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FCA finds weaknesses in challenger banks’ financial crime controls, here’s what the experts said

By Gaia Lamperti

April 27, 2022

  • Challenger Banks
  • Digital Banks
  • Encompass Corporation
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A recent review conducted by the Financial Conduct Authority (FCA), and published online, has found that some challenger banks have significant weaknesses within their financial crime controls, and need to improve how they assess financial crime risk.

Some failed to adequately check their customers’ income and occupation. In some instances, challenger banks did not have financial crime risk assessments in place for their customers at all.

Sarah Pritchard, Executive Director, Markets at the FCA, said: “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 review, conducted in 2021, also 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.

“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,” said Dr Henry Balani, Global Head of Industry and Regulatory Affairs at Encompass Corporation, the platform to automate corporate KYC.

The 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, primarily digital banks, covering over 8 million customers. However, some evidence of good practice was found, for example, in the innovative use of technology to identify and verify customers at speed.

“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,” Balani added. “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 continuous innovation.”

Colum Lyons, CEO at ID-Pal, the identity verification company, commented: “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.”

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