FCA flags concerns over challenger banks’ financial crime defences

The Financial Conduct Authority has raised concerns over the adequacy of challenger banks’ defences against financial crime, after a “substantial” increase in suspicious activity reports filed last year.

The remarks come as the watchdog attempts to toughen its approach against money laundering, which the National Crime Agency estimates costs the UK £100bn annually.

“Challenger banks are an important part of the UK’s retail banking offering,” said Sarah Pritchard, executive director for markets at the FCA. “However, there cannot be a trade-off between quick and easy account opening and robust financial crime controls.”

The review, which looked at six challenger banks with more than 8mn customers between them in 2021, found a number of issues. Most banks studied did not take the details of customers’ income and occupation, limiting their ability to fully assess the risk.

Frameworks to assess customers’ risks were poorly developed and lacking in some cases, making it difficult to effectively carry out due diligence.

The monitoring of alerts was found to be “ineffective”, with inadequate resources hindering quick responses. The FCA also said that some banks had failed to adequately adapt their oversight as they had rapidly expanded in recent years.

The regulator’s concerns echo earlier scrutiny of digital banks and other payment service providers, which have attempted to win customers from high-street brands with ease of use, functionality and speed. Last July, Monzo said it was under investigation by the FCA over potential breaches of anti-money laundering laws.

Revolut, which has an e-money license and was outside this review, faced questions after it emerged in 2019 that the fintech had “erroneous[ly]” switched off an automated system for flagging potential money laundering for several months the previous year.

The challenges of financial crime are not unique to challenger banks. In a letter to chief executives last May, David Geale, FCA director of retail banking supervision, warned that the regulator had found “several common weaknesses in key areas of firms’ financial crime systems” and ordered all businesses to check their processes.

The FCA, which is struggling with high levels of job vacancies, told the Financial Times in January that it was exploring using criminal powers in two anti-money laundering investigations, after a landmark conviction of NatWest last December.

The case, which also included a £264.8mn fine for the bank’s historic failures to prevent a £365mn alleged money laundering scheme, marked the first time that the agency had brought a criminal prosecution under anti-money laundering laws.

However, criminal investigations require significant amounts of time and effort. Nikhil Rathi, FCA chief executive, told the Treasury select committee of MPs in a letter in December that the NatWest probe had taken up to 30,000 staff hours.

The FCA also fined HSBC £64mn in December, citing “serious weakness” in its anti-money laundering controls over an eight-year period.

The fast-growing category of crypto assets is also a target for the regulator. In its three-year plan released at the start of April, the FCA said it would ensure that crypto companies complied with anti-money laundering regulations and promised to intervene “where firms pose harm to consumers or market integrity”.