On 22nd April, the Financial Conduct Authority (FCA) published their latest review of financial crime controls in Challenger Banks. This is part of their continuing strategy to inform the regulated sector of their expectations in this area and the areas highlighted should be considered by all sectors that are subject to the Money Laundering Regulations.

The key issues of concern remain consistent with the ‘Dear CEO letter’ to retail banks that was published in June 2021. However, the FCA have been more forthright by stating where material issues are identified; consequences will be applied which will include initiating a remediation programme, which is often under the auspices of a section 166 notice. Other key penalties that have previously been imposed on firms by the FCA, are restricting the number and/or type of new customers that are permitted to be on-boarded or requiring firms to exit customers.

Firms are also reminded of their requirement to inform the FCA under Principle 11, where firms are expected to act in an open and cooperative way and report anything to the regulator that they would reasonably expect to be informed of.

The FCA highlighted a number of observed themes of financial crime control weaknesses which they clearly describe:

Customer Risk Assessment (CRA)
Managing the risk of the customer is a dynamic and on-going process. Whilst some good and innovative processes were identified during the review, firms still need to ensure that they meet all their requirements under the law, regulation, and guidance.

An effective CRA process is key in demonstrating that the financial crime risk that the customer presents to the firm has been accurately assessed at customer onboarding but also throughout the relationship with the firm. As recent events in Ukraine have shown, the customer risk assessment model must be updated to reflect changes in internal and external risks that a firm may face.

Customer Due Diligence
If a firm’s CRA is not effective then an accurate assessment of risk will not be possible and higher risk customers will not be identified or relevant information sought. One of the key areas that the FCA has highlighted is the requirement under Section 28 (2)c of the Money Laundering Regulations to assess the purpose and intended nature of the relationship with the firm.

Whilst not an explicit requirement in the law to obtain occupation and income, it is recommended in the JMLSG guidance, it now appears that the expectation is that occupation and income should be collected on new retail customers.

Transaction Monitoring
An ineffective CRA will also impact on transaction monitoring. Customers that are identified as representing a higher risk of financial crime are required to be subject to enhanced ongoing monitoring. The form of monitoring undertaken will vary depending on the type of firm and its risk of financial crime; however, there should be clearly differentiated methodologies applied according to risk. However, if the information is not correctly classified, then the monitoring will not be effective.

An important part of transaction monitoring is the generation of unusual alerts that require investigation. Firms need to have a structured process and competent staff to be able to investigate and determine those alerts in a timely manner. It is imperative that investigators access all relevant information to make an accurate judgment and rationale as to why a Suspicious Activity Report (SAR) should be reported to the National Crime Agency. If sufficient customer information has not been captured at onboarding, this will reflect on the quality of the SARs being filed.

Change Management
There is a clear expectation that the financial services industry is a key component in the fight against financial crime. Crime continues to evolve and diversify; it has become more complex with modern technology and global interconnectivity enabling criminals to circumvent weak controls. Therefore, organisations must ensure that their financial crime framework is constantly being reviewed and enhanced. Successful change programs need the full support of senior management, skilled resources and budget.

Gracechurch has extensive experience in the design, implementation and operation of some of the industry’s most advanced AFC transformation programmes. If you wish to discuss any of these changes and how they may affect you or your business, please contact a member of the Gracechurch Financial Crime Prevention team.

John Flynn
28 April 2022