FCA notes concerns with challenger banks’ crime defences

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.

Conducted over 2021, the review, revealed that in some instances challenger banks did not have financial crime risk assessments in place for their customers. It 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.

As the banks grow, so does the need for financial crime defences 

A challenger bank is a smaller, newer bank aiming to directly compete with traditional banks using modern financial practices. Most challenger banks were established within the last ten years, and whilst some offer the same services as traditional banks, others are digital-only companies specialising in only one service such as mortgages, loans or business banking.

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 covering over eight million customers.

Dr Henry Balani, Global Head of Industry and Regulatory Affairs for Encompass Corporation, comments: “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.

“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.

“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 continued innovation.”

Creating robust financial crime controls

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

Sarah Pritchard, Executive Director, Markets at the FCA said: “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.”