The UK Financial Conduct Authority (FCA) has published an expected report on challenger banks and financial crime controls which states that some are falling short when it comes to diligence against malfeasance such as money laundering. The review, conducted during 2021, said that some challenger banks failed to adequately assess customer risk while identifying a rise in SARs or Suspicious Activity Reports by these banks. The review predated the Russia sanctions regarding the war in Ukraine.
Challenger banks are frequently digital-only banks that aim to compete with legacy, high street banks. The UK is one of the most robust markets in the world for these banks and Fintech in general. The review included 6 challenger retail banks, covering over 8 million customers. The FCA did not point to any profound illicit activity.
The review of financial crime controls covered:
- 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
The FCA did add that they did find “some evidence of good practice,” including the use of technology to validate a user.
Sarah Pritchard, Executive Director, Markets at the FCA, commented on the review:
“Our 3-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.”
The FCA outlined the next steps for these banks:
- consider the key observations and broader findings we are highlighting here to review and enhance your firm’s financial crime frameworks
- ensure your customer risk assessment and enhanced due diligence measures adapt to the heightened risk of sanctions evasion, including but not limited to the identification of ultimate beneficial ownership in higher risk corporate structures
- review the Treasury’s NRA[7] to ensure your firm has appropriately considered money laundering and terrorist financing risks as part of your risk assessment
- see our Dear CEO letter to retail banks on common control failings identified in AML frameworks; these common themes and the need to address identified gaps equally apply to challenger banks
- refer to the guidance produced by the Joint Money Laundering Steering Group (JMLSG)[9], and
- be prepared to give us an update on your firm’s financial crime framework as part of monitoring compliance with the MLRs against a backdrop of changing financial crime risks
