The fast, no-fuss, easy to access and control accounts that challenger banks claim to be offering are attractive to the consumer who desires speed and agility. However, this also seems to be attracting the attention of criminals—specifically those who intend to set up “money mule networks”.
In order to capture potential customer interest, challenger banks promote their quick and efficient onboarding process. The ability to open accounts easily and within minutes might make procedures of the traditional high street bank seem draconian in comparison. However, is it equally draconian to consider that with increased speed comes increased scope for error? Changing and updating processes in the name of progress is a valid and noble idea, but not when that change leads to wider scope for abuse by the criminal fraternity and increased and unnecessary exposure to risk for the consumer in general—particularly those that are more vulnerable than others.
This raises the question of whether the information that challenger banks gather through this newer, faster process is sufficient, robust, and of the same quality as that obtained via more conventional means by traditional banks; the fable of the Hare and the Tortoise springs to mind. (Having said that, it is not as if the more traditional model has never been found wanting, or that those banks using the traditional model have never found themselves on the wrong side of the regulator.)
In light of the above concerns, the FCA recently reviewed a sample of challenger banks to obtain a clearer picture of how these institutions are exposed to financial crime risk—especially money laundering. Their analysis was focused on (but not limited to) the following financial crime procedures within the firms reviewed:
- Governance and management information
- Policies and procedures
- Risk assessments
- Identification of high risk / sanctioned individuals or entities
- Due diligence and ongoing monitoring
- Communication, training, and awareness
Main observations
Through this review, the regulator concluded that, although challenger banks rely on fast customer growth in order to expand, this does not mean that they must sacrifice their compliance with Customer Due Diligence (CDD) obligations as set out within the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs) (as amended).
Key findings of the review
- Weaknesses were found that eventually elevate the risks of financial crime from the commencement of the customer onboarding; these continue throughout the customer journey.
- The FCA set out their expectations for challenger banks: to put in place adequate plans of regular reviews of their financial crime control resources, processes, and technology, as the firm exponentially grows.
- Deficiencies were observed in CDD procedures: the banks were not collecting sufficient information about customer income and occupation. This resulted in incomplete risk assessments concerning the purpose and intention of the customer with the bank.
- Processes to formally document increased risk circumstances, for example those involving Politically Exposed Persons (PEP’s), were not efficiently or consistently applied by several firms.
- Lack of development and detail was further observed in relation to customer risk assessment frameworks.
- Transaction monitoring alerts were also criticised as their management was lacking supervision and consistency.
- An increased volume of Suspicious Activity Reports (SAR’s) from challenger banks was reported by the UK Financial Intelligence Unit (UKFIU) within the National Crime Agency (NCA).
- From observations on the fast-changing business models of challenger banks, the FCA noted that there was ineffective management of their financial crime change programmes; the banks’ control frameworks were unable to be updated and implemented on a regular basis.
Suggested good practices from the FCA
The FCA was clear on the increased scrutiny that they will be placing upon challenger banks, and suggested the following good practices for firms to consider:
- Thoroughly study the FCA’s Financial Crime Guide and SYSC 6.3 of the FCA handbook, with increased emphasis to be placed on the responsibilities under the MLR’s.
- Take into consideration the findings of the challenger banks’ financial crime control review in order to heighten the reliability of financial crime procedures.
- Prioritise risk assessment and CDD, especially with the increased dangers of sanctions evasion.
- Critically analyse the Treasury’s National risk assessment of money laundering and terrorist financing 2020 and implement money laundering and terrorist financing risks within their own risk assessment frameworks.
- Further examine and implement information provided in the “Dear CEO letter” to retail banks, as well as the Joint Money Laundering Steering Group (JMLSG) and be adequately prepared for future FCA correspondence in respect to compliance monitoring and financial crime frameworks.
Additional good practices documented in the FCA’s review include innovation and monitoring customer accounts. However, the regulator highlighted the importance for all firms to be on the same page when it comes to identifying and mitigating financial crime and money laundering within the financial services sector. It seems that significant improvements need to be made by challenger banks in the foreseeable future as the FCA watches on intently—especially with the noticeable expansion of digital banking and payment systems and solutions.
In the race for efficacy, it would appear that the jury is still out as to who will win—the Hare or the Tortoise. On the one hand, the regulator seems to be acknowledging the success and advantages that the challenger banks provide, whilst on the other hand requiring their financial crime frameworks to mirror the more traditional model. The ideal challenger bank appears to be one that can offer a hybrid model of speed, agility, and tradition.
How Complyport Can Help
Our experienced Financial Crime and Forensics team led by Martin Schofield—one of the world’s leading specialists in the field—brings a wealth of experience to every project we are engaged in. Our highly experienced financial crime professionals and forensic experts, in subjects such as anti-money laundering, counter terrorist financing, anti-bribery and corruption and fraud and regularly help our clients navigate the complexities of the financial crime and money laundering environment.
Services offered by Complyport include:
- Financial crime health checks and audits,
- Implementation of financial crime, AML, CTF, ABC, Fraud and market abuse controls and frameworks,
- Ongoing advice on financial crime, AML, CTF, market abuse and fraud prevention,
- Authoring/reviewing financial crime policies,
- Outsourced MLRO support
- Outsourced KYC and CDD support,
- Assistance in identifying Politically Exposed Persons (PEPs),
- Assistance in navigating international sanctions,
- Support with preventing market abuse and insider dealing,
- Expert Witness in Financial Crime cases
- Forensics and Investigations
- Design and/or delivery of online or face to face financial crime training
If this article has raised any questions, or you think your firm may require assistance, please contact either Martin Schofield via martin.schofield@complyport.co.uk or Jan Hagen via jan.hagen@complyport.co.uk to book in a free consultation.
About Complyport
Complyport is the City’s market leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.
Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. Our vision is to be there for our clients every step of the way, helping them change, grow, and excel through expertise, insight, and innovation, and in so doing to become our clients’ most valued supplier and trusted advisor.
We have successfully assisted over 1000 firms to become authorised with the FCA and EU and are providing regulatory support to over 600 regulated firms on an ongoing basis globally. With presence in the UK and EU, as well as via our Associates Network, Complyport can assist firms across multiple jurisdictions.
Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers.
Day to day, we conduct audits and reviews of a firm’s products, processes, policies, and procedures to identify scope for business, to determine the impact of regulatory developments and to verify compliance with local regulations. Our clients tell us we live our values; we are driven, agile and collaborative.
