Commentary on challenger banks and financial crime controls


Edward Vaughan, Head of Banking at TruNarrative, comments on the recently released FCA report ‘Financial crime controls at challenger banks’.

You may have seen that the FCA issued its review of financial crime controls at challenger banks; whilst the findings were not particularly surprising to anybody in the industry, it formalised what a lot of us thought.

I use a challenger bank for my day-to-day spending, and I’ve really enjoyed watching the innovation in this space over the last few years. These are fast-growing, dynamic organisations whose focus is understandably on service and customer acquisition. I personally welcome this latest report as it is indicative of this space reaching a new level of maturity.

For instance, the FCA review found that some challenger banks have fallen short with routine customer due diligence requirements, and not always applying enhanced due diligence where appropriate. And in some instances, where the checks may have been done, they were not recorded adequately for audit purposes – particularly around the handling of PEP and sanctions checks. The latter being somewhat pertinent at the moment.

Alongside this, some challenger banks had customer risk assessment frameworks that were not well developed and lacked sufficient detail (some did not even have a customer risk assessment process in place).

This finding in particular serves as a good reminder to banks that swift onboarding can’t come at the expense of robust risk assessment.

The FCA commented there was a noticeable amount of ineffective management of transaction monitoring alerts. For example, inconsistent or inadequate rationale was used for discounting alerts. There is a need for changing controls to adapt to changes in business models which is yet to be addressed on a consistent basis. Other notes of interest include:

  • UK FIU within the National Crime Agency noted a substantial increase in the volume of SARs reported by challenger banks as banks exit customer relationships for financial crime reasons. This shows that the challengers are indeed exercising fraud controls, however, we can all agree it’s best to not let these customers open an account in the first place
  • Weaknesses were found in the effective management of financial crime change programmes, including inadequate oversight and a lack of pace of implementation which meant challenger banks’ control frameworks were not able to keep up with changes to the business models

The FCA also made a point that they had found evidence of good practice in terms of innovative use of tech indicating you don’t need to sacrifice compliance for speed of acquisition.

The report observes that ‘more needs to be done by the challenger banks sector as a whole in light of the areas of improvement we identified. The weaknesses [they] found create an environment for more significant risks of financial crime to occur both when customers are onboarded and throughout the customer journey.’

Like the FCA, we encourage challenger banks to review and enhance their firm’s financial crime frameworks with a focus on ensuring routine customer risk assessments and adequate due diligence measures.

I regularly speak to challenger, start-up, and tier 1 banks about their overall risk-based approach – and I’m yet to find that anyone who isn’t continuously striving to make sure their financial crime controls remain robust and fit for purpose. I am looking forward to further discussions in light of the report’s findings and continuing to help TruNarrative clients evolve their financial crime and compliance strategies.

TruNarrative has the ability to rapidly implement customer onboarding strategies and demonstrate ongoing compliance. We help banks dynamically adapt their processes, based on risk appetite or regulatory guidance.

For example, FCA and PRA-authorised GB Bank recently procured TruNarrative’s technology to deliver its onboarding and transactional risk strategies. Using TruNarrative, GB Bank are able to build a complete risk profile for each customer using transactional monitoring with risk visibility over applications, deposits, withdrawals, and repayments.

GB Bank are now able to access a full case management system for manual reviews and referrals, a natural language rule builder allowing for rapid strategy changes, and a comprehensive audit trail with instant recall of data for regulatory purposes.

For more information about how we can help, fill out the contact form below and one of my team will be in touch.