UK watchdog identifies major flaws in how challenger banks tackle financial crime risks

Following a recent investigation by the Financial Conduct Authority (FCA), it was discovered that several challenger banks had major flaws in their financial crime controls and that they need to enhance their assessment of financial crime risk overall.

Indeed, challenger banks were found to have failed to undertake financial crime risk assessments on their clients in certain circumstances, according to the review conducted over 2021 and published by the FCA on Friday, April 22.

The challenger banks under consideration were those that were relatively new to the industry, and that provided a rapid and straightforward application procedure. Specifically, it consisted of six challenger retail banks, mostly comprised of digital banks, and served more than eight million clients in total. 

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.”

Review found some evidence of good practice

After conducting a thorough investigation, the review team discovered some indications of excellent practice, such as the creative use of technology to quickly identify and authenticate clients.

While Dr. Henry Balani, Global Head of Industry and Regulatory Affairs for Encompass Corporation,  shared his insight with Finbold on the matter:

“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.”

He added:

“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.

In general, the digital expertise of challenger banks such as Revolut is well-known. Still, the necessity to sustain high levels of consumer growth while also managing rising financial crime threats necessitates continuing innovation on the part of all financial institutions.