract customers, there is a risk that information gathered at the account opening stage is insufficient to identify higher risk customers.
Among the FCA findings; some challenger banks were not consistently applying enhanced due diligence (EDD) and were not documenting it as a formal procedure to apply in higher risk circumstances, for example when managing politically exposed persons (PEPs).
The UK Financial Intelligence Unit (UKFIU) within the National Crime Agency (NCA) noted a substantial increase in the volume of Suspicious Activity Reports (SARs) reported by challenger banks as banks exit customer relationships for financial crime reasons. This raises concerns about the adequacy of these banks’ customer due diligence (CDD) and EDD checks when onboarding. The FCA also had concerns about the quality of SARs reported to the NCA.
The regulator suggested that the challenger banks’ control frameworks were not able to keep up with changes to business models.
For more visit the FCA website.
Comment
Sridhar Iyengar, MD for cloud software company Zoho Europe said it was no surprise that challenger banks are being impacted, but being able to verify customers at speed is no use if suspicious activity is being missed. “And, as it stands, money launderers are still able to evade detection by capitalising on the shortfalls within a banks’ technological infrastructure.
“There are many new features that can help make systems more secure or raise red flags early. Companies including banks can now benefit from the likes of AI-based systems to help identify potential fraudulent activities, so immediate action can be taken and customers can remain sheltered from risk. In highly competitive markets, such as banking, having modern IT systems can make a real difference in terms of providing business value and can positively impact customer trust and the customer experience as a whole. For market challengers, this is even more important.
“The growing cyber risk, coupled with the growth of hybrid working, which can potentially add further security risks, makes it imperative for all businesses to assess their current IT systems. Keeping operations secure, efficient and compliant with regulations is a different endeavour to what it was just a few years ago, and it demands that all organisations modernise their IT systems so that they are fit for the post-Covid working era.”
