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FCA Reviews Financial Crime Controls At Challenger Banks

Technological developments have disrupted the banking industry, and the quick adoption of financial technology has become a key competitive advantage for banks worldwide. Challenger banks have proven to be more ready than others in embracing the digital transition. Challenger banks have grown in popularity with more than 200 launching across the global market in the last five years, these relatively recently founded companies compete with the well-established financial institutions, leveraging technology to streamline their operations.

The Financial Conduct Authority (FCA) ensures that firms they regulate are effective in preventing financial crime, this includes testing the financial crime controls of new business models as they enter the UK financial industry. Following a review of the financial crime controls at several Challenger banks the FCA has published their key findings, including examples of good practice and areas of improvement, as outlined below.

  • Innovative use of technology to identify and verify customers at speed.

  • Weaknesses found create an environment for more significant risks of financial crime to occur both when customers are onboarded and throughout the customer journey.

  • Challenger banks should apply a risk-based approach to anti-money laundering (AML) controls and continuously make sure their financial crime controls remain fit for purpose as their business develops and grows. 

  • Most Challenger banks did not obtain details about customer income and occupation, resulting in an incomplete assessment of the purpose and intended nature of a customer’s relationship with the bank. 

  • 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). 

  • Some had customer risk assessment frameworks that were not well developed and lacked sufficient detail. Some did not even have a customer risk assessment in place.  

  • Found ineffective management of transaction monitoring alerts. For example, inconsistent or inadequate rationale used for discounting alerts. 

  • 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 raised concerns about the adequacy of these banks’ Customer Due Diligence (CDD) and EDD checks when onboarding these customers. There were also concerns about the quality of SARs reported to the NCA.  

  • Found weaknesses in the effective management of financial crime change programmes. This included inadequate oversight and a lack of pace of implementation which meant that the Challenger banks’ control frameworks were not able to keep up with changes to the business models.

Overall, as set out in the National Risk Assessment (NRA) the FCA remain of the view that there are limited differences in the inherent financial crime risks faced by Challenger banks, compared with traditional Retail banks. However, they also explicitly state that Challenger banks should keep evaluating their approach to identifying and assessing the financial crime risks they are exposed to. They need to ensure that they develop their defences against financial crime as their customer base grows and/or they expand into new business areas.

Are you a Challenger bank that is growing? To ensure that you continue to fulfil your legal, risk and regulatory responsibilities do you need to expand your Financial Crime, Compliance, Risk, and Legal resources?

The Danos Group is the leading provider of permanent & interim Compliance, Financial Crime, Risk, Legal & ESG recruitment solutions. For over 18 years we have been supplying the best talent to our clients across the Financial Services sector.

If you would like the most current hiring market information, to discuss career opportunities, or you are directly looking to expand your team, then please contact one of our UK practice experts:

Claire Singer l Compliance & Financial Crime

Penny Parker | Legal

Peter Umesi | Risk

Alex Bayne-Powell | ESG

Sources: Statista & FCA