The Financial Conduct Authority (FCA) performed a review on challenger banks and the results are not encouraging, with some of these financial institutions failing to conduct proper due diligence during the onboarding process and/or perform overall risk assessments.

Large consumer adoption brings greater responsibility for challenger banks

The switch to challenger banks is a trend among UK consumers. Challenger banks are intrinsically tech-savvy and typically digital-only banks. They are seen as more convenient for customers to when it comes to basic banking needs such as transferring money and opening additional accounts.

Challenger banks are critical for the UK financial landscape due to their large adoption (online-only banks already account for 27% of the market). This reality carries great responsibilities. These banks need to maintain their trademark of nimble processes for the customer but must also grant the same levels of security as traditional banks provide.

The easy and fast onboarding and money transfer processes resulted in the rise of the popularity of challenger banks amongst financial criminals, according to an NRA 2020’s risk assessment.

The higher risk these financial institutions face increases the need to understand if they are ready to fight financial crime. As a result, FCA conducted a study that analyzed 6 challenger banks – over 50% of the most relevant firms – with more than 8 million users.

FCA Challenger Bank Study Finding

The outcome of this study was that challenger banks need to improve their financial crime risk assessment.

In some cases their Customer Due Diligence (CDD) was flawed, lacking validation of basic information such as the occupation and income of the customer. This data is crucial to understanding the real motivation from the customer towards the bank.

Challenger banks are also failing to conduct Enhanced Due Diligence (EDD) as a step of the Anti-Money Laundering (AML) procedures by not formally documenting higher-risk cases like Politically Exposed Persons (PEP).

Additionally, there is the absence of a clear strategy for managing transaction monitoring alerts. They do not follow a coherent pattern for dealing with alerts and the investigation notes lack data and criteria.

The faulty CDD implementation opens a breach for fraudulent customers to successfully open an account and results in less effective transaction monitoring.

A review conducted in 2021 uncovered a rise in Suspicious Activity Reports (SARs), where in some cases, these banks ended relations with customers due to financial crime reasons. Most of those clients could have been stopped or tracked from the beginning if they were correctly analyzed during the onboarding process.

Rethink Customer Onboarding Strategy and AML Procedures

As Sarah Prichard, Markets Executive Director at the FCA, mentioned: “There cannot be a trade-off between quick and easy account opening and robust financial crime controls”. Therefore, challenger banks must revisit their strategy for the implementation of AML procedures. They must review and conduct risk assessments as part of the onboarding process. Additionally, the validation of customer’s against sanction lists and media adverse lists are critical, alongside the identification of the ultimate beneficial owners.

Despite failing on AML compliance on some levels, some good practices were highlighted, such as the identification and verification of customers through video selfies and mobile phone geolocation data. Some of those also incorporated additional monitoring for specific customers, for example, checking on customers using multiple divides to manage their accounts.

Solutions that are flexible and that grow with the company are the key to helping these financial institutions evolve to the correct implementation of AML procedures and easier management of monitoring transactions, keeping both the bank and the customer safeguarded.

Want to learn how Feedzai can help you protect your customers and your organization from money laundering? Download our Solution Guide For Financial Institutions: How to Evolve Your Suspicious Activity Detection.