The UK watchdog has called on challengers to beef up their financial crime systems in light of changing business models and rising customer numbers.

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Most challenger banks have a slicker and much faster onboarding process than incumbents, using modern technology like biometrics and application programming interfaces. But the swift acceptance of new customers has also attracted bad actors looking to exploit flaws in the process, particularly criminals setting up money mule networks.

Therefore, baking in compliance from the outset should be of the highest priorities for these newly licensed entrants; however, the UK’s Financial Conduct Authority (FCA) has found gaps in their financial crime controls.

In its recent review of six UK challenger retail banks, together covering more than eight million customers, the regulator found weaknesses in customer due diligence, enhanced due diligence and inadequate or non-existent customer risk assessment frameworks. Without a customer risk assessment, a firm can’t ensure that due diligence measures and ongoing monitoring are effective and proportionate to the risks posed by the customer.

The FCA review uncovered inadequate handling of transaction monitoring alerts, including a lack of basic information recorded in the investigation notes and the absence of holistic reviews of the alerts, which in turn impacted the ability of the banks to make suspicious activity reports in due time.

It also found failings in the management of financial crime change programmes. According to the FCA, this included inadequate oversight and a lack of pace of implementation which meant that the challenger banks’ control frameworks were not able to keep up with changes to the business models.

While recognising that the challenger banks have grown substantially in recent years, the FCA reminded them to keep evaluating their approach to identifying and assessing the financial crime risks they are exposed to. “[Challenger banks] need to ensure that they develop their defences against financial crime as their customer base grows and/or they expand into new business areas. This is so their control framework remains fit for purpose,” it said. The regulator has requested that the banks review these findings and make improvements where necessary.

Many believe it was high time that the UK watchdog evaluated neobanks’ compliance programmes in light of their rapid scaling and changing business models, with some incumbents grumbling about a regulatory playing field tilted in favour of the newcomers.

Interestingly, the review comes close behind the release of the FCA’s new three-year strategy, which “prioritises resources to prevent serious harm, set higher standards and promote competition”. It is therefore likely that this marks the beginning of a greater level of scrutiny than neobanks have faced to date. And where the FCA goes, other regulators are sure to follow.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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