FCA review finds weaknesses in challenger banks’ financial crime controls

A recent review conducted by the Financial Conduct Authority (FCA) has found that some challenger banks have significant weaknesses within their financial crime controls and need to improve how they assess financial crime risk.

The review, which was conducted during 2021, has revealed that, in some instances, challenger banks did not have financial crime risk assessments in place for their customers. It also identifies a rise in the number of Suspicious Activity Reports reported by challenger banks, in turn raising concerns about the adequacy of these banks’ checks when taking on new customers.

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, which primarily consist of digital banks, and covered over eight million customers.

The review did find some evidence of good practice, for example when it comes to the innovative use of technology to identify and verify customers at speed.

Cyber crime on the rise

Sridhar Iyengar, managing director at Zoho Europe, commented: “Today, cyber crime and fraudulent activity is rapidly on the rise with more sophisticated episodes taking place all over the world. It’s 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. As it stands, money launderers are still able to evade detection by capitalising on the shortfalls within a banks’ technological infrastructure.”

Iyengar continued: “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 Artificial Intelligence-based systems to help identify potential fraudulent activities. Immediate action can be taken and customers will remain sheltered from risk.”

Further, Iyengar stated: “In highly competitive markets such as banking, having modern IT systems in place can make a real difference in terms of providing business value and 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.

Iyengar concluded: “Keeping operations secure, efficient and compliant with regulations is a different endeavour to what it was just a few years ago, and demands that all organisations modernise their IT systems such that the latter are fit for purpose in the post-COVID business landscape.”

Three-year strategy

Sarah Pritchard, executive director for markets at the FCA, said: “Our three-year strategy highlights our commitment to reducing and preventing financial crime. This is important in terms of creating confidence for consumers and market participants in financial services and in demonstrating that the UK is a safe place in which to do business.”

Pritchard concluded: “Challenger banks are an important part of the UK’s retail banking offer. 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 to enhance their own financial crime systems in order to prevent harm being done by criminals.”

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